Q1 2022 Uni-Select Inc Earnings Call

Operator: Good morning ladies and gentlemen and welcome to Uni-Select Inc`s 2022 first quarter results conference call. At this time all listeners are in listen-only mode. Following presentation we will come back to question and answer session.

Operator: If at any time you during this call you require immediate assistance, please press star zero for the operator. Note that today's call is being recorded. [French translation]

Operator: [French translation]

Multiple speakers: [Operator] [French translation]  I would now like to turn the conference over to Max Rogan, Chief Legal Officer and Corporate Secretary. Please, go ahead. [Max Rogan] Thank you. Good morning everyone, and thank you for joining us for Uni-Select`s first quarter conference call.

Max Rogan: Presenting this morning are Brian McManus, Executive Chair and CEO of Uni-Select, and Anthony Pagano, 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.com in the Investors section.

Max Rogan: As noted on slide 2, 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 US dollars, except as otherwise specified. With that, let me turn the call over to Brian.

Brian McManus: Thank you, Max. Good morning everyone, and thank you for joining us for our first quarter results conference call.

Brian McManus: Please turn to slide 4 for the key highlights of the first quarter.

Speaker 5: First quarter.

Brian McManus: We are pleased with our first quarter performance. We had a strong start to the year, with sales increasing as market tailwinds improved demand and we saw price increases above historical levels.

Brian McManus: We also benefited from the operational improvements implemented by our team over the past several quarters, and favourable timing and reconciliation of vendor rebates.

Brian McManus: Turning to our results, consolidated sales for the first quarter were up 11% to $410 million, from $370 million last year, primarily attributable to organic growth of 11.6%.

Brian McManus: In turn, adjusted EBITDA increased over 50% to $45 million, or a margin of 11%, compared to $30 million, or a margin of 8.1% last year, representing the increase of 290 basis points.

Brian McManus: This performance was largely driven by higher sales, additional vendor rebates in all segments, and a streamlined cost structure.

Brian McManus: These factors were partially offset by our higher operating expenses related to inflationary fuel and energy costs, as well as the cost impact of a fully operational business.

Brian McManus: As a result of higher adjusted EBITDA and significantly lower financing expenses, our diluted adjusted net earnings per share reached 43 cents per share versus 12 cents per share last year.

Brian McManus: While our first quarter performance was very strong, we caution that the magnitude of improvement will likely be greater in the first half of the year due to the timing of certain rebates and as we begin to lap operational improvements implemented in the back half of 2021.

Brian McManus: Furthermore, although we do expect to leverage further operational and market opportunities going forward, including potential strategic acquisition opportunities, we still need to contend with ongoing supply chain challenges, labor issues and inflationary pressures.

Brian McManus: I will now turn the call over to Anthony to complete the financial review. Anthony?

Anthony Pagano: Thank you, Brian . I will direct participants to page 6

Anthony Pagano: Before I discuss the results from our three segments, I would like to touch upon two onetime items that negatively impacted EBITDA by about $12 million in the first quarter, both of which have been excluded from the calculation of adjusted EBITDA.

Anthony Pagano: The first relates to inventory obsolescence. As you recall, in Q2 of last year we took a large charge associated with the change in inventory provision assumptions at our finished master segment.

Anthony Pagano: During Q1 of this year, we conducted similar work regarding our inventory provision methodologies at kag and their underlying assumptions.

Anthony Pagano: As a result of this, a one-time obsolesccent expense of $10.9 million was recognized in the quarter.

Anthony Pagano: We also recognized a $1.2 million expense for various items, including restructuring charges relating to the rebranding of GSF and other special items.

Anthony Pagano: Having taking these two charges in Q1, we anticipate that the bulk of one-time charges for 2022 have been completed.

Anthony Pagano: Turning now to page 7 for finish master.

Anthony Pagano: Both sales and organic growth increased 9% to $173 million, driven by a general recovery in the market and the effect of price increases.

Speaker 4: And organic growth increased 9% to $173 million.

Speaker 4: Driven by a general recovery in the market and the effect of price increases.

Anthony Pagano: Adjusted EBITDA also continued to improve, reaching $19.6 million, or a margin of 11.3%, compared to $10.1 million, or a margin of 6.4% for the same period last year.

Anthony Pagano: This significant improvement was primarily driven by additional sales volume and rebates, as well as an optimized cost structure, which is testament to operational initiatives taking hold.

Speaker 4: As well as an optimized cost structure, which is testament to operational initiatives taking hold.

Anthony Pagano: Our focus remains on ramping up sales, optimizing our path to market, and further leveraging technology to develop our operating model.

Anthony Pagano: Turning to page 8 for the Canadian Automotive Group.

Anthony Pagano: Sales reached $130 million, of 12.7% from $115 million last year.

Anthony Pagano: Mainly attributable to strong organic growth driven by increased demand and price increases.

Anthony Pagano: We have been pleased by our ability to grow sales, despite continued supply chain constraints across certain product categories.

Anthony Pagano: Adjusted EBITDA reached $17.2 million, or a margin of 13.2%.

Anthony Pagano: Up from $12 million, or a margin of 10.5%, for the same period last year.

Anthony Pagano: This increase is mainly due to improved demand, additional vendor rebates, price increases and product mix.

Anthony Pagano: Note that during the first quarter we completed the acquisition of three stores from one of our members in Quebec.

Anthony Pagano: Turning to page 9 for GSF.

Anthony Pagano: Sales reached $107 million, an increase of 10.7%, from $97 million for the same period last year.

Anthony Pagano: This growth was mainly attributable to organic growth of 14.8%.

Anthony Pagano: Driven by demand and price increases.

Anthony Pagano: And partially offset by the negative effect of currency conversion.

Anthony Pagano: Adjusted EBITDA reached $10.9 million, or a margin of 10.2%, up from $10 million or a margin of 10.3% last year.

Anthony Pagano: This growth is due to additional sales volume, higher vendor rebates and an optimized cost structure.

Anthony Pagano: It was partially offset by government subsidies recorded in 2021 and higher operating expenses relating to inflationary, fuel and energy costs.

Anthony Pagano: As well as a growing network of stores.

Anthony Pagano: In the quarter we opened two Greenfield stores and we expect to invest in additional openings in 2022, in line with our growth strategy.

Anthony Pagano: In summary, we are pleased with the operational results across all three of our businesses.

Anthony Pagano: And are encouraged by the growing list of opportunities for ongoing improvements and sales initiatives that will be executed going forward.

Speaker 6: For ongoing improvements and sales initiatives that will be executed going forward.

Anthony Pagano: Turning to page 11 for comments relating to our cash flow.

Anthony Pagano: We generated $8 million of cash flow from operations in the first quarter, compared to a small cash outflow in the same period last year.

Anthony Pagano: This variance is primarily attributable to increased profitability and lower interest payments, given our immitted credit facility.

Speaker 4: Given our immentended credit facility.

Anthony Pagano: It was partially offset by higher working capital investments due to typical seasonality and additional inventory purchases to mitigate supply chain delays.

Anthony Pagano: After accounting for net investments in merchant advances as well as capital investments.

Anthony Pagano: We generated free cash flow of $2 million in the first quarter, up from outflows of $6 million for the same period last year.

Speaker 6: Up from outflows of $6 million for the same period last year.

Anthony Pagano: This is primarily driven by higher cash flow from operations combined with higher CapEx.

Anthony Pagano: Including the opening of stores at GSF, and software development to support productivity and sales initiatives.

Anthony Pagano: Note that customer investments were lower than the same period last year due to timing.

Anthony Pagano: Turning to our financial position on page 12.

Anthony Pagano: At the end of Q1, our total net debt stood at $327 million.

Anthony Pagano: Including $104 million of IFRS 16 lease obligations related to buildings.

Anthony Pagano: This represents an increase of $18 million versus $309 million at the end of the fourth quarter.

Anthony Pagano: Although our total net debt was higher, our leverage ratio decreased further to 2x at the end of Q1 from 2.1x at the end of last year.

Anthony Pagano: Driven by a higher adjusted EBITDA.

Anthony Pagano: This leverage represents the lowest since the acquisition of GSF in 2017.

Anthony Pagano: In addition, at the end of the quarter we had $174 million of available liquidity, subject to compliance with financial covenants.

Anthony Pagano: We continue to be highly focused on driving absolute utilization, including working capital, in order to drive stronger returns for our shareholders.

Speaker 4: In order to drive stronger returns for our shareholders.

Anthony Pagano: I will now turn the call over to Brian for concluding remarks. Brian?

Brian McManus: Thank you, Anthony. Please turn to slide 14.

Brian McManus: Our views on 2022 have not changed since last quarter. Based on what we currently see, we still expect modest improvement in sales and higher adjusted EBITDA and diluted adjusted net earnings per share in 2022 compared to 2021. As I mentioned in my opening remarks, the magnitude of improvement will be greater in the first half of the year due to the timing of certain rebates and, as we begin to lapse, certain operational improvements implemented in the back half of 2021

Brian McManus: Having said this, we remain cautiously optimistic about 2022, as we face ongoing headwinds with regards to our supply chain and labor. We expect continued challenges with fill rates, inflationary pressures on labor and labor availability.

Brian McManus: While our team continues to do a great job managing through these, we expect it will become increasingly challenging going forward.

Brian McManus: Our priorities for 2022 will be to continue to focus on organic growth and drive operational improvements across each business unit. Making use of our improved balance sheet, we intend to reinvest in the business through increase Capex and customer investments, and begin to consider strategic acquisition opportunities to further expand and consolidate our market position.

Brian McManus: To conclude, we are well positioned to drive the business to the next level, given the global market recovery, our healthy balance sheet and the dedication of our team.

Brian McManus: This concludes our presentation. We are now ready to answer any questions. Operator?

Operator: Thank you, sir. Ladies and gentlemen, we will now conduct the question and answer session. You should like to ask a question, please press star and the number one on your telephone keypad. Should like to withdraw your question, please press star two. If you're using a speaker phone, please lift the handset before you press any keys.

Operator: One moment, please for your first question. The first question comes from Nauman Waqar Satti with Laurentian Bank. Please, go ahead.

Nauman Waqar Satti: Hi. Good morning, everyone. So my first question is more on the timings of vendor rebate, I think you guys benefited in last quarter from that and this quarter as well. How should we expect that in the second half, was in your outlook comments as well. It appears that the first half would be better than the second half. Is that the right way to think?

Anthony Pagano: Hi, Nauman. I think think the best way for you to think about this, as you  consider the balance of the year and similar to what I mentioned in the last quarter, is to look at the last 12 months, or rolling 12 months on average, and that should get you to about the right place, as we consider the full year 2022.

Nauman Waqar Satti: Okay, that's fair. And, I think in your prepared remarks you mentioned that the focus is on sales increase. Some of that is natural sort of recovery from COVID, but is there anything else that you guys are doing to increase sales, any new initiatives, or it's just benefiting from the natural volume rebound?

Anthony Pagano: Naturally we're focused on driving sales in all of our divisions. I think the prepared remarks I was referring directly to finish master, if I recall correctly. I think we do expect to benefit somewhat from a recovery in the market. But we have implemented a variety of initiatives both in terms of our team and incentivizing them. But, yeah, that's kind of what I had in mind. 

Speaker 6: Sort of our team and incentivizing them.

Speaker 6: Yes that that's kind of what I had in mind. Okay, and do you see any changes in the customer mix, like getting some customers- because of these ongoing, probably supply chain challenges and one things normalized- they can probably go back to different suppliers- or has anything changed in that within the customer mix recently?

Yes that that's kind

Nauman Waqar Satti: Okay, and do you see any changes in the customer mix, like getting some customers because of these ongoing, probably supply chain challenges and once things normalized, they can probably go back to different suppliers, or has anything changed in that within the customer mix recently?

Brian McManus: It's Brian speaking. Not so much from the client mix. I think on the supplier side we are looking to other suppliers to help fill where we may have shortages. But on the customer mix, for the most part it would be similar. There has been opportunities where we're able to fill in for a competitor that may not have what a particular customer`s looking for, but I would say it probably goes the other way sometimes for us. So in general it's fairly stable.

Nauman Waqar Satti: Okay, fair enough. And just one last one from me. I think you guys were also benefiting a little bit from the change in product mix, from private labels. Was that something in the [inaudible]quarter as well?

Brian McManus: Yes it's something we continue to focus on and we've made progress.

Nauman Waqar Satti: Okay, thanks for taking my question and congrats on a good quarter. 

Operator: Your next question comes from David Ocampo with Cormark Securities. Please, go ahead.

David Ocampo:   Thanks, good morning, everyone. I just wanted to circle back quickly on the private label stuff. I know the supply chain issues, as [inaudible] mix a little bit more towards private label. But as we begin to normalize, maybe in the back half of the year, maybe even 2023 deep, do you think that mix shifts back? Or just curious how sticky your private label business is, I mean, do the customers just shift back in a normal environment?

Brian McManus: Look, it's hard to predict with 100% the future, but I think, what we are seeing is a fairly good uptake by our clients. There seems to be some stickiness to it. I think they're seeing the value in it, and part of, also the increase in private brands is just the categories of products that we're also carrying it in. So we've expanded beyond just certain categories, so the mix has increased as well.

Speaker 6: Uptake by by our clients. There seems to be some sticking as to it. I think they're seeing the value in it, and part of also the increase in private brands is just the categories of products that we're also carrying it in. So we've expanded beyond just certain categories, So the mix increased as well.

David Ocampo: Right, right. No, that's helpful. And, I don't know if you can comment on this, but, I mean, it's pretty good organic growth across the board and all three of your divisions. I was wondering if you could break that down, if you can, between volumes and price increases. Is it more tilted towards price increases versus volumes?

Brian McManus: Yes, that's fair. I think it would be a bit more tilted towards price increases than volumes. And obvious, as you can understand, we're not going to break that down for competitive reasons.

David Ocampo: Completely understand that. And then, last one from me, on the MNE environment: is there one particular area where you see more opportunity and, just given all the volatility that we're seeing in the marketplace with multiples coming down, is there just less willingness to sell in the current environment?

Brian McManus: I think the best way I can answer that is just to say we're keeping our eyes and ears open in all the business units and we'll see what lies ahead, but we're confident that this year we`ll hopefully be able to see a couple of acquisitions.

David Ocampo: Okay, that's it for me. Thanks a lot, guys.

Operator: Your next question comes from Jonathan Lamers with BMO Capital Markets. Please, go ahead.

Jonathan Lamers: Good morning. Maybe picking up on that last question.

Jonathan Lamers: Brian, could you give us a little bit more color as to how the acquisition pipeline has trended versus the Q4 report in February ?

Brian McManus: Not really. I would say that it's still, there's still a pipeline, Jonathan, and we're actively discussing with various parties out there, but that's about as much as I would say.

Speaker 4: Actively discussing with various, various parties out there, but that's about as much as I would say.

Jonathan Lamers: Okay. And Anthony, I know you said that you can't break down the organic comp.

Jonathan Lamers: But just on finish master, the paint suppliers did see a real step up in their finish volume trend from Q4 to Q1. We didn't really see that with finish master this quarter, as far as I can tell.

Jonathan Lamers: Are the results we're seeing from the paint suppliers, just a leg? Did the finish master already benefit from that in Q4? 

Speaker 10: The panish milounouse to already benefit from that in Q4. I think there's.

Anthony Pagano: I can't comment on the results of our suppliers and we won't. But I think the one thing I would say is there's naturally some differences in timing around when we buy, when our competitors would buy, behaviour is influenced, actually buy price increases from suppliers because their customers will know, to some degree, in advance of their price increases coming in, so that tends to drive some volumes. 

Speaker 6: their customers will know, to some degree, in advance of their price increases coming in, so that tends to drive some volumes. 

Anthony Pagano: It's certainly something we look at and we consider, but very difficult to deconstruct.

Jonathan Lamers: Okay. That's fair. On paint inflation. Is there anything... help us with, in terms of timing  and there might be another round of price increases pass through?  

Anthony Pagano: No, we don't have visibility on that. I mean, those things typically come to the market in one go, Jonathan, so we can't speculate on when the timing of future price increases may or may not happen.

Jonathan Lamers: Okay, and just last question, on the auto parts divisions: has the parts supply availability gotten worse in recent months?

Brian McManus: I would say it hasn't gotten worse but it also hasn't improved very much. I can continue to be very pleased with the work of our team to mitigate around it, but I would say it's pretty much in the same position as we would have been last quarter.

Speaker 4: Of our team to mitigate around it, but I would say it's pretty much in the same position as we would have been last quarter.

Jonathan Lamers: And just on that would you say there was any material abnormal benefit from inflation in  the earnings this quarter that we should be thinking about as we model forward?

Speaker 10: Material abnormal benefit from inflation.

Brian McManus:  There will be a certain amount of benefit. I don't think I would call it material or abnormal, though.

Jonathan Lamers: Thanks for your comments.

Operator:  Thank you. Your next question comes from Daryl Young with TD Securities. Please, go ahead.

Daryl Young: Hey. Good morning guys. Congrats on a great quarter. Sticking out the inflation theme, but maybe coming out a slightly different way. We're starting to hear some folks talking about potential for a deflationary environment 12 months out. Is that's something that's that's on your horizon at this point, or is it still trying to catch up with the current inflationary environment? But the mobe's any comment you might have on that longer term called a threat? Yeah, it's really hard to comment on it, especially in the position we are now where we're not getting the supply that's coming in. So it's, I guess from our standpoint it's a little hard to imagine a deflationary scenario right now, So probably premature to have any any comment on that. And if that were to unravel with that, would that be?

Daryl Young: Hey. Good morning guys. Congrats on a great quarter. Sticking out the inflation theme, but maybe coming out a slightly different way. We're starting to hear some folks talking about potential for a deflationary environment 12 months out. Is that's something that's that's on your horizon at this point, or is it still trying to catch up with the current inflationary environment? But the mobe's any comment you might have on that longer term called a threat? Yeah, it's really hard to comment on it, especially in the position we are now where we're not getting

Daryl Young: Hey. Good morning guys. Congrats on a great quarter. Sticking out the inflation theme, but maybe coming out a slightly different way. We're starting to hear some folks talking about potential for a deflationary environment 12 months out. Is that's something that's on your horizon at all at this point, or you`re still trying to catch up with the current inflationary environment? But be muted any comment you might have on that longer term called a threat? 

Anthony Pagano: Yeah, it's really hard to comment on it, especially in the position we are now, where we're not getting the supply that's coming in. So, I guess, from our standpoint, it's a little hard to imagine a deflationary scenario right now, So probably premature to have any comment on that. 

Daryl Young: the supply that's coming in. So it's, I guess from our standpoint it's a little hard to imagine a deflationary scenario right now, So probably premature to have any any comment on that. 

Multiple speakers: [Daryl Young] And if that were to unravel with that, would that be margin destructive, I guess would be the way to put it, or there are ways to mitigate that in the future? [Brian McManus] There'll certainly be ways to mitigate it. I think one of the ways we're already mitigating it, which is part of the reason we don't necessarily see the gains from inflation or as much as you would expect if we had a larger inventory, is really, we continue to be very focused on working capital. So as we increase our turns of inventory, it reduces your exposure to either upward or downward price movement.

Multiple speakers: [Daryl Young] Sorry, I know that was a bit of a wildcard question. And then, just on the auto parts side. Just thinking through, you know, vehicle pricing, lack of new car inventory. Is there any way to kind of quantify how long this could impact you and how much of a benefit you see this being over the next 12, 24 months? [Brian McManus] Very, very difficult, if I mean, I'd like to think it does create a tailwind for us in that, you know, the people be hanging on to their cars longer probably, you know, investing into them, especially when you see the price of the used cars in general, that you know there's an incentive to continue to keep it in good shape. But beyond that very difficult to predict.

Multiple speakers: [Daryl Young] Got you, okay, thanks. Thanks for a humouring me guys. [Operator] Your next question comes from Zachary Evershed with National Bank Financial. Please, go ahead.

Zachary Evershed: Morning, everyone. Congrats on the quarter. So, as paint manufacturers do raise prices, do you see any lag in raising your own prices that might weigh on margins, or can you pass that through seamlessly?

Anthony Pagano: As we've discussed a few times here, Zach, the majority of our pricing to our customers is based off a sort of a manufacturer-published rate. It's called "jobber" in the industry jargon. So, as the paint manufacturer increases their prices, the jobber rate goes up and our pricing through to our consumer follows concurrently or immediately. So, to answer your question more briefly, they will not be alike.

Zachary Evershed: Great. Thank you. And then, are you comfortable with your inventory levels, given the current environment?

Anthony Pagano: As I've said in the prepared remarks, we're really focused on driving asset utilization and naturally we don't want to be in a position where we need to take an inventory right down again.

Anthony Pagano: So, I mean the inventory, the working capital ticked up here in Q1. We had mentioned that to the community. It's something we expected. It's been very, very planned out, a very thoughtful exercise on our side to really build out safety stocks to insulate ourselves over any potential issues with supplier fill rates.

Anthony Pagano: And I suspect, as the situation stabilizes, that we would be able to continue down our path of optimizing inventory.

Zachary Evershed: That's helpful. Thanks. And then on MNA, what's the range of sizes you're evaluating?

Anthony Pagano: I think the best answer I can give to that, or the only answer probably, is various sizes.

Zachary Evershed: Gotcha, thanks. Then, last one for me. Sorry to be the dead horse here, but just to clarify: do you think the current pace of vendor rebates is sustainable or is it more of a temporary restocking tailwind, given the safety's doc you bill?

Anthony Pagano: As I mentioned on the first questions, Zach, what I would guide you towards is to look at the last 12 months and that should be a reasonable proxy for the full year.

Zachary Evershed: All right, thanks. I'll turn it over.

Operator: Thank you. Your next question comes from Michael [inaudible] with [inaudible] Please, go ahead. 

Michael: Hello, everyone. Congrats on the great quarter. My first question would be: when it comes, we see numbers in Europe, GDP numbers come down lately. What do you really see with your exposure and the current environment that there's, the more consumers are holding tight their money. 

Multiple speakers: [Anthony Pagano] I would say you know through the first quarter we didn't see much of it. I would say it's something we certainly are aware of. But the team in the UK is still doing a good job of maintaining and trying to grow market share. We've also open some Greenfield branches over there. That's further expanding our reach into areas we weren't before. So, that combined we'll hopefully mitigate any softer demand in the market. [Michael] Perfect. Thank you, and just a quick second one. Have you seen any changes in delivering issues in north America or is it the same as last quarter?

Multiple speakers: [Brian McManus] Very similar to last quarter.  You know, we're working through it and we're managing, but it's still a tough labor market, for sure. [Michael] Perfect. Appreciate the time. [Brian McManus] Thank you. [Operator] Thank you. There are no further questions at this time. Mr. McManus, you may proceed. [Brian McManus] Thank you everyone for listening. We look forward to updating you on our progress during our next quarterly call. Also, Please join us for a virtual AGM today at 1: 30 PM. Details can be found on our website. Have a great day.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.