Q3 2022 Uni-Select Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to Genie Select Inc. 's 2022 third quarter results conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Any time during this call you require them either assistance. Please press star zero for the operator also note that today's call is being recorded.
Let me see.
Coffeehouse telephonic, so let him you touched 12 him too much stimulus they can do that initially.
Ask Mama totally linked fulltime, but they could.
I pull up there without that scale Nucor said, though I would say also the costume earphones.
She at to my Mom's antibodies wage enough staff image Yep, Yep, who used to live twice as they hoped and you go look at.
<unk> $8 just like.
So it would come if not for the lack of <unk> and Mr. Maxwell again shift alleged axial I thought was really Jake is pick that back up go ahead chip.
And I would like to turn the conference over to Maxwell Good Chief Legal Officer and corporate Secretary. Please go ahead Sir.
Thank you.
Good morning, everyone and thank you for joining us.
Third quarter conference call presenting this morning are Brian Mcmanus executive chair and CEO of Uni select.
Anthony <unk> 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.
Like to remind you about the caution regarding forward looking statements or supply store presentation and comments.
All amounts are expressed in U S dollars unless otherwise specified.
With that let me turn the call over to Brian .
Thank you Max and good morning, everyone and thank you for joining us for our third quarter results Conference call.
Please turn to slide four for the key highlights of the third quarter.
We are pleased with our results in the third quarter, which reflect our ongoing efforts to deliver impactful operational improvements.
During the quarter, we realized organic sales increases across all our businesses generated strong cash flow and achieved higher EBITDA, despite meaningful headwinds from currency translation effects.
We also closed the previously announced acquisition of mass wax supply limited and are pleased with the progress to date.
Consolidated sales for the third quarter were up six 2% to $453 million from $426 million last year.
Primarily attributable to organic growth of nine 8%.
This organic growth is largely due to price increases across our businesses driven by the current deflationary environment.
Adjusted EBITDA increased 16, 5% to $49 million or 10, 9% of sales, representing a 100 basis point year over year improvement.
This performance was driven by price increases rebates and scaling benefits of higher sales, which largely offset inflationary pressures relating to fleet and energy costs.
Adjusted diluted EPS in turn stood at 48 cents up from 36 last year, reflecting higher adjusted EBITDA the benefits of amendments to our credit agreement and lower borrowing levels.
While we remain pleased with the progress that our finished master and Canadian automotive group divisions, the profitability of Jets that did not meet our expectations we.
We continue to believe that our assets brand and market position in the UK are capable of delivering better results.
We have made a change in leadership and I have temporarily taken over as president and CEO of GSS.
Over the past few weeks I have worked closely with the local team and refining GSS plans with a near term focus on servicing our customers and improving cost management.
We have every confidence in our team of GSS and are in the process of recruiting a new leader.
I'll now turn the call over to Anthony to complete the financial review.
Anthony.
Thank you Brian .
Participants to page six for finished faster.
Both sales growth and organic growth reached eight 1% to $189 million.
Driven by price increases.
Adjusted EBITDA also improved reaching $20 1 million or 10, 6% of sales.
Compared to $15 9 million or nine 1% of sales for the same period last year.
This solid improvement was driven by vendor rebates price increases.
And higher sales driving scaling benefits, which.
Which were partially offset by higher delivery costs.
Okay.
Our priorities are to finish master remains centered around ramping up sales and volumes.
Optimizing our path to market.
And expanding our use of technology to refine our operating model.
Yeah.
Turning to page seven for the Canadian automotive group.
Sales reached $160 million.
10, 8% from $144 million last year.
While organic growth was seven 8% driven primarily by price increases.
Acquisitions completed over the past 12 months.
Tribute at six 7% of the sales increase.
This growth was partially offset by a $5 4 million translation effect from.
Fluctuations in the value of the Canadian dollar versus the U S dollar.
Adjusted EBITDA reached $21 1 million or.
Or 13, 2% of sales.
From $16 $8 million or a margin of 11, 6% for the same period last year.
This solid 160 basis point increase reflects price increases.
A more favorable product mix.
And higher sales driving scaling benefits.
These factors were in part offset by transaction costs related to the <unk> acquisition.
Certain FX losses.
Finally, we continue to work closely with our members.
As well as improving all aspects of our operations, including our corporate stores.
Turning to page eight for DSS.
Sales decreased three 1% to $103 million compared to $107 million for the same period last year.
This variation was mainly attributable to a negative currency translation effect of $17 6 million.
Organic growth was strong at 15, 3%.
Driven by price increases Greenfield store openings.
And growth in our click and collect e-commerce business.
EBITDA was $9 $5 million or a margin of nine 2%.
Versus $11 million or a margin of 10, 3% last year.
This decrease is primarily attributable to inflationary fuel and utility costs.
Higher repair and short term rental costs.
Any delays in replacement of our vehicle fleet.
As well as higher payroll costs, which.
Which were partially offset by the scaling benefits of higher sales.
And vendor rebates.
While we have been quite pleased with top line sales growth of GSS.
As Brian mentioned, we have been underwhelmed by profitability.
It should lead to a change in leadership.
With the initiatives currently being put in place we are optimistic about the future prospects of GFS.
And this quarters results do not reflect its long term potential.
Coming back to the over overall Uni select business for a moment.
As we look ahead, our teams in Canada, the United States and in the U K continue to focus on improving profitability by driving sales growth and operating efficiency.
Turning to page 10 for comments relating to our cash flow.
We generated $75 million of cash flow from operations in the third quarter.
Compared to $43 million in the same period last year.
This strong improvement reflects increased profitability.
Sound working capital management.
A reduction in stock based compensation paid.
And certain temporary benefits from vendor negotiations.
After accounting for net investments and merchant advances as well as capital investments.
<unk> free cash flow of $67 million in the third quarter.
Up from $37 million for the same period last year.
This was primarily driven by higher cash flow from operations.
Partially offset by a high level of customer investments this year versus last.
Our solid cash flow performance reflects the efforts of our team across many areas of the business.
We are pleased and thankful for all they have done to make cash flow a key priority.
Turning to our financial position on page 11.
At the end of Q3 total net debt stood at $264 million switching.
Which includes $96 million of Ifr 16 lease obligations related to buildings.
This represents a decrease of $27 million since the end of the second quarter.
Despite allocating $41 million of capital towards the math Black acquisition.
Driven by lower net debt and higher adjusted EBITDA or.
Our total net debt to adjusted EBITDA ratio decreased to one four times at the end of Q3.
Down from one seven times at the end of Q2.
This represents by far our lowest ratio since acquiring GSS five years ago.
We also completed the third quarter with $228 million.
Available liquidity subject to compliance with financial covenants.
In summary, we are pleased by our financial results and financial position this quarter.
Our teams have made good progress and continue to deliver on their operational plans.
We remain focused on generating stronger returns for our shareholders through operational improvements and excellence and asset utilization, including working capital.
I will now turn the call back to Brian for concluding remarks.
Brian .
Thank you Anthony.
Please turn to slide 13.
Looking ahead to the fourth quarter of 2022, we anticipate a modest year over year improvement.
While we expect our focus on operational excellence and cost discipline to bear fruit, we continue to manage through persistent labor and inflation challenges.
And we will be lapping certain operational improvements.
As well as the timing of vendor rebates realized in the fourth quarter of last year.
Looking ahead to 2023, we expect higher adjusted EBITDA and adjusted EPS compared to 2022.
This will be driven by a strong focus to drive organic sales growth through volume gains across our businesses.
Acquisitions completed in 2022 together with associated synergies will also contributed favorably as they are integrated into our existing operations.
Operational efficiency cost discipline, and working capital management have become part of our DNA and we expect to continue to deliver operational improvements in 2023, albeit to a lesser extent than in 2022.
Offsetting these positive drivers, we expect ongoing adverse currency translation impacts labor and operating cost inflation as well as ongoing but moderating supply chain issues.
2022 generated a tremendous amount of cash flow and we intend to continue to make this a priority going forward. We are extremely disciplined on capital allocation and our strong balance sheet positions us well to pursue further acquisition opportunities.
In closing I want to thank all of our employees for their continued efforts and teamwork to improve our company and provide value to our customers and members.
This concludes our presentation, we're now ready to answer your questions.
Operator.
Thank you Sir.
Ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one on your Touchtone phone you will then hear a threefold prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and if you're using a speaker phone. Please lift the handset before pressing any keys. Please go ahead and press.
Star One now if you do have a question.
And your first question will be from <unk> at Deutsche Bank. Please go ahead.
Yes, good morning, Brian Good morning, Anthony and congratulation for the strong quarter.
Thank you Ben.
You mentioned with respect to the quarter that a good portion of the organic growth was driven by price increases.
Was just wondering what are the impacts in Q3, how much it was similar to the first half and how should we be thinking going forward related to price increases for Q4 and 2023.
Hey, Bill.
It's Anthony.
So I think the impact of price increases.
Quite similar in Q3, I would say to the Q2 and Q1.
Going forward it does it.
Price increases from our vendors don't don't really seem to be abating. So I think we'll certainly have a.
A benefit into into Q4.
What I would see stayed in some parts of our business primarily in the in the part side you see a bit of a moderating of that of that effect.
Naturally we will carry a bit of a bit of that pricing pricing impact into into next year as well.
Okay, perfect and with respect to the Hurricanes that we saw in the U S would you be able to you mentioned some color about how it's impacted finish master during the quarter and what are you seeing greater demand for car repairs on the back of those events going forward.
So.
We had a few branches that were closed for a few days here and there.
We have the impact, but it's really it's really de minimis and not something we want to we want to focus on.
As it pertains to potential benefits of that flood damage flooded cars are often written off so we don't see any potential.
Any potential material moves in our in our revenue because of the stock.
Okay, that's great color and last one for me could you provide maybe some color on what drove the strong free cash flow generation in the quarter.
What we should expect in Q4.
I'll, probably be a little bit muted as it pertains to Q4, but what I would say in Q3, obviously, we had a we had a good quarter of strong EBITDA.
And we are very as you know we've been very disciplined on the working capital we've been trying to make it a core competency and part of our DNA as a company and you see that shining through.
That being said.
We did have we did.
Have a sort of favorable benefit associated with negotiation with some of our largest vendors and we expect that to give that benefit back into Q4.
And into Q1 as well so.
Yes, it's strong but over time, we can expect to see that free cash flow outperforming EBITDA indefinitely.
Okay, Okay, great. Thanks for the time gentlemen.
Youre welcome. Thanks, Pat Thanks, Good luck.
Next question will be from Luke Hannan with Canaccord Genuity. Please go ahead.
Thanks, and good morning, I wanted to stick on that theme of working capital Anthony I think you've mentioned in the past that you've been holding more inventory on your books, then you would ordinarily like just because of the.
The lead times that you're seeing in the supply chain right now, but there was two to your point there was a pretty big inventory drawdown during the quarter as well so.
Is it fair to say that you are seeing those those sorts of pressures alleviate.
Over time, we still expect to be able to hold less inventory on your books going forward or how should we read into that.
I think you should certainly look at it is we're trying to we're trying to minimize the amount of inventory we carry it to generate as many times as possible.
Naturally we.
The inventory levels sort of.
Ebb and flow with the buying us protecting ourselves.
As as supply chain burden disease, and we can start getting comfortable that the lead times, we see from our suppliers are going to be consistent.
Then we then we'll be at a point, where we can start dropping down our safety stock levels.
What I would point you to is.
Look at the inventory and the payables in many ways together.
If we are buying more to protect ourselves you'll typically see the payables moving in sync with that.
Got it and actually on that topic on the payables as well.
I did notice that the take up on the vendor financing program is relative to last year, it's improving I think relative to Q2. It is as well, but it is still well below that that authorized amount, but can you share with us what sort of helping to close that gap and what future actions or initiatives could you take to further close that gap.
Prove that working capital as well for you.
Yes, I think if you look back at the history of the company Luke.
The company got itself and some amount of trouble with the use of this vendor finance facility. So we are quite disciplined on how we're going to use it and how we think about liquidity.
That being said I think it represents.
It's a pretty good tool for some of our vendor vendor partners too.
Get get paid on there.
On the receivables or payables sooner without impacting our balance sheet. So.
We talked to our vendor partners about often.
We see we see a certain interest in it.
Okay last one for me a quick one and then I'll pass the line the M&A pipeline I'm curious to know if the changing interest rate environment has had any impact on either one the pricing or the multiples in the space or the the number of bidders that would be at the table with you guys and competing for these assets.
Yes, good question.
Continue to see opportunities across all three business.
And I think.
It's probably a little premature to really see a bet effectors come through yet.
That of course is at what stage, we might be in discussions to actually know.
To be able to properly answer that question, but I can tell you.
You can see by our balance sheet, we're in a great position, we're actively looking at various opportunities out there.
Like we said, we're going to be very disciplined.
And how we deploy our capital.
Makes sense. Thank you very much thank.
Thanks Luke.
Thank you. Your next question will be from David Ocampo at core Mark Securities. Please go ahead.
Thanks, Good morning, everyone.
David I just wanted to start on unfinished faster most of the improvement we've seen in recent quarters. It has mostly been from pricing.
And you've talked in the past about reclaiming some of your lost market share. There. So I was wondering if you can give us an update on your path to kind of returning to pre pandemic volumes.
Yes.
Two things.
You have to think about there David one is just the overall.
Industry in terms of where the industry is in terms of pre pandemic, we're probably still.
Depending where you get the information from but I would say somewhere between 5% to 10% still down compared to pre pandemic in terms of overall industry volumes.
So that.
I would consider a tailwind at some point in time hopefully will.
Come about and then to the second part of your question, which is more I would say controllable by US is trying to okay.
Get back some of the some of the areas, we lost and it's still a work in progress I would say.
Team continues to push on it.
We're seeing areas.
Areas of opportunity are we completely satisfy not yet.
Team continues to push hard on it.
Got it makes sense and then just kind of following up on <unk> question on the M&A environment and you guys could provide.
The amount of liquidity that you guys had.
Just thinking about the uncertainty that we're seeing in the marketplace today and you guys have gotten your leverage down to a very respectable level does that change.
The current environment does that change how you're thinking about.
The total net debt to EBITDA that you guys are willing to go up to.
You guys didn't give a number in the past but hasn't.
Has that changed.
Want to keep locked down on the balance sheet than you had in the past.
Look I think as we see where.
Interest rates are going and again the overall economic conditions. We're certainly pleased to have a strong balance sheet. So.
We havent provided guidance in the past as you said, how much we'd be willing to add leverage to it.
We're certainly able to it at this point in time.
But we are going to be again disciplined in ensuring that the opportunities makes sense for us before.
Before we're going to act on anything because.
We worked hard to get our balance sheet in the position.
Believe that.
Yeah.
It will be advantageous to us in the future as these opportunities come about.
Got it and then just as a quick.
Quick one for me.
On the favorable product mix or are you guys, referring to at least on the CAC side is that more white label products.
Correct, yes.
Private label private label.
Yeah got it got it okay. That's it for me thanks guys. Thank.
Thank you.
Thank you next question will be from Zachary <unk> at National Bank Financial. Please go ahead.
Good morning, congrats on the quarter.
Thanks Zack.
So it looks like you're targeting organic growth through <unk>.
Any insight into whether pricing will be sticky into 2023, if we do see raw materials and other cost inflation items Isa.
Every every indication that we have currently is that there is going to continue to be some.
Some price increases coming through.
EBIT into the even into the end of this year potentially.
That being said I think I.
And then on the first question.
Certain areas of our business and in particular some of the sum of the parts businesses.
We could we could see a little bit of a.
A bit of a reduction in price.
Flowing through so I think overall, it's balanced somewhat inflationary.
Makes sense. Thanks, and then on the private label question are you seeing good mix shift there.
Do you think that might be picking up ahead.
Of potentially recession fears or what else could be driving that.
I think as we've said as we've said in the past Sac.
One we've made a concerted effort.
We're very focused effort to try to increase our mix of private label, we think it's.
It offers a compelling value opportunity for our customers a compelling margin opportunity for us and for our members.
So it's something that we pursued.
The thing we said is.
It's been one area, where we've been able to.
To control, our destiny, a bit more than we've been able to control our levels of inventory.
So in an environment, where their suppliers potentially didn't have product or we weren't getting the fill rates wanted too.
We had product available on the private label side, which probably helped accelerate the uptake of those somewhat.
And we're pleased that we're seeing I would say.
Some good stickiness in terms of those that have used it.
Feedback has been great.
We're pleased with that.
That's great news and just one last one on the vendor rebates your favorite topic.
As we're thinking about paring back inventories as supply chains normalize.
But still looking for improved adjusted EBITDA and improved adjusted EPS next year.
Would that be a correct indication that you think that your operational improvements will outpace.
The effect of dwindling vendor rebates next year.
I think they think dwindling is probably not the right word.
Yes.
I would say that they're probably likely to be likely to be.
Less of a contributor than they were this year.
There's a bunch of reasons for that shift to private label would be one right. So you would pick up margin on one side, but.
Louis rebates on the other net net year ahead.
So I guess that that would be sort of how I would think about it.
The operational improvements is something that we continue to we continue to focus on and it's going to be as Brian mentioned, its going to be part of our DNA and our way of doing business into the future.
Great color, Thanks, I'll turn it over.
Thank you next question will be from Daryl Young of TD Securities. Please go ahead.
Hey, good morning, everyone.
I apologize I had some tech issues. So I missed the first part of the call but.
Ask a question my apologies.
But on the UK business it looks the margins held in better than maybe you would've expected are you, making progress on some of the fuel pass throughs and offsetting some of the inflationary conditions there at the call at the operating level.
Yeah.
It's a good good question I would say.
The biggest impact under the call. It uncontrollable cost is certainly fuel and energy cost.
UK is the area I would say, we're feeling hit the most.
We're a little disappointed in terms of the controllable cost.
Part of that as I said in my.
In my comments, so that we're dealing with right now and so I think as we move forward over the coming quarters, we will work to improve that part of the equation in terms of our cost to serve.
Okay.
And then just on finish master.
Some of the companies have.
Manufacturers have started to highlight some logistical and raw material issues in the U S.
Seem like Youre seeing any impact at this point, but.
Is that something that you've seen behind the scenes or that's impacting fill rates at all maybe all of them on the margin.
I have to I'll start this by.
Giving giving a lot of credit to our team and finished last year U S. Because they've been they've been managing through these issues for at least the last six months.
And they've done a fantastic job of.
Of sort of dealing with that finding alternative products and skus from the.
Factors that could work that we're in stock. So I think it's something that we've been dealing with.
It's something that the team continues to manage through.
Not something Thats.
That's more concerning than it has been in the past.
Okay, and not leading to any sales say left on the table.
Backlog of unfilled demand or anything like that.
Nothing nothing that I mean, theres going to be there's going to be pockets of it Darryl and then sometimes in unexpected areas but.
But it's nothing nothing thats, causing.
Large impact on our results.
That's great that's it for me thanks, guys.
Thanks, Jeremy.
As a reminder, ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by one on it that's telephone and your next question will be from spot corn at RBC. Please go ahead.
Alright, great.
Just maybe following up on the UK business I guess from our perspective things generally look in line with what we're looking for could you maybe share a little bit of color on kind of.
Maybe some of these controllable cost that could have gone better than you were talking about it in terms of the leadership change is it more just operationally or do you think maybe a more strategic shift in that business might be required.
No I think.
To answer that.
Operational it's definitely more operational look we're pleased with certain parts received some good organic sales.
Coming through but I think back to my original.
The point I made earlier in terms of the controllable cost aspect of it.
We have seen in our other businesses sorted that scaling effect of the higher sales and being able to see an EBITDA boost it's something that I would say, we lost a bit of focus in the UK.
<unk>.
Hi.
The team over there solid they're they've all pulled together and already starting to see some positive changes so it's under control and will improve as we go forward.
Okay, Great and then I guess with the balance sheet getting better free cash flow is in a good shape backdrop also is a bit more volatile kind of in the market at least maybe if you could just talk about the willingness of potential targets to sell your willingness or transact kind of in the current environment.
Now how likely is it that there is M&A even against the current backdrop.
Again, we're seeing opportunities in the various business units.
We're still very interested too.
Deploy capital again, we'll be disciplined.
Where we deploy it.
I think often in these times is where we could see some good opportunities.
Okay. Just quick one last one obviously a lot of moving parts of the supply chain with paint parks.
I guess do you have a view at all on.
Can we be in a normal state is at some point early next year are you seeing any meaningful improvement in any one business or region as opposed to others and it's a hard question philosophical I just wanted to your perspective on Europe .
Your outlook at this point.
I think.
We're seeing it improve.
Overall.
And again, you can kind of almost answered your question. It is in different pockets, but I would say at this point.
It's better than it's been in the past, but still certainly not to what we would've experienced pre pandemic in terms of the overall supply chain.
Hard to predict what's going to actually theres. So many so many variables out there it's really hard to predict what next year is going to look like but hopefully the trend continues and we'll continue to see it improve.
Great. Thanks, very much for the color. Thank.
Thank you.
Thank you and at this time gentlemen, we have no further questions. Please proceed with your closing remarks.
Thank you operator, and thank you everyone for listening we look forward to updating you on our progress at our year end call.
Dave.
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 do ask that you. Please disconnect your lines have a good weekend.
[music].