Q4 2019 Earnings Call

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Good morning, ladies and gentlemen, thank you for standing by and we will come to the unique still that's Inc. fourth quarter results conference call.

This time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.

A question during the session you want me to press Star one on your telephone. Please get back. That's today's conference is being recorded if you require any further assistance. Please press star Zero I would now like to turn the conference over to your Speaker. Today do is you know chief legal officer and corporate Secretary Secretary. Please go ahead.

Thank you usually good morning, everyone and thanks for joining US 40 units <unk> fourth quarter conference call.

Presenting this morning, our brains Wyndham President and CEO of unit Silicon President since you became in automotive.

And Eric <unk>, Executive Vice President and Chief Financial Officer.

Following their comments, we'll open the call for questions.

Please know that all documents referred to in today's conference call, including <unk> webcast presentation can be found on our website that you select dot com Indeed investors section.

As noted on slide two we would like to remind you about the caution regarding forward looking statements.

Which is applied to our presentation in common.

Oh, I'm, sorry, expressing U.S. dollars, except as otherwise specified.

As noted on slide three.

The Corporation applied for the first time on January 1st.

2019.

Alright 16 leases.

During the modified retrospective transition approach and did not reach the comparative amounts for the year prior to its adoption.

As permitted.

As a result, the 2019 condensed consolidated financial statements present significant environments as well.

When compared to 2018 <unk>.

Please refer to the adoption of our as far as 16 nieces section in D.N., Danny poor pretty de do.

With that centimeters turning to call over to Brett.

Good morning, everyone. Thank you for joining please turn to page five for fourth quarter results 29 team was a transformational year and we're pleased with the outcome of the performance improvement plan.

Realizing 31.9 million an annualized savings in 2019, and reaching our target of 50.6 million annualized savings since beginning the plan.

We will continue to realize these annualize impacts route 2020.

In December we concluded the strategic review process and modified our capital structure with the issuance of 125 million Canadian convertible senior subordinated.

Unsecured debenture.

Transformation steps already undertaken over the past years I've been necessary to stabilize the three business segments.

Enabling us then.

Initiate a continue continuous culture of improvement or operations and to capitalize on our future growth opportunities.

We would like to thank each of our 6000 plus team members for their commitment to resolved during the year.

I would like to thank them for their dedication to our customers and the continuing improvement to our business now, let us turn to our results.

For the year in constant currency sales increased 1.1% driven by the contribution from acquisitions and organic growth adjusted earnings before tax decreased to 40.7 million impacted by marketing conditions at finish Master network investments and higher borrowing costs.

Now, let's look at our most recent quarter.

Our fourth quarter is typically our softest quarter. The year. This year was no exception combined with a softer market conditions and all three business segments. However, we are seeing an encouraging signs as we continue to successfully implement the performance improvement plan, which continue to yield tangible results and the parcel and especially the finished at finish master.

We're profitability was up year over year for the first time in 29 T.

Sales decreased 1.6% for the quarter compared the same quarter last year, reflecting soft market conditions as well as erosion himself from the integration of company owned stores, which represented 80 basis points of the decline.

These factors were partially offset by the contribution of the acquisitions that as previously mentioned in the quarter. We integrated 14 more stores ending the year with 440, 434 stores and generate an additional 8.2 million an annualized savings for the quarter on a year over year basis, the adjusted earnings before taxes decreased to five.

Hi point, Fourmillion or a margin of 1.3% mainly explained by the pricing pressures and evolving customer mix adelphia negative organic growth, which impacted by and conditions and the absorption of fixed cost.

Let me go into the Cup in more detail on page six please [noise].

We're pleased to report at the ended the year, we surpassed the objective in both terms and timing and savings.

We delivered what we sell to do in 2019 the initiatives were one since initiatives will launch we generated for the three business units the annualized savings of 50.6 million as indicated before we expect these savings to be fully materialize in 2020.

Also the actions taken in realized in 2019 by the three segments approximately 50% of these savings from its weight or operating results for the year.

About 20% benefited for the fourth quarter.

As a current initiative gradually come to a close we will continue to strategically look for the optimization opportunities in our network to make continuous improvements as part of our culture moving forward.

Now, let's turn to page seven for finish Master.

Sales for the fourth quarter decreased 2.5% impacted by the erosion of 1.3% from the integration of company owned stores and negative organic growth well the erosion themselves was more significant during the fourth quarter, reflecting the full impact to the stores already integrated in the back half of the year. These results remained in line with their expectations.

In the quarter, we continue to execute the integration of seven stores for a total of 29 stores in 2019, ending the year at 180 stores.

Adjusted earnings before tax related margin reached 9.3 million and 4.7% itself.

Respectively up year over year for the first time at 29 team.

As you recall and last October we appointed Rob Molinar as the interim President and CEO finish Master. We're currently in the recruitment process and make it and making good progress.

There were finished markets continued to be solved as result of lower collision claims ongoing consolidation in refinish market and the advancing technologies, although we expect the market to be slightly down in terms of volume in 2020, we will continue to drive our top line by executing our self strategies and the various refinished channels, which we serve.

Please turn to page eight for Canada.

Sales for the fourth quarter were stable year over year as the contribution from acquisitions offset the negative organic growth and the for the quarter.

Organic growth was impacted by the timing the different timing of the sales of PB as indicated in the previous quarter.

Which was partially offset by the ourselves or a private brand products.

When you look at the full year of 2019 in constant currencies sales were up 4.8% driven by solid organic growth of 2.4% and the contribution of the business acquisitions.

In the quarter, we continue to grow bumper to bumper membership and loyalty. We also experienced another strong quarter of improvement of our company owned stores, which bodes well for us in 2020.

We continued with the integration of one store, we can the completion of the integration of the parts watch foreigners cell system and all the legacy bumper to bumper company owned stores. We also continue with the successful integration of the auto choice acquisition last year.

Our adjusted earnings before tax reached 3.6 million over 3% ourselves down from 6.5 billion EUR, 5.3% cells last year.

Realized savings from the pill and the contribution from acquisitions were more than compensated by the favorable onetime items at the fourth quarter last year. However, when comparing to last year adjusted earnings before tax were up 27.8% to 25.3 million and the related margin reached 4.9%.

At 100 basis points.

Now turning to page nine for the parts Alliance. Please.

In constant currency sales decreased 1.3% versus the same period last year due to the erosion or the sales of 80 basis points, resulting from the integration the company owned stores and the negative organic growth organic growth continued to be impacted by the macroeconomic challenges in the UK, partially offset by the contribution of the recently opened greenfield.

In the quarter.

We opened two for a total of five for the year and 20 since we see we acquired TPH.

Address the new market realities, we accelerated the pill.

Reshaped our regional trends regional management teams and proved our productivity in our logistics to support ourselves and network efficiencies. You also integrated six stores in the quarter for a total of 10 for the year ending the year at 179 stores.

These initiatives not will will not only benefit TPS in the short term, but they will position the business, possibly for the <unk> as a market gradually recovers.

On a year over year basis, the adjusted earnings before tax for the quarter was 300000 or 34.3% of cells compared to 1.2 million or 1.2% ourselves last year. The decrease is primarily due to lower cells. While recent investment in our supply chain of five greenfields, our new National distribution Center.

Sure.

The 18 converted branches into regional hubs, partially offset by the savings the pill, which start which is starting to materialize as expected in a more meaningful way.

The UK left you on January 30, Onest entering into 11 month transition period, which could also create an ongoing uncertainty.

Having said this is important to understand that long term fundamentals of the UK auto parts market remains sound and we'll continue to execute.

Our business strategy.

Back in the recent green with the recent Greenfields open we were able to further support the national account business in the quarter, we expect to see that to continue in 2020. Furthermore, in 2020, we integrated though we will integrate the last operating Andy to TPH point to sell system.

Which will lead to additional operating benefits greater efficiency.

I will now turn the call over to air to complete the financial review here. Thank you Brett.

Good morning, everyone. Please turn to page 13 for the consolidated profits.

The fourth quarter, we reported a loss of 49.4 million $1 in 17 cents per share versus a loss of 2.4 million 4.6 cents per share last year, mainly due to special nonrecurring costs in particular, an impairment loss on goodwill related to the UK totaling 45 billion for $1.06 per share.

Adjusted earnings for the quarter totaled 4.6 million or 11 cents per share versus 5.4 million or 13 cents per share last year.

The decrease in adjusted earnings was mainly attributable to lower adjusted earnings before tax in a different income tax rate. In addition.

Additional information is available on slide 21, including pro forma adjusted EBITDA to help you had better understanding our results.

Let me comment on our cash on page 14.

The fourth quarter of 2019 cash flow provided by operating activities were 3.5 million versus 13.4 million last year. This variation was mainly attributable to a different timing of purchases and vendor financing transaction, partly offset by reduced purchases of entry and lower corporate tax installments.

In fact, we continue to optimize our inventory throughout the three operating segments.

We generated 24.1 million to free cash flow for the quarter compared to 7.8 million last year due to lower level of corporate tax installments and investment and capital expenditure.

For the year, we generated 33.3 million in cash flow from operations down from 95.6 million last year, mainly as a result of at one time 55 million cash outflow due to change and payment terms or one of our large supplier.

Excluding this factor we would have ended the year rich will be in line with 2018.

Given the situation, we manage our balance sheet very prudently throughout the year as shown on our consolidated cash flow statement would reduce our net investment in merchant advances from 32.6 million in 2018 to 10.4 million in 2019.

Spending marginally less than our normal run rate. We also did not make any material acquisition and maintain our net investment in Capex at 22.1 billion a similar level to 2018.

Dividends were also maintained at similar level of 11.9 million in fact, when taking these individuals item as a whole we invested 55 million less than 2019 than in 2018 and generated 19.5 million with the sale of the pro color better program.

To date, the board of director declared a quarterly dividend of nine in a quarter cents per share payable on April 21, 2020 to shareholders of record as of March 30, Onest 2020.

This represents a dividend yield of 2.79%.

Thats Yesterdays closing price.

Turning to page 50.

I was at December 30, Onest 2019 are outstanding total net debt stood at 449 million, including 101 million of lease obligation versus 530 million, including 104 million of lease obligation three months earlier in our funded debt to adjusted EBITDA ratio stood at 3.46 time versus 4.09 time.

Last quarter.

This reduced leverage as a direct result of the convertible debenture financing completed in December in addition to providing us with greater flexibility this financial instrument immune leave improve our leverage ratio.

Bank covenants as it is considered cause I equity forward, both bank covenant calculation and for reported ratio.

This complete the financial review for the fourth quarter I will now I'll turn the call over to Brett.

Thank you are.

With the successful execution of the performance improvement plans in each of the businesses. The strategic review now being concluded the new financing in place, where we are well positioned continued transformation of our operations and set the path forward for future growth and 2020, we will build on the work we've accomplished in 2019 banks.

And our sales initiatives, which will continue to be positioned the business for strategic growth.

Our new continuous improvement culture will continue to improve our profitability and all three business segments and maximize our shareholder value.

Like to take a moment to discuss the investor relation activities.

We're taking the opportunity to inform you that we're looking into an investor day in the coming months, we will provide more detail once we finalize a day.

In closing we want to thank our shareholders our customers our team members in our suppliers for their ongoing support. This concludes the presentation. We're now ready for your questions. Thank you.

As a reminder, just a question you will need to press star one on your telephone to withdraw your question pressed a fancy please standby while the composite joining roster.

Your first question comes along the line have been talking with this album. Please go ahead.

Good morning, gentlemen.

Morning.

Yeah. Good you talk a little bit that Bob so be expectation for 2020 in terms of organic growth given the a the soft finished we saw toward the end of 2019, and maybe what kind of color you can provide in terms of organic growth expectation. Thank you.

So been why we were not giving guidance or outlook on 2020 at this time, we're pretty much focused on the continuation continual improvement to the business and operating at this point.

So at this point, we're not give an outlook.

Okay, perfect and when I look at the pace. Obviously, you are now closer to 51 million what would be the incremental contribution in terms of cost saving that we should see in 2020 that would come from the paved.

Well, but benoit issue a.

Pure look at our remarks during the call where we said is the actions taken in 2019 and realize in 2019, which has basically at $31.9 million about half of that was actually in pain impacted our 2019 results.

That amount of the 31.9, 20% was actually.

Its way into Q4, so defacto. It tells you a little bit about the run rate going forward with windows.

Strategic and fit initiatives that we've done.

Okay. So okay, okay, perfect and given the software market environment, when I look at the organic growth.

Would it be fair to expect further cost reduction initiative on top of the 51 million that you've announced so far.

Hi, I would just simply say then why we believe that theres plenty of opportunity for us to continue to optimize the three business segments.

And our our cultural really be about a continual improvement process. So that it's just not an event or.

It will be part of our ongoing process.

Okay, perfect and easy when I look at your balance sheet 3.5 time.

At the end of the year, if you exclude the convertible debt could you talk a little bit about the the free cash flow expectation for 2020, and the flexibility that your balance sheet provides right now to invest in the business organically or through M&A.

Yes, so look a a within all first of all into in 2020 Theres nothing that we are aware at this point that would impact from a supplier perspective and supply chain perspective.

And.

Terms that we have right. So the event that we set that we experienced in 2019 with the reversal of some of the payables linked to payment terms, we don't expect that in 2020. So thats I would say that's the first thing if you look at our cash generation in 2018 2019, it's somewhat similar so I think it's a good guidance to think about this going forward.

And the other factor yet to keep in mind is we use about 55% of 125 Canadian million dollars convertible bond was used to apply against a debt balances money that was applied against the revolver, but can be use obviously for M&A or growth opportunities, including.

Continuous improvement initiatives that we have throughout the three businesses.

So I think we had the flexibility in 2022 to do what we are set up to do.

And also.

I might have decent returns to shareholders has it base diverse activity that we're conducting.

Okay. Good could you talk a little bit about your organic growth a fortune does your capex expectation for 2020 in maybe the.

The potential.

Capital and low geared toward M&A that you foresee fourq 2020 units.

Well, though looking to buy wallet can tell you as my expectation in terms of Capex is very much in line with which we spent in 2018 and 2019 as it relates to organic growth. It's a big question right away with what's going on worldwide. We know is will be the impact on on the GDP growth of different countries.

But all things being equal that would that would expect similar trends in 2020 than we've experienced in 2019.

And we're well positioned in the UK for recovery.

Done a lot of work to make sure that what they were we did on the bit would not impact of business negatively. If there is a recovery. So thats a good thing to gain businesses is healthy and performing and Theres nothing into rights and they would tell me that they should be materially different.

And finish master as we all know when we've done a lot of work could finish master and we expect to read some of the benefits of that into going into coming quarters.

Okay and lastly for me could you maybe provide some color about the the retention.

The captive booties due to retain the employee and dependent dropper. Given you you went through the this tragic review I'm just curious winter into.

It has impacted some key matrix or two on our turnover ratios Uni select given beyond the this tragic review that was completed.

Okay excellent question been why would tell you from a customer point of view our customers have never been stronger our loyalty is at a high rate today higher than in the past.

And I think we've continued to invest in the value proposition for them. So.

So that they can grow their business and we can be a better supplier tool.

From an employee engagement point of view certainly as we went through.

The plans in each one of the three businesses.

It's had an impact to our overall turnover rate, but our key employees are certainly secure.

And they are driving the change in leading to continue to improvements inside the businesses. So no for your from that.

Thank you very much weren't on time.

Thank you. Thank you, but on your next question comes from the line of Daryl Young with TD Securities. Please go ahead.

Morning, gentlemen, good morning Darryl.

My first questions on the competitive dynamics and the paint industry and.

Specifically I guess, what what percentage of your sales today are being made msos and on the positive defined msos anything three stores are more.

But I guess, what I'm trying to figure out is how much further.

Margins can can potentially a road as this consolidation seed continues at the MSL level and yet what the kind of mix of your existing revenue is from MISO versus a troops like the true large at Misos, who would be who would be getting lower.

Fee versus the mom and Pops.

Look I think it depend somewhat on the activities at Dms, who may or may not pursuing in 2020 rights.

As you probably know we are more exposed to national Emmis OWS.

We have a high concentration on that type of business at finish mastercraft spend into markets as a whole.

It's a question of alignment with Arpine. Some manufacturers I would tell you that a lot of it is driven by what happens in the market because entry barrier level.

Which we can't predict if at one will consolidate this market of that market when that happens. It certainly has some impact on our business model and our margins and we have to adapt to that reality.

As it relates to data speed it migration looks funny speaking there is a trend that trends have been around for us in the last couple of years, we expect this trend to continue.

Part of the restructuring that we conducted in 2019 was to allow us to be successful in that segment.

Okay, and then in terms of the increase in the competitive dynamic in the industry can maybe just give a bit of color on where that's coming from.

Yeah, I think it's important to keep in mind that when you have a consolidating market we were experiencing the paint business.

Some of the independent distributors will focus on certain niche markets or down market in some cases and that is certainly a competitive area, where a lot of the distribution is focusing because of what's going on in the national and regional level.

Just a normal outcome of that competitive landscape.

So.

That's where I would say the bigger pressure is that we can tend to see on the on the smaller accounts.

And then you have the fundamental trend of a consolidation happening so you've got sort of two different factors going on in the industry.

Got it okay.

And then in terms of the in the UK.

Are you seeing increased competition, there as as the macro headwinds.

Evolve or is it mostly just a lower top level demand from from the macro headwinds I.

I would say, we really haven't I think all of our competitors are going through the same things that we're going through.

Certainly everything's been indicated to us that were not experienced anything different than they are so I think it's purely a top line that is in our country at this point.

So.

Okay.

And then on on M&A potential.

In the past I know, we've we've mentioned Theres a lot of opportunities in the job or network in Canada.

Is that still a priority focus to continue working with the joggers.

On succession planning.

Absolutely is I mean, we're looking at it from a strategic point of view not opportunistic standpoint.

So I would tell you it's clearly as part of the growth strategy for Canada moving forward.

And then on the on the dividend.

Having to pay out ratio is fairly low still at Fortyish percent.

Any plans to rethink the dividend strategy at all.

Although that will be something that the board me and we look into.

Both future, but for now based on where we know.

Well take our dividend.

Numbers as we as Weve stated in into Q4.

Okay, great. Thanks, very much. Thank you. Thanks Darryl.

Again, if you'd like to ask the question Press Star one on your telephone.

Next question comes from the line of secondary Eversheds with National Bank Financial. Please go ahead.

Morning, two questions for me.

Could you give us some examples the optimization opportunities that you'll be pursuing in 2020 in each segment.

Well I would say that we're continuing to look at further automation.

All of our processes, certainly whether it's back office or.

And our distribution or our branch network.

We will also looking at workforce planning and now we optimize our.

Our Workforces and also we're looking at our route optimization. So we can be.

Really not.

Not only environmentally friendly but also benefit from RPL point of view. So those are three major initiatives that we're looking at an all three businesses.

And freight rates have come off quite a bit from where they were all last year is that having a significant impact on your bottom line.

I will say I haven't seen that yet.

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So I think it's not been materializes or a material impact us at this point.

Hey, Thanks, and then one last one expecting any incremental contribution from ramping industrial paint distribution in 2020.

Certainly it is one of our growth sector sectors that we mentioned that we're we're supporting and we're looking for that to continue to grow.

And we've made significant investments in our sales organization around that.

As well as operationally so yes, we're looking for that to continue to grow at a rapid rate hopefully.

Thank you very much the color that's it for me I'll turn it over.

Thank you.

Your next question comes from the line of Jonathan Lieberman with BMO. Please go ahead.

Good morning, Jonathan.

Good morning, I appreciate that will be holding an investor day in the coming months.

But sorry can you just review for us what areas. The further strategic initiatives. This year might cover will they be.

Maybe which division will be sorry, you mentioned the route optimization for apps finished matter I missed the first part of your comments there.

No on site there they're not.

There are against all three business segments, we're looking at route optimization and all of our branches we have branches in all three businesses today.

We're certainly looking to automation and all of our back office processes.

We're looking at investing.

To be in all three of our businesses and further drives efficiencies and be able to manage more effectively.

So I mean, all three of the things that we have a list of network initiatives in all three businesses that will continue to evolve to service in a more efficient manner and more effective manner for both our customers as well as our benefits our profitability.

Thanks.

I appreciate that you're not providing guidance.

But I believe the.

Pain suppliers generally are looking for volumes to be sort of flat to maybe down slightly to market level and pricing can be up modestly.

In 2020.

You have any thoughts as to the I would look for the overall market.

For 2020 and over the medium term.

Yes look we as we stated into in the speech.

If you think about collision claims that we've seen some some reduction in collision claims in the last.

For years, and we don't expect that trend necessarily to change.

Volume of bank.

Discussed in the past is fairly stable to reducing so the reality is.

The organic growth so to speak is typically coming from price increase and then the question because when is the timing of those price increases envisioned.

There there, it's probably more in the second half.

As we know at this point, having said that the manufacturer could could decide to push price increases sooner or or or not.

Based on what we know what the paint level it should be more in the second half of the year.

Thanks.

On the competition I believe this is the second quarter, well, that's where that's been.

Called out.

Yeah.

Was there a step change and competitive dynamics at some point last year.

There will be lapped sorted by the second half of this year.

No I wouldn't say there has been an event or I think it's what we're seeing in the market and as I was expanding early on the fact that you've got some more localized distributors that are fighting for market share in the local market that is getting smaller and smaller right and that's what we've seen in certain markets because those national accounts or regional accounts.

In consolidating.

And that's what we're referring to in terms of pricing pressure in that.

Tier of traditional smaller accounts.

Thanks, and if I could just asking about the board changes.

How many board meetings.

There have been since January Onest and.

Burchill provided any indication of changes they would like to see.

So I would say this is our first board meeting.

Since the first the year.

And.

Purchases were excited to have them to be part of the board and certainly.

We have nine board members and there they have their position.

And all of them speak their mind, so I'm not worried about too.

I have nine.

But no not at this point, it's all good.

Okay. Thanks for your comments.

There are no further questions at this time I will turn the call back over to the presenters for closing remarks.

Thank you very much we look forward to see new and talking to you in the very near future and certainly as we indicated as soon as we get to finalize date for the Investor Day, Eric and I will be sharing that with you.

Thank you for your support.

Just conclude this conference call.

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Oh.

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