Q4 2021 Uni-Select Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Uni Select Inc. 2021 first quarter results conference call at this giant all lines are in listen only mode. Following the presentation, we will.
A question and answer session. If at any time during this call you quite immediate assistance. Please press star zero for the operator.
Note that today's call is being recorded.
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I would now like to turn the conference over to Max Rogen, Chief Legal Officer, and corporate Secretary. Please go ahead.
Thank you good morning, everyone and thank you for joining us for Uni select fourth quarter and year end conference call.
Resenting. This morning are Brian Mcmanus executive chair, and CEO of Uni select and Anthony <unk>, Our 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 this webcast presentation can be found on our website at Uni select dot com in the investors section.
As noted on slide two I would like to remind you about the caution regarding forward looking statements, which applies to our presentation and comments.
All amounts are expressed in U S dollars, except as otherwise specified.
With that let me turn the call over to Brian .
Thank you Max good morning, everyone and thank you for joining us for our fourth quarter and year end results conference call.
The second half of 2021 was very exciting as we work to set the foundation for future growth.
We refreshed the leadership team aligned the three businesses with our vision and focus on operational excellence.
Parallel we also identified some interesting growth opportunities and look forward to executing upon them in 2022 and beyond.
Let me turn to slide four for the key highlights of the fourth quarter.
We ended the year in a very strong note with profitability, surpassing 2020, as well as pre pandemic levels in 2019.
These results reflect the successful implementation of operational improvements significant savings on borrowing costs and the dedication and relentless efforts of all our team members.
Consolidated sales for the fourth quarter were up just over 9% to $400 million.
From $366 million last year, primarily attributable to organic growth of seven 5%, reflecting continued recovery in all business segments, coupled with a favorable impact from currency conversion.
Organic sales were positive for third consecutive quarter with all three segments contributing driven.
Driven by increased demand and price increases.
In turn adjusted EBITDA increased 47% to $37 million or a margin of nine 4% compared to $25 million or.
Or a margin of six 9% last year, representing an increase of 250 basis points.
Excluding government assistant assistance programs received last year, the margin would have increased by 280 basis points.
This performance was largely driven by additional vendor rebates in all segments and a streamlined cost structure.
These factors were partially offset by higher expenses related to a fully operational business.
Unfavorable variations in foreign exchange and higher short term incentive expenses.
As a result of higher adjusted EBITDA and significantly lower financing expenses, our adjusted EPS reached <unk> 36 per share versus an adjusted loss of <unk> <unk> per share last year.
Now turning to slide five for a quick overview of the year.
Consolidated sales for the year were up almost 10% to $1 6 billion.
Mainly driven by organic growth and currency conversion effects.
Sales have not quite recovered to pre pandemic levels, primarily due to slow recovery. It finished master profitability certainly has.
Adjusted EBITDA and adjusted EPS reached $147 million and $1 14 per share respectively in 2021.
Given this greatly improved profitability, we generated solid cash flow from operations, which we used to make strategic investments to grow our business and continue to reduce our total net debt ending the year at $309 million, our lowest level since 2017.
I will now turn the call over to Anthony to complete the financial review.
Anthony.
Thank you Brian .
Turning to page seven for finished master.
With sales and organic growth increased eight 5% to $168 million.
Driven by a general recovery in the market and the effects of price increases.
Sales have continued to improve sequentially generating positive growth for a third consecutive quarter.
Adjusted EBITDA also continued to improve.
<unk> $15 $6 million or a margin of nine 3%.
Compared to $8 $4 million or a margin of five 4% for the same period last year.
This significant improvement was driven by additional sales volume and rebates.
As well as an optimized cost structure.
Note that Q4 2021 represents the best adjusted EBITDA margin for finished faster over the last nine quarters.
This is a testament to our operational initiatives taking hold.
For the full year sales reached $672 million.
Up two 8% from $654 million in 2020.
But remained lower than the 2019 level of $831 million.
Adjusted EBITDA reached $55 million or a margin of eight 2%.
From $33 million or a margin of 5% in 2020.
But still down from $773 million or a margin of eight 8% reached in 2019.
While the sales recovery in the FM business is taking longer to materialize. Our operational improvements are definitely taking hold as our margin is much closer to pre pandemic levels.
For 2022, our focus will be on ramping up sales.
Optimizing our path to markets.
And further leveraging technology to develop our operating model.
Turning to page eight for the Canadian automotive group.
Sales reached $136 million.
Up 9% from $125 million last year.
This growth was attributable to strong organic growth of five 5%.
Driven by increased demand price increases and favorable currency conversion effects.
Sales remained strong in Canada and have now surpassed 2019 levels.
Adjusted EBITDA reached $16 $8 million or a margin of 12, 4% up from $13 $5 million or a margin of 10, 8% for the same period last year.
This increase is mainly due to additional vendor rebates.
Mix and price increases.
It was partially offset by an unfavorable variation in foreign exchange.
For the seventh consecutive quarter CAG reported double digit adjusted EBITDA margins.
For the full year sales reached $541 million up.
Up 11, 4% from $485 million in 2020.
And surpass sales of $516 million in 2019.
Similarly, adjusted EBITDA reached $64 million or.
From a margin of 11, 7%.
Up from $48 million or a margin of nine 9% in 2020.
Despite having recorded a $3 $3 million government subsidy in 2020.
2021, adjusted EBITDA also surpassed the 40.
The $47 million or margin of nine 1% reached in 2019.
For 2022, we see further opportunities to improve our overall CAG operations.
Turning to page nine for GSS.
Sales reached $96 million.
An increase of 11, 2% from $87 million for the same period last year.
Mainly driven by organic growth of eight 6%.
And the positive effects of currency conversion.
This represents the fourth consecutive quarter of sales increases.
And sales have now surpassed 2019 levels.
Adjusted EBITDA reached seven $4 million or a margin of seven 6% up from $6 $7 million or a margin of seven 7% last year.
This growth.
And adjusted EBITDA is due to additional sales.
Higher vendor rebates and an optimized cost structure.
Partially offset by the government subsidies recorded in 2020.
For the sixth consecutive quarter GSS has reported an improvement in its year over year adjusted EBITDA.
For the full year sales reached $400 million.
Up 22% from $333 million in 2020, and surpass sales of $393 million in 2019.
Similarly, adjusted EBITDA reached $37 million or a margin of nine 2%.
Up from $21 million or a margin of six 2% in 2020.
And surpassed the $22 million or margin of five 6% reached in 2019.
In fact 2021 adjusted EBITDA is the highest on record since Uni select acquired the business in 2017.
In the quarter, we opened two greenfield branches and we expect to invest an additional openings in 2022 in line with our growth strategy.
In summary, we are pleased with the operational results across all three of our businesses.
And are encouraged by the growing list of opportunities for ongoing improvement.
And sales initiatives that will be executed in the coming year.
Turning to page 11 for comments relating to our cash flow.
We generated $28 million of cash flow from operations in the fourth quarter.
<unk> to $48 million last year.
This decrease is primarily due to is primarily attributable to an unfavorable variation in working cap versus 2020.
Partially offset by increased profitability.
After accounting for net investments in merchant advances as well as Capex on intangibles, we generated free cash flow of $20 million in the fourth quarter.
Versus $46 million for the same period last year.
This is primarily driven by lower cash flow from operations.
Bind with higher value added investments.
Including the modernization of the vehicle fleet.
The development related to sales and productivity initiatives and.
And increased customer investments.
Similarly for the year, we generated $114 million in cash flow from operations and.
And $91 million in free cash flow.
Paired to $133 million and $122 million, respectively in 2020.
Recall that this variation is primarily attributable to a meaningful release of working capital in 2012 in 2020.
Driven by the right sizing of the balance sheet.
During 2021, we began to reinvest in strategic initiatives to grow the business.
Therefore, our investments in Capex intangibles and customer incentives were higher than in 2020.
And have effectively returned to pre pandemic levels.
In 2022.
We will be increasing these investments across the three business units.
Key projects include one time improvements to the CAG distribution network.
Increased customer investments in F M and additional greenfield branches and GSS.
Turning to our financial position on page 12.
Recall that last quarter, we said that our total net debt would tick up at the end of the year.
Due to our decision to strategically procure inventory.
Given the given the timing and the arrival of these goods. We now expect the impact of inventory on our cash flow to flow through in the first quarter of 2022.
As a result at the end of Q4, our total net debt stood at $309 million, including $99 million of Ifr 16 lease obligations.
To buildings.
This represents a decrease of $6 million versus $315 million at the end of Q3 2021.
And represents our lowest debt level since Q2 of 2017.
Driven by a higher adjusted EBITDA and lower total net debt or.
Our leverage ratio decreased further to two one times at the end of 2021 from two three times at the end of Q3.
And 4.0 times at the end of 2020.
In addition at the end of the quarter, we had $186 million.
Available liquidity subject to compliance with financial covenants.
Looking to 2022.
We continue to be highly focused on driving asset utilization, including working capital in order to drive stronger returns for our shareholders.
Yeah.
I'll direct you to page 13 for an update on our capital structure.
In the fourth quarter, we entered into an amended credit agreement with a syndicate of lenders.
We reduced our credit facility from $453 million to $400 million and converted it into a single revolving facility.
The new facility features a reduced pricing grid.
Revised covenants and covenant calculation.
As well as increased flexibility.
And now also includes a $200 million accordion feature.
In addition to covenant step ups in the case of certain acquisitions.
This decision reflects our increased confidence in the stability of our business and in our cash flows.
As well as our desire to further reduce standby fees wildly.
While leaving us with ample headroom to operate and grow.
Finally, we were in compliance with all of our covenants at the end of the quarter.
And are pleased with our ability to successfully leverage our improved financial position to further reduce financing costs.
I will now turn the call over to Brian for concluding remarks, Brian .
Thank you Anthony.
If you could please turn to slide 15.
We moved forward on key initiatives in the second half of the year.
First we identified and executed operational improvements across the three business units.
At <unk> had the opportunity to visit our operations in many parts of the country I am pleased with the work that Emily and her team has started on the operations front, which effectively helped drive double digit margins.
Furthermore, the team continued to nurture relationships with our members who form the historic backbone of our company.
We also toured the distribution operations and identified opportunities to better utilize our existing distribution center footprint.
F M. We have substantially improved inventory management through the better use of technology and analytics.
We also reviewed our distribution network in detail consolidated a distribution center and successfully integrated its operations into the four remaining distribution centers.
Furthermore, we leveraged the tools at our disposal to better understand unit and customer level profitability and plan to use this information to improve performance over the coming years.
At G. CSF, we expanded our click and collect service across the network, which is yielding incremental sales.
We also announced and started to execute our rebranding strategy to GSA, which has begun to generate excitement amongst employees and customers alike.
In addition, with a renewed team and by leveraging technology. We are in the process of improving our working capital management.
We also made headway at the corporate level, we streamlined our overhead costs and now have a lean corporate team in place to support the business going forward.
In the past six months, we also made substantial improvements to the company's results and financial position.
As mentioned earlier 2021 was a strong year for Uni select in terms of profitability adjusted EBITDA reached $147 million or a margin of nine 1% and adjusted earnings rose to $49 million or.
Or $1 14 per share.
Given our active cash management and improved profitability, our total net debt decreased year over year to $309 million or a leverage of two one times the lowest level since 2017.
In the second half of the year, we also made material progress with the team and organizational culture.
We improved our bench strength with a completely new senior leadership team through a combination of key hires and promotions across the businesses.
This refreshed team has stepped up to the challenges and is rapidly aligned to the strategic direction. We are taking.
We are focused on empowering our people, making them accountable and having them behave as owners of our company.
While changing the company's mindset takes time and effort we are already seeing signs that a culture shift is slowly being embraced.
With our operational improvements taking hold our healthy balance sheet and our new leadership leadership team firmly in place we are well positioned to take advantage of growth opportunities.
Our priorities for 2022 will be to continue to drive operational improvements across each business unit.
We will also reinvest in the business and expect to increase spending for Capex and customer investments in.
And finally, we will look for strategic acquisition opportunities to further expand and consolidate our market position in all three businesses.
That said, we remain cautiously optimistic about 2022, as we continued to face headwinds with regards to our supply chain and labor.
More specifically, we expect challenges with fill rates inflationary pressures on labor and labor availability.
While our team has done a great job managing through these so far we expect it will become increasingly challenging going forward.
Recall that tag and GSS or more likely to be impacted by global supply chain shortages FM for its part is also far from being immune from these challenges.
Based on what we currently see we expect modest improvement in sales and higher adjusted EBITDA and adjusted EPS in 2022 compared to 2021.
This assumes more intense inflationary pressures and supply chain and labor challenges.
These factors are expected to be mitigated by a more optimized cost structure lower financing costs and a strong focus on driving sales in our three business units.
To conclude we have started to create a solid foundation from which we can successfully build the future.
We have the assets the financial flexibility and a dedicated and passionate team to make this happen.
This concludes our presentation, we're now ready to answer your questions.
Operator.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session.
Do you have a question. Please press star followed by one on your Touchtone phone.
<unk> Brown Ichnology request and your question will be pulled in the order that you received.
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Your first question comes from David Ocampo, with Cormack Securities. Please go ahead.
Hi, Thanks, good morning, gentlemen.
Good morning morning, David.
In your release in your prepared remarks, you called out rebates as a <unk>.
Driving factor behind part of the margin improvement, but you guys also noted in the release.
<unk>.
Rebates for where low last year, particularly in finished monster just from inventory.
Optimization.
Curious if we stripped out any abnormal rebates what would the margin profile look like I'm, just trying to get a sense on what that's a good run rate going forward.
Alright, Thank I think David if you naturally you're going to have a little bit of.
I have a catch up in rebates in Q4, as we sort of realize on or have a better idea of what our aggregate purchases will be for the year. So what I would do is I would use the full year.
Our full year margin details that we provided.
And I would take those as a good estimate of what to expect going forward.
Okay. That's helpful.
You guys called out labor scarcity and inflation is an ongoing headwind.
Anthony maybe you could speak a little bit about your ability to pass through price increases.
Our ability to defend margins is it something where we can expect it to be flat or can we still expect.
The margin improvement going forward.
Naturally we're going to do we're going to do our utmost to try to continue to drive margin improvement.
What I would say is.
In some parts of our business.
The ability to pass through prices easier than in others.
So far we've been pleased with what the team has been able to accomplish though in this regard.
And was there any benefit in the quarter from moving over lower price inventory.
There is theres going to be a little bit David, but it's not not something that I would call out as a material driver.
Okay. That's it for me I'll hop back in the queue.
Thanks.
Thank you <unk>.
Next question comes from Noah <unk> with Laurentian Bank. Please go ahead.
Hi, good morning, everyone.
Morning.
So the first question is on the pricing front I just noticed in your presentation for GSS, there hasn't been any price increases or there wasn't any material impact from that so is that one of those parts.
One of those segments, where we should expect in future price increases and I'm. Just wondering if you could give us some more color in terms of how your competitors are.
On the pricing front <unk> been the leader in that or Youre, just following the industry in terms of price increases.
It's hard for me to comment directly on my competitors I can say that.
We do our utmost to pass through price increases as they as they come through and it varies between the business units kind of the timing of those price increases both when we receive them and when we're able to pass them on.
Yes.
Okay.
Fair enough and just you had mentioned that M&A or.
Acquisition opportunities is something that now you'll be looking at it I'm just wondering what's the comfortable bridge liberate that you guys are thinking internally.
Uh huh.
I'll borrow a line from Brian here.
We've just recently done a bunch of work and gotten ourselves.
Out of a situation, where we were arguably over levered. We're in no rush to return to that level. So we'll be we'll be very prudent as we as we think about the capital structure going forward.
Yes.
Okay Fair enough and just last one again on the capital allocation. One is dividend something that that is also under discussion right now youre more focused on deleveraging and if there is an opportunity to just focus on the M&A.
Yeah, well you almost answered your own question, but I would say obviously dividends are always a board decision, but I think the board and management certainly feel that going forward.
We have a good potential pipeline to deploy capital.
That would be best for all shareholders. So at this point.
I would say dividends or not.
In the near future.
Okay. Thanks for the color I'll get back in the queue. Thank you.
Thank you.
Thank you. Your next question comes from Benoit Poirier with Desjardin capital. Please go ahead.
Hey, Good morning, Brian and then Tony and congrats to the team for the impressive results.
Thank you Brian .
Yes, just looking at 2022, obviously you finished on a strong note with an adjusted EBITDA margin of 9.1 you had.
Expected improvement in 2022 could you provide more color about the magnitude of the change we might see and also the biggest driver that will drive.
The improvement for each.
Each segment.
I think I think really going forward venmo, a key focus for us and the teams and a lot of it is even the way we set up our structures, where we're looking to push as a lot based on driving it from the top line and then.
Letting it flow through getting that leverage as it goes through the income statement.
As you know, we're not going to provide specific guidance on EBITDA I think we've kind of come with a statement that we do expect it to be.
Higher in 2022.
<unk>.
While we have some certain headwinds that we've identified I think at the same time a lot of the operational improvements that we're putting in place and I think continue to take hold.
Help mitigate that and hopefully more than offset it.
Okay.
On the call, Brian you've talked about the sales initiatives that will drive results in 2022 could you maybe provide more color about the sales initiatives you put in place.
I think I'd prefer not to get into the specifics on it Ben watches for competitive reasons.
Okay, Okay and for 2022 with respect to Capex any color you could provide in terms of what we might expect in also.
And then are removed in Q1 any color about the free cash flow expectation.
Yeah, I think I think it's easier for me Benoit.
More comfortable for me to answer the first part of your question. So in terms of in terms of the Capex.
I would I would guide you to something or to expect something closer to 2019 levels of capex and customer investments in the business.
Okay. Okay, that's great color and last one for me strategy to acquisition opportunities.
Any color about which segment.
We should see more there was more you feel that there was more fortunate these right now.
I wouldn't highlight one in particular <unk> I think we do see opportunities across the three business units of various sizes.
If we're going to be very disciplined with our capital and use it in what we feel is the most appropriate.
Preet opportunity so.
Yes, really just to say that we're seeing opportunities across all three businesses.
That's great. Thank you very much for the time.
Thank you Ben.
Thank you. Your next question comes from Daryl Young with TD Securities. Please go ahead.
Good morning, gentlemen.
Hi, Derik.
First question is is around finish master in.
Just some of the competitive dynamics in the industry I'm wondering if you've seen any of.
The retail auto parts players look at shifting into paint at all I know there is a pretty concerted push by some of them to move greater into the do it for me segment on the auto parts side, but just curious if they picked up any.
Sure.
Daryl we're not we're not we're not seeing that dynamic play out, but it is a competitive environment.
Okay and then.
Just in terms of.
Negotiations with customers finish master and in the U S.
Scale uncertainty of supply.
Certainly been highlighted as important through the pandemic has abated easier to have those conversations with customers to win new work or are there any shifting dynamics in terms of small distributors getting pushed out.
Daryl.
We manage.
Manage our inventory and our fill rates very very carefully.
We're managing that on a daily weekly monthly basis. So we're really focused on on what we can control and that's making sure we have the right product in the right place at the right time for the customers.
Okay, and then with which we do hope translates into <unk>.
Finding ourselves.
Being more attractive to the customers out there and increasing our market share.
Okay, Great and then.
In terms of the auto parts.
Have you seen in each of the last quarter, you mentioned, some mix shifts and the ability to.
Get customers on to in house branded products.
Have you seen any changes in those dynamics and I guess following on that is there any margin mix shift related to maybe a normalization of those buying patterns in the future that you would expect.
Yes, I think it's something that we continue to we continue to work towards Darryl.
Particularly I think that private label part of our business has been particularly helpful. As we've thought about.
Maintaining in stock positions and all of our Skus.
And one of one of the drivers of margin in the quarter and throughout the year quite frankly has been has been the mix of private labels.
Okay, and you would expect that to be a sustainable trend.
We think so we think.
Sort of the.
The <unk>.
Tightness of shortages in some of the branded products has allowed our clients or customers to really see the value proposition that these private brands spring.
Okay, great. Thanks, that's it for me thanks, guys.
Thank you.
Thank you. Your next question comes from Kerry I ever shed with National Bank. Please go ahead.
Good morning.
Exactly.
So without asking you to peg it to a number but discussing your leverage comfort zone would you be willing to take it higher than normal in the short term for the right acquisition or is it more of a hard cap on your mind.
Yes, that's accurate I think.
We've published.
We will be publishing momentarily, our amended credit facility on an on SEDAR and I'm getting a nod here that it hasnt been published.
So there is we have the our covenants are kind of clearly indicated in there as well as the step up provisions that I that I mentioned, so we would want to make sure that in anything that we do.
We're not in a position, where we're where we're bumping up too closely to those covenant levels.
Absolutely. Thanks.
And you see opportunities across the segment, what's your pecking order for M&A among the three and are you looking at anything outside of your existing geographies.
I think the second part of that question will be easier to answer I would say, we're not looking outside of our existing geographies.
For the first part.
It's really I can't say, there's one particular preference I think we're going to just look at each opportunity and judgment on its own merit.
How it fits with that particular business unit.
That's helpful. Thanks, and then last one for me any interest in ever getting back into U S auto parts.
I never want to say never but I would say at the current time I think we have enough on our plate and enough opportunities ahead of us with the way the three business units are currently running.
Fair enough thanks for that I'll turn it over.
Thank you.
Thank you.
Next question comes from Jonathan Lamers with BMO. Please go ahead.
Good morning.
On the supply chain.
On the supply chain challenges, which are affecting the distribution center sector.
Sector globally.
Could you provide any commentary as to how those trended.
Towards the end of the quarter into Q1.
Whether it started to result in lower fill rates or anything like that.
I think as we've.
In the prepared remarks, we talked about it that we continue to see challenges.
Fill rates really vary regionally and by different business units.
And really.
What may be short in one particular time period makes up at another particularly the time period and our team is doing a great job of.
Finding other sources and finding ways to mitigate.
We are seeing potential.
Potential shortages, so it's a constant ongoing challenge.
I am very pleased with how we're how we're trying to manage through it.
And we hope that as we progress through the year that some of these will start to disappear.
Okay non finish master.
Sure.
Volumes are still.
Quite depressed compared to 2019.
Are you finding that is.
Volumes start to recover.
But you are starting to bump up against labor shortages or.
Maybe asked another way.
How much more capacity do you think you have to sort of fill finish master before the.
Labor shortages or wage inflation starts to become an issue for you.
I think it's less of an issue for us as it is when you get down to the actual paint shop level, where both a combination of part shortages with labor.
Labor availability, there is more what's probably holding back.
Some of the overall demand from our perspective I'm comfortable that we have the capacity and as we continue to work on our network the ability to.
Handel.
Some good growth.
Going forward, it's really going to be when that demand is able to fully kick back.
Brian would you be comfortable to provide us with a little more.
Color on the acquisition pipeline that you see are.
Whether you signed any.
N D A's or LOI is yet for example, and maybe the devaluations that.
You see out there.
I would say, thanks for asking Jonathan but no I wouldnt be comfortable on any of those.
Fair enough. Thanks for your comments.
Alright, thank you.
Thank you.
No further questions at this time Mr. Mcmanus you May proceed.
Thank you operator, and thank you everyone for listening we look forward to updating you on our progress during our next quarterly call have a great day.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.