Q2 2022 Uni-Select Inc Earnings Call
If at any time during the call you require immediate assistance, please press star zero for the operator. Note that today's call is being recorded. Bonjour mesdames et messieurs et bienvenue à la conférence telephonic sur les réjustaires de 2,added- containing plantings in the Uniselect Inc.
At this time, all links are in the description. After the presentation, we will proceed to a question and answer session.
If at any moment you have had the chance to meet with an assistant, you will be allowed to enter 0 for the operation. The call is now registered. I would like to turn the conference over to Max Worgen, Chief Legal Officer and Corporate Secretary. Please go ahead, sir.
Thank you. Good morning everyone and thank you for joining us for uniSelect's second quarter conference call.
Presenting this morning are Brian McManus, Executive Chair and CEO of Uniselect, 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 uniselect.com in the investors section.
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 .
Thank you, Max. Good morning, everyone, and thank you for joining us for our second quarter results conference call.
Please turn to slide four for the key highlights of the second quarter.
We are very pleased with our second quarter results that build on the positive results from our first quarter. We continue to see organic sales growth in all three business units due to market tailwinds and price increases.
Costs were also well contained in the quarter and reflect continued discipline of operational excellence and our culture of ownership.
As a result of these factors and additional vendor rebates, we reported very strong profitability in the quarter.
Consolidated sales for the second quarter were up 6.7% to $444 million from $416 million last year, primarily attributable to organic growth of 10.8%.
In turn, adjusted EBITDA increased $38.5% to $51 million, or a margin of 11.5% compared to $37 million, or a margin of 8.9% last year, representing an increase of 250 basis points.
This performance was largely driven by higher sales.
Additional vendor rebates and all segments and benefits from our streamlined cost structure.
These factors were partially offset by certain inflationary costs, including fuel and wages, as well as a timing of certain expenses related to network expansion at GSM.
As a result, higher adjusted IViDA and significantly lower financing expenses.
diluted adjusted EPS more than double to 51 cents per share last year.
In addition to our regular financial review, I am pleased to announce that subsequent quarter end, we announced and closed the acquisition of mass lack supply, a distributor of automotive and industrial parts and paint located in northern Ontario.
The acquisition of Mazlac represents our first significant acquisition as a new leadership team and demonstrates uni selectability to leverage its solid and improving balance sheet to make sizable investments to grow our business.
We are very pleased with this addition to our Canadian network and we intend to remain active in seeking further acquisition opportunities. We are very pleased with this addition to our Canadian network and we intend to remain active in seeking further acquisition and we intend to remain active in seeking further acquisition
I will now turn the call over to Anthony to complete the financial review. Anthony? Okay.
Thank you, Brian .
I'll point you to page six for Finish Master.
Both sales and organic growth reached 8.9% to $186 million in the quarter.
driven largely by the effect of price increases.
Adjusted EBITDA also strongly improved, totaling $19.8 million or 10.6% of sales.
compared to $13.7 million or 8% of sales for the same period last year.
improvement was primarily driven by additional vendor rebates.
Price increases and higher sales.
Our focus at Finish Master remains on ramping up sales.
optimizing our path to market and further leveraging technology and data analytics to develop our operating model.
Turning to page 7 for the Canadian Automotive Group.
Sales reached $161 million.
up nearly 11% from $145 million last year.
Mainly attributable to stronger genetic growth of 13.8%.
Driven primarily by price increases.
Organic growth was complemented by the benefits of the
of acquisitions completed over the past 12 months.
This was partially offset by $6 million of translation effects.
from the decrease in the value of the Canadian dollar versus the US dollar.
Adjusted EBITDAF reached $26 million.
or 16.1% of sales.
up from $17.9 million or a margin of 12.3% for the same period last year.
In addition to the aforementioned factors,
This increase reflects additional vendor rebates.
and the reversal of certain bad dead expenses incurred in prior periods.
Coupled with disciplines spending on operating expenses.
During the second quarter, we completed the acquisition of four stores from one of our members in Ontario.
We also signed a strategic agreement with a new member operating 20 locations in the Maritimes.
the first new member of SCALE to join the Canadian Automotive Group in over a decade.
Turning to page 8 for GSS.
Sales at GSF decreased 3.1% to $97 million compared to $100 million for the same period last year.
This decrease was mainly attributable to a negative currency translation effect of $11 million.
Organic growth was a solid 9.7%.
driven by price increases and the contribution of recently opened stores.
with the latter accounting for approximately half of the organic sales growth.
Adjusted EBITDA reached $8 million or a margin of 8.3%.
down slightly from $8.4 million or a margin of 8.4% last year.
I'd like to point out that last year's Q2 results.
included approximately $400,000 in governmental occupancy subsidies.
In general, margins remain affected by higher operating expenses relating to inflationary fuel and utility costs.
as well as payroll costs.
These factors were partially offset by higher sales and vendor rebates.
In the quarter, GFF opened seven Greenfield stores.
Bringing the year-to-day total to nine new locations.
To summarize.
We are pleased with the results of our three business units.
More importantly, we believe we can continue to improve profitability by focusing on sales growth and operational excellence.
to page 10 for comments relating to our cash flow.
We generated $51 million of cash flow from operations in the second quarter. $51 million of cash flow from operations
Compared to $43 million in the same period last year.
This improvement stems primarily from increased profitability and lower borrower costs.
which were partially offset by a lower release of working capital than the prior year.
After accounting for net investments in merchant advances.
as well as capital investments.
We generated free cash flow of $43 million in the second quarter.
up from $41 million in the same period last year.
This is primarily driven by higher cash flow from operations.
Partially offset by higher capex.
including the opening of storage at GSM.
and a higher level of customer investments this year versus last.
Turning to our financial position on page 11.
At the end of Q2.
Total net debts that have $291 million.
which includes $103 million of IFRS 16 lease obligations related to buildings.
This represents a decrease of $36 million since the end of the first quarter. This represents a decrease of $3.5 million This represents a decrease of $3.5 million This represents a decrease of $3.5 million
Driven by lower depth.
and higher adjust city but that.
Our leverage ratio decreased to 1.7 times at the end of Q2.
down from 2.0 times at the end of Q1.
This represents the lowest leverage ratio since acquiring GSF five years ago.
At the end of the quarter, we had $208 million of available liquidity, subject to compliance with financial covenants.
Over the past year, we have made material improvements to our balance sheet.
Despite this progress, we're not resting on our laurels.
Our teams across all business units remain highly focused on driving asset utilization, including working capital.
in order to generate stronger returns for our shareholders.
I will now turn the call back to Brian for concluding remarks.
Brian .
Thank you Anthony.
Please turn to slide 13.
While our first half results have been very strong, we caution that the magnitude of improvement observed in the first half of the year will likely not repeat in the second half due to the timing of certain rebates and as we begin to lapse certain operational improvements implemented in the back half of 2021. Furthermore, although we do expect to leverage further operational and market opportunities going forward, we still need to contend with ongoing supply chain challenges, labour issues and inflationary pressures.
After one year at CEO of UniSelect, I am proud of what our teams have accomplished.
We have significantly improved our operations and financial results while strengthening our balance sheet.
We are pleased about our recent acquisition of Mazlack and continue to focus relentlessly on improving our operations while seeking to take advantage of market opportunities, including M&A. We are pleased to take advantage of our operations while seeking to take advantage of market opportunities, including M&A.
My sincere thanks to our entire team for the continued efforts to improve our company and provide value to our customers and members.
This concludes our presentation. We are now ready to answer your questions.
We are now ready to answer your question. Operator.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press start followed by a one on your touch tone. You will then hear a three-tone prompt acknowledging if you request. And if you would like to remove yourself from the question queue, please press start followed by two. And if you are using your speakerphone, please list the handset before pressing any keys. Please go ahead and press start one now if you have a question.
And your first question will be from David Ocampo at Coremark Securities.
Thank you. Good morning, everyone.
Give it up.
Brian , I just wanted to circle back on your commentary on the profit improvement in the back half of the year. When I take a look at Q3, it's normally seasonally the strongest quarter for you guys, but I'm guessing that won't be the case this year. So is it best to kind of evaluate the company on a trialing 12 month basis of an assumed normal season alley into that here? For them, I don't assume normal season alley into that here.
Yeah, that's actually...
would definitely be the.
definitely be the best way to approach that.
Goodbye. Goodbye! Thank you.
This is happening as you think of...
As you think of last year, we had really strong performance in the back half and we're very cognizant that we're that we're comping over that going forward into the back half of this year.
And on Finnish Master, I think it's still down north of 10% versus pre-pandemic levels. Has the market come back in a way or are you guys just down on a market share basis? And if that's the case, what is it gonna take to get back to that level?
It's actually a very good question and I would point to a combination of both of those David were aware that we've probably slipped a bit over the last couple of years. Our team is working hard on that but I would also say the industry itself is not fully back.
Thank you.
Okay, Brian . And if you can comment on your private label, how's the growth trending in that market? And if you are growing, is it in that? And if you are growing, is it in that?
kind of the current product categories that you guys offer today, or are you guys expanding your catalog of offerings?
It's a bit of both, but we are seeing growth and the categories we're currently carrying, and we have recently added a bit more to the depth of our offerings.
in the private breadth.
Okay, that's it for me. I'll hand the call over.
Thanks, Eric. Thank you. Your next question will be from Luke Cannon at Kenna Court. Please go ahead.
Thanks. Good morning, everyone. I wanted to start on GSF. I think there was commentary in the press release that margins were impacted because of some fleet replacement delays. Just curious to know if that was resolved maybe towards the end of the quarter into Q3 and then if possible if...
You can quantify how much exactly that may have dragged on margins.
We have called out about three or four different items that have impacted GSF on the margin side. One is certainly the aging fleet. Another one is going to be the aging fleet.
substantially higher fuel and energy costs across the UK business. It's no surprise to anyone, the whole world is experiencing higher energy costs, but the UK in particular. There is a drag related to the new greenfield sites that we opened up. We've had quite a few in the first half of the year and that naturally will be a little bit of a drag on margin as those...
those ramp up their profitability. And the final factor will be we benefited from about 300,000 Canadian dollars sorry about 400,000 US dollars
governmental subsidies in Q2 of last year, which also impacts your quarter over quarter comparison. So I wouldn't just point to the fact that you mentioned previously. I'm sure you mentioned previously. I'm sure you mentioned previously.
Got it. And then following up on that last point, if there being higher fuel and energy costs, I'm curious to know other than finding efficiencies elsewhere in the business, what other leverage do you have to pull specifically for those fuel costs? So you've seen from some other, you know, road-based services companies that there's sometimes a fuel surcharge at the implements on their deliveries. Is there something similar that maybe you are doing there or can't do there?
This is something we looked at very early on. It's not something that's prevalent in the business. I do think that
These impacts in the cost to serve tend to get flushed out over time through the selling price that ourselves and our competitors will put into the market.
Okay, appreciate the color. Thank you very much.
Thank you.
Thank you and your next question will be from Darryl Young at TD Securities. Please go ahead.
Hey, good morning, guys.
The first question is around the purchasing rebates. I was wondering how much
The price that impacts that is based on price and volume or is it just a volume based rebate? Maybe some clarity there.
Yeah, there's a bit of a mixed bag, Darrell.
Some are volume based, some are price based. Naturally, we would prefer price based. I do think what you're seeing here is a bit of timing as we continue to reconcile some amounts from... some amounts from...
from prior periods and as we begin to scale up our purchasing, if you think of a year ago, the company was very much in balance sheet rationalization mode. You see that pretty clearly in our cashflow, a very large, really, subworking capital in Q2 last year. So we've just sort of gotten back up to, I guess, normalize that maybe even slightly higher than normalize purchasing levels. As we contend with trying to manage through potential supply chain delays.
Cut. Okay. So yeah, so not so just curious from the inflation angle if you were getting a bit of a double double benefit one on the organic side and then also on the volume rebate side.
It's vendor by vendor, Darrell. It's tough to make a generalizing state, and don't it.
Gotcha.
And then the next question is on the Finnish master. We've seen some pretty active M&A over the last year, on the collision repair side and the customer side.
Is that going to have any implications for a, your margin profile, or b, your strategy in terms of how you serve? As we see, can it continue to accelerate consolidation and some bigger players of merging pretty rapidly?
Yeah, Daryl, this is something, you know, I think ourselves in the industry has been contending with for several years now. We continue to drive operational improvements in our business to help offset some of those changes. And, you know, work.
We continue to do that. We continue to seek good opportunities.
You know, to drive those efficiencies, but at the same time, we also recognize that we need to focus more on driving ourselves as well. So a combination of those two things, while we're on with locking those focus.
Also looking for market opportunities ourselves. In terms of consolidation opportunities, we believe will help offset the impact that you're referring to. That you're referring to. That you're referring to.
And do you care to share the percentage of your customers that are larger MSOs versus the smaller one-off locations? I'm Mr Karnor.
No, that's not the whole thing.
Justslow.
Okay, thanks very much guys, and you can go at some of your quarter. I'll turn it over.
Thank you very much.
Once again as a reminder, if you do have a question, please press star followed by one on your touch-dome phone.
Your next question will be from Benoit Poirier at the Jaldin Capital Markets. Please go ahead. Good morning and good morning, Brian .
Yep.
Yeah, first question, when we look at the JSF in the UK, you open up a seven green fill location and nine year to date. Could you talk about the sustainability, how many green fill location could you sustain a year? And maybe how do you look at the full potential in the UK in terms of opening green fill locations in the longer term?
Hi, Daryl. It's Benoit Santoni speaking. So, you're right, we opened nine year to date. We have a handful left to open for the balance of the year from Q2. Those are substantially complete as of today. Our approach here, Benoit, is to use our green fields to fill in certain white space. destroying better equity, and I think the ones you see in the chat above will bethere to take questions from us if we get whatsoever. So, wait until you've looked through it. Also a little bit later I will have gone over a couple of steps and quickly navigate through those off goal areas that just on UNRls, they have these adapter settings forrockers that remember
We're certainly not going to, I'm gonna give a number on where we think that ends or how many we'll do going forward. These are the first openings that the UK team has done under the new leadership. We'll be cautious to see those bleed in, deliver, and then consider them for future capital allocation opportunities.
Okay, that's great Tyler. We saw that you entered into a resale agreement for electric vehicle charging equipment with EVO charge. I am just wondering, is this a space you are looking to grow and what about the margin profile? How does it compare to the car parts?
Yeah, I will get specifically into the margin profile then, while but I think, you know, as a supplier of automotive parts, it's only natural that we have to start looking at what we will need to supply to our customers and members in terms of...
electric vehicles as they continue to grow their market share.
of the vehicle fleet. So, you know, just, I suggest to the changes in the market.
Okay, and now last one in terms of M&A pipeline, could you maybe provide more color about the, where do you see the largest opportunities these days? And, yep.
We won't get into specific spend law, but we're certainly seeing opportunities in all business units.
both of small and large and
Obviously we're going to be patient and
deploy the capital where we feel it's best.
Okay, thank you very much for the time and congrats again.
Thanks, Kanwar.
Thank you, and your next question will be from Zachary Evershed at National Bank. Please go ahead.
Good morning, everyone. Congrats on the quarter.
I'm excited. I'm excited. I'm excited. I'm excited.
So what are you seeing right now in terms of supply chain reliability and how is that influencing your inventory positioning right now and in the quarters ahead?
I think it's...
It's largely the same exact to slightly improving. You know, certainly free rates of...
have started to tick down a bit. What I would say is,
We've continued to adopt a somewhat conservative approach to inventory management, where we're holding.
a bit more than we would ideally, and quite a bit more than we would target long term, just to ensure that we're able to...
to absorb any potential shocks to the system.
Thank you.
Makes sense, thanks.
and on the recent acquisitions, how much integration work is there left to do?
It's very recent, so lots.
Thank you.
And in terms of the work itself, you guys are usually pretty mum on specific of improvements, but maybe you could give us some examples of integration work. The examples of integration work.
You're referring more specifically as it would relate to potential synergy in SAC or, and you're referring more specifically to potential synergy in SAC or, and you're referring more specifically to potential brewing somebody where you should experience
Yeah, we do see opportunities. We're not going to attach a specific number to it at this point.
There enough.
And in the rising rate environment, does your criteria for M&A target selection shift at all?
We're hoping that there'll be potentially less competition for some of those opportunities, but that's hard to say and I guess we'll see as we move forward.
Hey, hey, hey, see.
everybody will adjust to a rising rate in terms of most likely the pricing that we'd see on those deals but again we'll take it one by one as they appear.
Good color things. Then just one last one. You're indicating a slowing in improvement in the back half due to the timing of certain vendor rebates and of course, lapping operational improvements.
Will the level of vendor rebates in the back half represent more of a steady state purchase level, or will it remain elevated versus long-term targets?
These are always a little bit lumpy, Zach. Some of them have to do with specific negotiations.
from quarter to quarter months to month. So I prefer not commenting at this time on whether something in the future is gonna be representative of the study state. What I would say is Q2 was elevated versus the study state. Q2. Q2. Q2. Q2. Q2.
Thank you..
Great color thanks, I'll turn it over.
Thanks, aye. Thank you. And the next question will be some from Svot Khan at RBC Capital Markets. Please go ahead.
Great, thanks and good morning. I guess just following up on the comments around the vendor rebates, is it when it's looked to the back half of the year, is it as simple as just the fact that the last year was probably when you started to get some of the larger vendor rebates and they're lapping against those or is there a change in rate as you go forward? I don't understand, you said there are a lot of moving pieces, but just want to get a big picture view on is it just a comp or is there some underlying rate changes and things like that going forward?
So it's a little bit of both, Sabah. Some of these vendor rebates are tiered and depend on our purchase levels. Particularly in the later part of the second half of last year, we got a little bit better at reconciling them. So we're able to bring some of them in sooner than we would have historically. But it's really a combination of the factors you've mentioned.
Okay, thanks for that. And then just want to clarify this comments, I think, at the MDNA as well as earlier, I just kind of a bad debt expense in the reversal.
Was it the bad debt expense? Was it taken last year and reversed in the quarter? Just trying to understand. Didn't think I followed the commentary. I must have missed it. I just hope it comes up quickly.
Yeah, so some of it was taken in the latter part of last year, some of this was taken in Q1 and as we've collected upon those receivables we've been able to release the provision.
Okay, and is that kind of one of the adjustments under special items or is that just in the numbers? No, it's just an item that we've called out as one of the factors influencing performance. We don't carve those out as special items.
Okay, perfect. And then just I guess as you look to kind of the back half of your intimex year, and with the macro situation evolving quite a bit, just a picture, have you seen any change in tonal commentary from customers, the UK was out with some negative kind of directional, macro negative commentary, just a big picture of what you're hearing from kind of particularly more focused on US and the UK.
I think in general, the tone is I would call it neutral for lack of a better way to explain it.
clearly with a lot of talk of recession and things like that, there's nervousness out there. But from our standpoint, as an industry with new car sales, still being difficult and people most likely, if we do get into harder times, we'll keep the vehicles longer. Those macro themes can help us is what we've historically seen. So I would say overall, we really do.
I wouldn't say we've seen a change in the overall tone. Maybe it's the best way to say it at this particular point in time. As we know, those things can rapidly change.
Okay, then just like one last quick one, as well as she continues to improve, obviously a good step down this quarter. Should we expect the focus of sort of the medium-long term to still be on kind of growth initiatives before we can think of the poor? Is there any other capital allocation priorities or how are you thinking about that? After this point in the cycle?
Yeah, that would definitely be a fair way to think about it.
Thanks so much for the call.
Excellent, thank you.
Your next question is from Daryl Young at TD Securities.
Thanks guys, just one quick follow up. On the volume side for the auto parts, is there a way to compare it?
2019 and see if there's any actual benefit coming through yet from the lack of new car car sales and if you've seen any sort of quantifiable benefit from
from those issues and then and higher used car prices as well.
It'd be very difficult, Darryl, there's so many variables in that and I think as we discussed in our Q2 report, what we're really seeing driving sales right now is certainly the inflationary effect on prices.
What I would add is obviously our continued initiative and one point that we haven't touched on necessarily for this Q&A. For this Q&A. For this Q&A.
Bringing on a new member in the Canadian Division is always going to help drive parts volume, and the green fields in the UK would certainly play a role in that as well. To Brian's point, there would be a bunch of factors to disaggregate.
and comment on if we were to provide any any type of figure around volume over
Thanks, guys.
Thank you.
Thank you. And at this time gentlemen, we have no further questions. Please proceed with your closing remarks.
Thank you, operator. Thank you, everybody, for listening. We look forward to updating you on our progress during our next quarterly call. Have a great day.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. in