Q1 2020 Earnings Call
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Good morning, everyone and thanks for joining yacht 40 units today that first quarter conference call.
I think this morning, or Brent Wyndham, President and CEO I've used today can presenting to you or the getting in automotive group.
And Eric <unk>.
Executive Vice President and Chief Financial Officer.
Following their comments, we will open the call for questions.
Please note that all documents referred to in today's conference call.
Including its way to webcast presentation can be found on our website at <unk> Dot com.
The investors section.
As noted on slide two I would like to remind you.
About cautions regarding forward looking statement, which is applied to our presentation in Colombia.
Oh, I'm, sorry, pets in U.S. daughters, except as otherwise specified.
With that.
Let me turn to call were two Brett I do.
Good morning, everyone and thank you for joining us.
Just a few weeks all of US with the entered unprecedented times there will continue to reshape the method that we were realized by a runner businesses.
As we started the knee or haven't concluded the strategic review I.
Having successfully executed the performance improvement plans.
He was ready for the next step in our continuous improvement.
Unfortunately, the current endemic crisis forced us to address immediate needs of safety and well being of our teams and those of our customers.
Established business continuity plan.
To service the essential services within each of the countries, which we operate we did this very successfully today.
It's nice to leadership team years like for the countless hours in sacrifices me.
We will continue to adjust to the dynamic market conditions to ensure we remain our leadership position in each of the businesses.
Today, we will provide an overview as well as comment on the impact of Coburn 19, and our strategy moving forward.
Let's turn to page four.
Our first quarter is typically a soft quarter. This year was compounded with the impact to covert 19 in the back half of them up in March, but our first quarter sales were down 2.9%, excluding the impact to cope with 19, we would've been flat year over year as our transformation, we're showing promising signs and traction.
We did benefit from an additional billing day the contribution from acquisitions the savings from the continue operational improvements. Despite these positive contributors are profitability was impacted significantly due to cover 90.
Along with the foreign exchange losses brought on by the recent volatility in currency markets, a onetime charge and the reduction in volume rebates falling within the decision to further optimize our inventories.
These factors resulted in a more absorption of fixed costs, which ultimately impacted our margins.
Excluding the FX losses, and the onetime charge, which combined represented four point Eightmillion. Our adjusted EBITDA would have reached 21.6 man or a margin of 5.3%.
Also in the quarter, we acquired three stores for our Canadian Operation. We also integrated six stores realize annualized Pip savings a 2.9 million from the combined contribution of all three businesses.
Performance improvement plan annualized savings realized since its inception reached 53.5 million at the end of the first quarter.
As a result, we ended the quarter for 431 stores in our network from for 34 at the end of 2019.
Please turn to page five.
[noise], where the onset of covert 19.
In March we quickly and proactively implemented measures to minimize impacts on our operations. We put in place stringent protocol for social distancing hygiene precautions to safeguard our team members, our customers and our supply partners.
We also implemented temporary measures for business continuity.
Before at approximately 50% of our workforce reduced our work hours by 20% for all remain team members. We temporarily closed about one third of our stores and our network all the stores. It remained open we're operating at reduced hours.
We also implemented a cash conservation plan to ensure maximum liquidity and financial flexibility.
We tighten the management of working capital and non essential expenses, we reduced capital expenditures customer investments board of directors remember ration and suspended the dividend.
These difficult decisions were made to safeguard our team members and our customers to ensure maximum available liquidity until the crisis abates and the market conditions improve.
Our objective is to come out of the Cobot 19 crisis ready to continue our performance improvement.
It's important to note we're continuously monitoring the announcement of the governmental assistance programs.
The reopening protocols and we'll make adjustments when needed.
Now, let's go to the first quarter results for Finch Master, Please turn to page.
Before I comment on the results I wanted to formally welcome Joe from Macquarie as President and CEO finished master Joe is a seasoned executive who brings 25 years of experience and they automotive industry.
Serving global aftermarket customer.
Customers he will be a great addition to our team.
Finish master sell through the first quarter decreased 1.1%, mainly due to the expected revenue decrease from the integration of 28 company owned stores within the last 12 months, the lower sales volume primarily related to covert 90.
Organic growth was negative 2% for the quarter. However, excluding the impact to covert Nike organic growth would have been flat.
In the quarter, we continued to execute the Phil.
The integration of two stores and in the quarter 178 stores.
Adjusted earnings before tax.
And related margin reached 4.8 main or 2.4% of cells down from 9 million or 4.4% itself for the same period last year.
This does this decrease is mainly explained by the lower volume of rebates to the inventory optimization, a onetime charge as well as a lower sales volumes, mainly attributable to cope with 19. These factors were partially offset by the savings from the optimization of processes and integration initiatives.
While our short term focus will be managing through the current cobot 19 crisis or long term objective remains the same.
We expect to capitalize on the transformation undertaken in 2019, well continue to adjust our cost to serve model to new market realities.
We are clear market leader, we have the ability to scale into existing and new markets. We intend to accomplish this by focusing on each of our paint segment.
Namely premium industrial and value segments, along with our associated products.
We will also benefit from the full deployment.
An impact of the pill, and we'll continue our journey towards a continuous improvement culture.
Now, let's turn to page seven for Ken.
Sales for the first quarter decreased 3.7%, mainly due to the negative organic growth primarily related to covert 19.
And the depreciation of the Canadian currency. These factors were partially offset by the additional billing day in the business acquisition.
Organic growth was negative 4.9% in the quarter.
However, excluding the impact to cope with 19 estimated at approximately 3.5% to 4% organic growth would have been negative 1%. This decline is related to the timing of PB product.
Sure independent members on a year over year basis.
The continued improvement performance of our corporate store network, partially counterbalanced assess the situation.
In the quarter, we continued to execute the pill with integration of one store, what we acquired Bay auto in truck in Ontario, adding three stores are in our store network.
Ending the quarter was 77 stores, our adjusted earnings before tax decrease to a loss of 2.6 million from a profit a 3.5 million last year.
The decrease is mainly explained by one a lower onetime volume rebates unfavorable variation and FX and the positive contribution from pro color last year.
These factors were partially again offset by the Cook.
Well, our short term focus will be managing through the cobot 19 crisis as mentioned before we will continue to increase operational efficiency and building our independent members market share, while driving new driving new bumper to bumper Auto service banner program to increase loyalty to our network.
[noise] for parts Y axis turned the page it please.
Sales for the first quarter decreased 5.7%, mainly due to the negative organic growth related to cope with 19 impact.
The weakening of the British pound and the expected revenue decrease from the integration of 13 company owned stores in the last 12 months.
Organic growth was negative 4.5% in the quarter. However, excluding the cobot impact estimated at approximately 5.5% to 6%.
Organic growth would have been positive our recent greenfields continue.
To be project or overall sales results as well in the quarter, we integrated three stores ending the quarter 176 stores in our network.
Our adjusted earnings before tax decrease to a loss of 300000 from a profit in 2.3 million last year, mainly explained by lower gross margin due to the different product mix.
More volume rebates and lesser absorption fixed costs.
Last year TPG also benefited from a gain of a property disposal, which was not repeated this year. These factors were partially offset by the savings from the Gill and the benefit of government subsidies related cold the 19th.
Objective will be to focus on capturing the full benefits of our recent investments we will continue to optimize our supply chain.
And the complete integration of our ERP systems.
With this I will now turn it over the air group from your financials.
Thank you Brett and good morning, Please turn to page 13 for consolidated profit.
For the first quarter, we reported a loss of $6.7 million or 16 cents per share versus a loss of 1.3 million or three cents per share last year.
Adjusted earnings for the quarter, where a lot of 44.3 million for 10 cents per share versus a profit to 5.1 billion or 12 cents per share that view.
The decrease in adjusted earnings was mainly attributable to lower adjusted earnings before tax and a difference in the tax rates from foreign jurisdiction as well as the different geographic distribution affected both earnings and losses.
Now, let me comment on forecast on page 14.
Recall that typically we burned cash it offers for me was 10.8 million of cash cash flow from operating activities and the first quarter Accordingly versus 69.5 million last year.
This marked improvement was mainly due to our proactive cash management in the face of code.
More specifically, we optimize our inventory and finish master, which improve our working capital by about 44 million year over year. In addition, we then offices on the collection of receivables, we improve our working capital by another 20 million year over year. These cash inflow were partly offset by the we're operating results.
Combined with additional borrowing under our credit facility, we use our liquidity in large part to fund our working capital make a tuck in acquisition in Canada, investing capex and merchant advances as well that pay dividends.
No that we did temporarily suspend future dividends in order to preserve cash to whether the current pricing.
We generated 11.8 million of free cash flow from the quarter compared to 19.2 last year. This variation is partly due to lower volume rebate associated with the opposition of inventory.
Turning to page 15.
As of March 31st 2020, or a funding total net debt stood at 468 million, including 96 million to a buyer for at least obligation versus 449 million No 101 billion, respectively three months earlier.
When you exclude I have for 60 lease obligation total debt to adjusted EBITDA stood at 3.15 times versus 3.63 times for the same period last year.
As of the end of March we were in compliance with our financial agreement.
Based on our assumptions, we believe that our current liquidity positive cash flow in future periods will be sufficient to meet darker it operating and capital need.
Let me provide more color on just terrible.
Turning to page 16 for the outlook.
[noise] there is significant uncertainty in the market, but we are working on the assumption that this will last were good part of Q2 with demand progressively recovering in Q3, and hopefully return to prior levels sub five in 2021.
In fact April consolidated sales contracted by approximately 50%.
As of end of April we had to reduce our payroll cost by approximately 50%.
We undertook temporary and significant cost reduction actions, which can be grouped under three categories personnel related actions.
Adjustment to variable costs.
Which married to lower projected revenue and elimination of discretionary spending combined with a significant reduction in capital investment initiatives.
We have a certain fixed cost base, including the facility red administrative expenses and interest expense that are harder to compress we are and we will continue to focus on preserving cash this period of reduced demand.
Currently on the bright side, we're able to gradually reopened our both stores in all three segments as market conditions are allowing therefore, we start to bring back some of our workforce changing store hours and adjusting payroll.
We are seeing this as a part of the first step to a gradual returned to a new normal.
In fact, they buy the and week by week sell threads are showing civilization and in some cases early signs of improvement.
And the first few days of me sales markedly improved compared with what was experienced in April at the very thick audience starts reopening for example in the maritime and in the problems of Quebec.
Although we are starting to see some encouraging sign these remain significant uncertainty going forward from the impact of depending make and they're really to financial impact is difficult to estimate or predict at this site.
However, let me provide you with a bit of color on the limited visibility we have.
As of Tuesday May 12 unit feel like had access to approximately $110 million on its credit facility. Following the good any preservation efforts take into context at Cobiz 19 pending.
In addition should depend indicates that longer than current expectation, we have initiated at our divest stage of discussion with certain existing lenders and governmental institutions to refinance certain debt would have you to preserving and increasing our available liquidity.
If we realize our refinancing strategy as anticipated our total access to liquidity would increase by an additional 100 million dollar to 210 billion on a pro forma basis as of May 12 point way.
Therefore.
We are confident that we have a solid financial plan to address the current price and sufficient liquidity to meet darker its operating and capital me.
This complete the financial review of the first quarter and I'll turn the call back to Brad.
Thank you are in conclusion the actions taken during the crisis will provide a safe and solid foundation as we returned to normal for all of US team continues to act on a number of fronts to address the new market realities as they are happening.
We're confident that these actions, including the ones to enhance our liquidity that we would be in a situation not only to weather the crisis, but emerge in a positive position.
I would like to thank each of the 6000 plus team members again for their commitment to adapt and to execute especially since the onset of coven 19, I would also like to thank our shareholders for their support and their guidance and these unprecedented times.
This concludes our presentation, we're now ready for your questions from Julie If you will please.
Here, if you like test the question Press Star one on your telephone keypad to withdraw your question has to come cheap seats waste, while the compiled the question.
Your first question comes from the line, that's been or plucky with their shopping. Please go ahead.
Yes, but thank you very thank you very much in a good morning, everyone.
If we looked at the end pockets, but didnt 19 could you talk about a if there's any particular region that are more or less impacted by idea dependent.
[noise] look better way it varies so much.
It week by week different markets, depending on the government government.
Actions, depending on the no real putting this sector section, but just think about Quebec right for instance, where the various economies from a regional standpoint are not moving into the same thing. So it's it's there's a wide range here and I wouldn't want to put color more so than anything else.
I will tell you that on a global bases, we saw sales reducing by about 50% in in the month of April.
And as I said that in my by my location.
This is a positive sign versus making that said that we're seeing may improving over April was slightly and Neil.
The markets will reopen we think that a revenue will follow.
Okay, perfect and when we look at you cost reduction initiatives, you've already taken some action with some furloughs some salary cuts reduce our work. So if we look in the past you've been quite good with that fit program in order to a.
Due to improved margin. So could you talk a little bit about the Oh overall fits that could vietnam's due to to improve cost and in terms of EBITDA also what type of margin we might be looking out given the significant reduction in itself.
Yes, so look.
I think it would be premature for us to to indicate the in any shape or form.
Overall impact at this point.
I think that if anybody has a crystal ball.
Yes, how quickly each economy will reopen.
Then there will be an easier conversation at all photos boldly. So I think I can only madej way way, we control and nothing we've done a very I'm personally very pleased with that would it seems that.
Last 60 days.
It's a very different world right now up there and that works or any managing our affair to make sure that we are that reduce cost and a significant manner.
The reality is we'll bring people back as revenue comes back and we got it. Please go to adjust that on a daily adjustments I can tell you from a store perspective, we tailor it to adjust workforce on a daily basis across our organization.
So that's a that's the extent of the color can give a disappointment.
Okay and in terms of working cap there was some consumption, which is typical in Q1 big improvement versus last year, but if we look at the full year 2020 could you walk us through de yes session action that you are taking and wetter you should.
Consumer working cap or improve working cap or given the different discussion you out with the let's say the a the suppliers order.
Yes.
So I will tell you have been what the way you should think about our working cap is it in two sex sequence. The first half of 29 20, and the second half of two anyway.
Due to the buying.
Buying patterns of 2019, we have more payables to be paid in the first half of 2020 versus the second half of 2020 and this is just on normalized volume I just want to make sure in other words, it's not straight line in our purchase behavior of 2019, and therefore, there's a are your.
Impact on working cap in the first half versus the second half.
And as not as usual right that that Uni select Q1 tends to be a week quarter from a capital perspective, that's no different this year and Corbett is a menu determination of that for work. Your way. However, Colgate will have an impact on our Q2 working capital right that that just think about sell contraction and the fact that you're not.
Collect that as many dollars from to sell that you that you would have done otherwise so.
Well in normal cases, I would have told you first that we're going to burn cash that cannot wed generated cash.
Difficult for me through to see how Q3 will shape up in Q4, right, but where are certainly taking significant measures to manage our cash for active.
Okay and now.
Last question on the Liquidities front, obviously, youre, having discussion with the lenders that the government levels.
I am confident to to get the another 100 million increase in terms of credit facility could you talk a little bit about the kaufman's and when we look at Q2 Q3, Q4, obviously within EBITDA reduction it seems that the.
Leverage ratio ratio is going to increase significantly.
Versus the last two quarters, so just want to get more color about what type of.
Ratios wetter there you expect to receive some waivers and.
The flexibility you out there on that thank you.
We're progressing well in our discussions with a group of lenders.
I think everybody is very realistic in the market with what's going on that to your point. The EBITDA measures will be impacted and I can assure you that the dennard at various discussions with the lenders were addressing that point also I will then we will bring more color to this once the financing is closed.
No I'd want to speculate on the on the final outcome of the financing at this point.
But I can tell you that it's been that worked out and then on the basis to ensure that there's flexibility for the company in view of different kind of content.
Okay. Thank you very much virtus on gentlemen.
Thank you been one.
Your next question comes the line of Jonathan Lemere wed be ammo kept those markets. Please go ahead.
Good morning, Good morning, Brian.
Eric could you. Please clarify a comment that you made in your prepared remarks I believe you.
Said something along the lines that the current credit facilities will meet needs for the foreseeable future does that comment include.
The proposed refinancing or exclude Dodd.
If I exclude the proposed refinancing based on what we see today.
We believe that we had the required barges. The reason why we're going ahead, whatever restructuring of kind of refinancing. So to speak is essentially nobody has visibility on how long this uncertainty and that period will that so we want to make sure that we have the proper flexibility over the coming months indicate that this crisis is longer.
And.
Okay and.
When you say that if you exclude that you believe its adequate I would be under the assumption is that you've laid out on slide 16 as I've got about is that fair to say.
Fysixteen or whatever Sightsee fysixteen.
Yes, I guess, yes.
Yes, yes.
Okay and can you tell us who the government institution has that you're speaking to on what program. It as you're looking back sauce.
We'll provide more color when the transaction is finalized an agreed on.
Okay.
Thinking about a breakeven level of sales.
Do you have.
My estimate for where that would be to help us at reasonable estimates.
Well look it's a very dynamic element Jonathan.
I think what I can the indicated that if we are able to.
To generate the results similar to the April results, we believe that we would be as we did a neutral on that basis.
But that still that theres, a so many things and so many moving parts.
And I would say, it's a range of depending on the revenue went up repeatable revenues are coming back.
Okay are you in a position to walk us through.
Your expense categories what portion.
Our where fixed expenses would be now or where they were before the.
Salary adjustments on what portions would vary with lower sales.
Well look I think the payroll contraction as we indicated in our remarks is about 50%.
Every year April to April.
Gives you any idea of the flex that we were able to do on the on the payroll site.
On the though that there is there is some unusual items that our Q1 right, there's the FX loss and the.
And the one fine.
In fact that we mentioned and those if you remove those that then you get into a a level of expense for the current volume.
Range on a quarterly basis between 28 and $30 million.
If you normalize this will put those type of one time and then you have your interest expense.
I would tell you that will be ranging between the into $20 million or with low low at $20 million range as my expectation at this point.
Okay, and how are the paint manufacturers.
Sorry, Jonathan winters, but it's our sorry, I apologize that fits window have interest expense in a quarter I met though more it's about the annual number so that there's a bit of a different eyeballs. How does this would be more like a 7 million.
<unk> expense for the quarter.
Okay. Thank you.
Brent.
How are the paint manufacturer responding to coal that in terms of.
Their relationship with you and the other distributors what are what are they communicating and are there any opportunities for you to access any.
Support or Conversely are there any.
Penalties, which should be thinking about.
So I would you say a we've been in constant conversation with all of our ER.
Our key partners supply partners, both on the parts and pain.
As you can imagine certainly on the paint side, we're very very integral with them. It is a good relationship. It is one has been very dynamic very open.
Very transparent, they're very supportive of everything we're doing and were very aware of what theyre doing in their supply chain.
They are all they're all facing 50% to 70% reductions in volumes.
So I quite frankly, we're we're working with them and make sure that when we come out of those together.
That we're we're in lockstep with so we can grow.
Okay, Thanks, and Derek regarding inventory and purchases.
Can you comment on how much has slowed purchases over Q2 and.
Described.
Any opportunities you see to sell down inventory to shore up the free cash flow.
Well I mean, if you look at what we've achieved just in Q1.
I think it's a significant destocking that we realize and we are certainly working on the bases that we reduced purchases significantly in the second quarter.
The reality, Jonathan as we add a sort of a target number of reducing inventory by approximately 100 million dollar compared to December 30, Onest 2019.
In my opinion will exceed that number slightly.
But what's important to understand is at some point you've got to maintain your fill rates and distribution you can only sell what you asked if you don't have it you lose et cetera. So fill rates has to be a and element that we maintain and we will obviously, there's been significant reduction in volume therefore, you're not burning through your inventory at the same speed that you were before.
The fact that you are reduced purchases on that basis, but we further reduce our purchases to destock, where we get away at where it makes sense the three businesses that targets to do so.
We'll tell you out based on Q1, and what I'm seeing so far we're tracking to our black.
And thats across all three boys period.
Okay. Thanks for your comments I'll pass line.
Thanks, John.
There are no further question at this time I will turn the call back over to the presenters for closing remarks.
Thank you very much for joining us today, and we look forward to talking to you as our next quarter results. Thank you and have a good they stay safe.
This concludes today's conference call you may now disconnect.
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