Uni-Select Inc. (OTCPK:UNIEF) Q2 2022 Earnings Conference Call August 5, 2022 8:00 AM ET
Company Participants
Max Rogan – Chief Legal Officer and Corporate Secretary
Brian McManus – Executive Chair and Chief Executive Officer
Anthony Pagano – Chief Financial Officer
Conference Call Participants
David Ocampo – Cormark Securities
Luke Hannan – Canaccord
Daryl Young – TD Securities
Benoit Poirier – Desjardins Capital Markets
Zachary Evershed – National Bank
Sabahat Khan – RBC Capital Markets
Daryl Young – TD Securities
Operator
Good morning, ladies and gentlemen, and welcome to Uni-Select Inc.’s 2022 Second 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. [Operator Instructions] Note that today’s call is being recorded. [Foreign Language]
And I would like to turn the conference over to Max Rogan, Chief Legal Officer and Corporate Secretary. Please go ahead, sir.
Max Rogan
Thank you. Good morning, everyone, and thank you for joining us for Uni-Select’s second quarter conference call. 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 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 U.S. 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 second quarter results conference call. Please turn to Slide 4 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 [ph] 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 in 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 the timing of certain expenses related to network expansion at GSF. As a result of higher adjusted EBITDA and significantly lower financing expenses, diluted adjusted EPS more than doubled to $0.51 per share versus $0.24 per share last year.
In addition to our regular financial review, I am pleased to announce that subsequent to quarter end, we announced and closed the acquisition of Maslack Supply, a distributor of automotive and industrial parts and paint located in Northern Ontario. The acquisition of Maslack represents our first significant acquisition as a new leadership team and demonstrates Uni-Select’s ability 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.
I will now turn the call over to Anthony to complete the financial review. Anthony?
Anthony Pagano
Thank you, Brian. I’ll point you to Page 6 for FinishMaster. 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. This significant improvement was primarily driven by additional vendor rebates, price increases and higher sales. Our focus as FinishMaster 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 strong organic growth of 13.8%, driven primarily by price increases. Organic growth was complemented by the benefits 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 U.S. dollar.
Adjusted EBITDA 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 debt expenses incurred in prior periods, coupled with disciplined 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 GSF. 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, GSF opened seven greenfield stores, bringing the year-to-date 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.
Turning to Page 10 for comments relating to our cash flow. We generated $51 million of cash flow from operations in the second quarter compared to $43 million in the same period last year. This improvement stems primarily from increased profitability and lower borrowing 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 stores at GSF 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 debt stood at $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, driven by lower debt and higher adjusted EBITDA, 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 are now 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?
Brian McManus
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 lap 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, labor issues and inflationary pressures. After one year as CEO of Uni-Select, 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 Maslack and continue to focus relentlessly on improving our operations while seeking to take advantage of market opportunities, including M&A. My sincere thanks to our entire team for their 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. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And your first question will be from David Ocampo at Cormark Securities.
David Ocampo
Thank you. Good morning everyone.
Brian McManus
Good morning, David.
David Ocampo
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 trailing 12-month basis and then assume normal seasonality into next year?
Brian McManus
Yes. That’s actually – would definitely be the best way to approach that.
Anthony Pagano
Hey, David – this is Anthony. As you think of last year, we had really strong performance in the back half, and we’re very cognizant that we’re comping over that going forward into the back half of this year.
David Ocampo
Okay. And on FinishMaster, 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 going to take to get back up to that level?
Brian McManus
It’s actually a very good question. And I would point to a combination of both of those, David. We’re aware that we’ve probably slipped a bit over the last couple of years. Our team is working hard on that. And – but I would also say the industry itself is not fully back.
David Ocampo
Okay, Brian. And if you can comment on your private label. How is the growth trending in that market? And if you are growing, is it in the kind of the current product categories that you guys offer today? Or are you guys expanding your catalog of offerings?
Brian McManus
It’s a bit of both, but we are seeing growth in the categories we’re currently carrying, and we have recently added a bit more to the depth of our offerings in the private brands.
David Ocampo
Okay. That’s it for me. I’ll hand back the call over.
Brian McManus
Thanks, David.
Operator
Thank you. Your next question will be from Luke Hannan at Canaccord. Please go ahead.
Luke Hannan
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, quantify how much exactly that may have dragged on margins?
Anthony Pagano
We have – I think we’ve called out about three or four different items that have impacted GSF on the margin side. So one is certainly the aging fleet. Another one is going to be 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 ramp up their profitability.
And the final factor will be – we benefited from about CAD 300,000 – sorry, about US$ 400,000, £300,000 of governmental subsidies in Q2 of last year, which also impacts your quarter-over-quarter comparison. So, I wouldn’t just point to the factor you mentioned previously.
Luke Hannan
Got it. And then following up on that last point of there being higher fuel and energy costs. I’m curious to know other than finding efficiencies elsewhere in the business, what other levers do you have to pull specifically for those fuel costs. So you’ve seen from some other route-based services companies, companies that there’s sometimes a fuel surcharge that they implement on their deliveries. Is there something similar to maybe you are doing there or can do there?
Anthony Pagano
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.
Luke Hannan
Great. Appreciate the color. Thank you very much.
Anthony Pagano
Thank you.
Operator
Thank you. And your next question will be from Daryl Young at TD Securities. Please go ahead.
Daryl Young
Hey, good morning guys. First question is around the purchasing rebates. And just wondering how much the price impacts that, is it based on price and volume? Or is it just a volume-based rebate? Maybe some clarity there?
Brian McManus
Yes. There a bit of a mixed bag, Daryl. 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 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 cash flow, a very large release of working capital in Q2 last year. So we’ve just sort of gotten back up to, I guess normalized and maybe even slightly higher than normalized purchasing levels. As we contend with trying to manage through, potential supply chain delays.
Daryl Young
Got it. Okay. So yes, so not – so just curious from the inflation angle, if you were getting a bit of a double benefit one on the organic side and then also on the volume rebate side.
Brian McManus
It’s vendor by vendor, Daryl. So it’s tough to make a generalizing statement on it.
Daryl Young
Okay. And then the next question is on FinishMaster. We’ve seen some pretty active M&A over the last 1.5 years 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 kind of continued acceleration of consolidation and some bigger players emerging pretty rapidly?
Brian McManus
Yes. Hi Daryl, this is something, I think ourselves and 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 we’re – we continue to do that. We continue to see good opportunities, drive those efficiencies but at the same time, we also recognize that we need to focus more on driving our sales as well. So a combination of those two things, along with also looking for market opportunities ourselves, in terms of consolidation opportunities, we believe, will help offset the impact that you’re referring to.
Daryl Young
Okay. And do you care to share the percentage of your customers that are larger MSOs versus the smaller one-off locations?
Anthony Pagano
No, that’s not something we’ll disclose.
Daryl Young
Okay. Thanks very much guys and congrats on a good quarter. I’ll turn it over.
Anthony Pagano
Thanks, Daryl.
Brian McManus
Thanks, Daryl.
Operator
[Operator Instructions] Your next question will be from Benoit Poirier at Desjardins Capital Markets. Please go ahead.
Benoit Poirier
Yes. Good morning Anthony. Good morning Brian. Yes. First question, when we look at the GSF in the UK, you opened up seven greenfield locations and nine year-to-date, could you talk about the sustainability, how many greenfield locations could you sustain a year? And maybe how do you look at the full potential in the UK in terms of opening greenfield locations in the longer term?
Anthony Pagano
Hi Benoit. It’s Anthony 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. Look, our approach here Benoit, is to use our greenfields to fill in certain white space. We’re certainly not going to and going to 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, will be cautious to see those bleed in deliver, and then consider them for future capital allocation opportunities.
Benoit Poirier
Okay. That’s great color. And we saw also that we entered into a resale agreement for electric vehicle charging equipment with EvoCharge. So I’m just wondering, is this a space you’re looking to grow and what about the margin profile, how does it compare to the car parts?
Brian McManus
Yes. I won’t get specifically into the margin profile, Benoit but I think as a supplier about 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 just us adjusting to the changes in the market.
Benoit Poirier
Okay. And now last one in terms of M&A pipeline. Could you may be provide more color about the, where do you see that the largest opportunities these days? And yes.
Brian McManus
We’ll get into specific Benoit but we’re certainly seeing opportunities in all our business units and both of small and large. And obviously, we’ll face it [ph] and deploy the capital where we feel its best.
Benoit Poirier
Okay, thank you very much for the time and congrats again.
Brian McManus
Thanks, Benoit.
Operator
Thank you. And your next question will be from Zachary Evershed at National Bank. Please go ahead.
Zachary Evershed
Good morning everyone. Congrats on the quarter.
Brian McManus
Thanks, Zach.
Anthony Pagano
Thanks, Zach.
Zachary Evershed
So what’re 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?
Anthony Pagano
I think it’s, I’d say it’s largely the same Zach to slightly improving and going to certainly, freight rates have started to tick down a bit. What I would say is, we’ve continued to adopt somewhat considerable approach to inventory management what 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 absorb any potential shocks to the system.
Zachary Evershed
Makes sense. Thanks. And on the recent acquisitions, how much integration work is there left to do?
Brian McManus
It’s very recent. So, lots.
Zachary Evershed
And in terms of the work itself, you guys are usually pretty on specifics of improvements but may be you could give some examples of integration work.
Brian McManus
You referring more specifically as it would relate to potential synergy’s sec or…
Zachary Evershed
Yes, please.
Brian McManus
Yes, we do see opportunities. We’re not going to attach a specific number to it at this point.
Zachary Evershed
Fair enough. And in the rising rate environment, does your criteria for M&A target selection shift at all?
Brian McManus
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. I think everybody will adjust to a rising rate in terms of most likely the pricing, that we see on those deals but again – we’ll take it one by one as they appear.
Zachary Evershed
Good color. Thanks. Then just one last one, you’re indicating a slowing an improvement in the back half due to the timing of certain vendor rebates and of course lapping operating improvements. With 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?
Brian McManus
These are always a little bit lumpy, Zach. Some of them have to do with specific negotiations from quarter-to-quarter, month-to-month, so I prefer not commenting at this time on whether – something in the future is going to be representative of the steady state. What I would say is Q2 was elevated versus the steady state.
Zachary Evershed
Great color. Thanks. I’ll turn it over.
Brian McManus
Thanks, Zach.
Operator
Thank you. And your next question will be from Sabahat Khan at RBC Capital Markets. Please go ahead.
Sabahat Khan
Great. Thanks and good morning. And I guess just following up on the comments around the vendor rebates. Is it when you look to the back half of the year, is it as simple as just the fact that last year was probably when you started to get some of the larger vendor rebates and are locking again, so there – is there change in the rate as you go forward to understand, you said there are a lot of moving pieces, but I 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?
Anthony Pagano
It’s a little bit of both, Saba. 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. And 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.
Sabahat Khan
Okay, thanks for that. And then just want to clarify those comments, I think in the MD&A as was earlier about just kind of the bad debt expense and the reversal. Was it the bad debt expense, was it taken a last year in reverse in the quarter just trying to understand, didn’t think I followed commentary and must have missed it. I just hope for some clarification.
Anthony Pagano
Yes. So some of it was taken in this 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.
Sabahat Khan
Okay. And is that kind of one of the adjustments under special items? Or is that just in the numbers?
Anthony Pagano
No. It’s just an item that we’ve called out, as one of the factors as we’re seeing performance we don’t carve those out as special items.
Sabahat Khan
Okay. Perfect. And then just, I guess, as you look to kind of the back half of the year into next year, with the macro situation evolving quite a bit, just big picture. Have you seen any change in tone or commentary from kind of customers the UK was that with some negative kind of directional and macro negative commentary? Just a big picture, what are you hearing from kind of particularly more focused on U.S. than the UK?
Brian McManus
I think in general, the tone is like; 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 will be themes can help us, is what we’ve historically seen so I would say, overall we – I wouldn’t say we’ve seen a change in the overall tone, maybe is the best way to say it at this particular point in time. As we know those things can rapidly change.
Sabahat Khan
Okay. And I just pick one last quick one as the balance sheet continues to improve, obviously a good step down this quarter. And should we expect the focus of sort of the medium to long-term to still be on? Kind of growth initiatives before you would think report any other capital allocation parties or how are you thinking about that at this point in the cycle?
Brian McManus
Yes, that would definitely be a fair way to think about it.
Sabahat Khan
Thanks a lot for the color.
Brian McManus
Thank you.
Operator
Your next question is from Daryl Young at TD Securities.
Daryl Young
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 sales and if volumes have, if you’ve seen any sort of quantifiable benefit from those issues and higher used car prices as well?
Brian McManus
It would be very difficult. 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. So…
Anthony Pagano
What I would add is, obviously our continued initiative and one point that, we haven’t touched on necessarily through this Q&A and bringing on a new member and the Canadian division is always going to help drive parts volume and the greenfields in the UK would certainly play a role in that as well. So to Brian’s point, there’d be a bunch of factors to disaggregate and comment on if we were to provide any type of figure around volume over the past three years.
Daryl Young
Got it. Makes sense. Thanks guys.
Anthony Pagano
Thank you.
Operator
Thank you. And at this time gentlemen, we have no further questions. Please proceed with your closing remarks.
Brian McManus
Thank you, operator and thank you everybody for listening. We look forward to updating you on our progress during our next quarterly call. Have a great day.
Operator
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. Have a good weekend.
Be the first to comment