Uni-Select Inc. (OTCPK:UNIEF) Q3 2022 Earnings Conference Call November 4, 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
Benoit Poirier – Desjardins
Luke Hannan – Canaccord Genuity
David Ocampo – Cormark Securities
Zachary Evershed – National Bank Financial
Daryl Young – TD Securities
Sabahat Khan – RBC
Operator
Good morning, ladies and gentlemen, and welcome to Uni-Select Inc.’s 2022 Third Quarter Results Conference Call. At this time all lines are in a listen-only mode. [Operator Instructions] Also note that today’s call is being recorded. [Foreign Language]
And now 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 third 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, unless 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 third quarter results conference call. Please turn to Slide 4 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 Maslack Supply Limited and are pleased with the progress to date.
Consolidated sales for the third quarter were up 6.2% to $453 million from $426 million last year, primarily attributable to organic growth of 9.8%. This organic growth is largely due to price increases across our businesses, driven by the current inflationary environment.
Adjusted EBITDA increased 16.5% to $49 million, or 10.9% of sales, representing 100 basis point year-over-year improvement. This performance was driven by price increases, rebates and the scaling benefits of higher sales, which largely offset inflationary pressures relating to fleet and energy costs. Adjusted diluted EPS, in turn, stood at $0.48, up from $0.36 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 at our FinishMaster and Canadian Automotive Group divisions, the profitability of GSF did not meet our expectations. We continue to believe that our assets, brand and market position in the UK are capable of delivering better results. As such, we have made a change in leadership, and I have temporarily taken over as President and COO of GSF.
Over the past few weeks, I have worked closely with the local team in refining GSF’s plans with a near-term focus on servicing our customers and improving cost management. We have every confidence in our team at GSF and are in the process of recruiting a new leader.
I now turn the call over to Anthony to complete the financial review. Anthony?
Anthony Pagano
Thank you, Brian. I’ll direct participants to Page 6 for FinishMaster. Both sales growth and organic growth reached 8.1% 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 9.1% 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 were partially offset by higher delivery costs. Our priorities at FinishMaster remain centered around ramping up sales and volumes, further optimizing our path to market and expanding our use of technology to refine our operating model.
Turning to Page 7 for the Canadian Automotive Group. Sales reached to $160 million, up 10.8% from $144 million last year. While organic growth was 7.8%, driven primarily by price increases, acquisitions completed over the past 12 months contributed 6.7% 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 13.2% of sales, up 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 Maslack acquisition and 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 8 for GSF. Sales decreased 3.1% 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 & collect e-commerce business.
Adjusted EBITDA was $9.5 million, or a margin of 9.2% 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 due to delays in replacement of our vehicle fleet, as well as higher payroll costs, 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 at GSF, as Brian mentioned, we have been underwhelmed by profitability, which led to a change in leadership. With the initiatives currently being put in place, we are optimistic about the future prospects of GSF, and this quarter’s results do not reflect its long-term potential.
Coming back to the overall Uni-Select business for a moment. As we look ahead, our teams in Canada, the United States and in the UK 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 in merchant advances as well as capital investments, we generated 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 higher 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, and 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, which includes $96 million of IFRS 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 toward the Maslack acquisition.
Driven by lower net debt and higher adjusted EBITDA, our total net debt to adjusted EBITDA ratio decreased to 1.4 times at the end of Q3, down from 1.7 times at the end of Q2. This represents by far our lowest ratio since acquiring GSF five years ago. We also completed the third quarter with $228 million of 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 in asset utilization, including working capital.
I will now turn the call back to Brian for concluding remarks. Brian?
Brian McManus
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 persisting labor and inflation challenges, and we’ll 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 contribute 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 are now ready to answer your questions. Operator?
Question-and-Answer Session
Operator
Thank you sir. [Operator Instructions] And your first question will be from Benoit Poirier at Desjardins. Please go ahead.
Benoit Poirier
Yes, good morning, Brian, good morning, Anthony and congratulations for the strong quarter.
Brian McManus
Thank you, Benoit.
Benoit Poirier
Yes. You mentioned, with respect to the quarter, that a good portion of the organic growth was driven by price increases. I was just wondering whether the impact 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?
Anthony Pagano
Benoit, it’s Anthony. So, I think the impact of price increase is quite similar in Q3, I’d say, to the Q2 and Q1. Going forward, it doesn’t – price increases from our vendors don’t really seem to be abating. So, I think we’ll certainly have a benefit into Q4. What I would see and say is in some parts of our business, primarily in the parts side, you see a bit of a moderating of that effect. And naturally, we’ll carry a bit of that pricing impact into next year as well.
Benoit Poirier
Okay. Perfect. And with respect to the hurricanes that we saw in the U.S., would you be able to mention some color about how it impacted FinishMaster during the quarter, and whether you see greatest demand for car repairs on the back of those events going forward?
Anthony Pagano
So Benoit, we had a few branches that were closed for a few days here and there. We have the impact, but it’s really de minimis and not something we want to focus on. As it pertains to potential benefits of flood damage, flooded cars are often written off, so we don’t see any potential material moves in our revenue because of the storm.
Benoit Poirier
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 and what we should expect in Q4?
Anthony Pagano
I’ll probably be a little bit muted as it pertains to Q4. But what I would say in Q3, obviously 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 a sort of favorable benefit associated with negotiation with some of our largest vendors, and we expect to give that benefit back into Q4 and into Q1 as well. So it’s strong, but over time, we can expect to see free cash flow outperforming EBITDA indefinitely.
Benoit Poirier
Okay, okay. Thanks for the time gentlemen.
Brian McManus
Thanks, Benoit.
Anthony Pagano
Thanks, Benoit.
Operator
Thank you. Next question will be from Luke Hannan at Canaccord Genuity. Please go ahead.
Luke Hannan
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 than you would ordinarily like just because of the lead times that you’re seeing in the supply chain right now. But there was – to your point, there was a pretty big inventory drawdown during the quarter as well. So is it fair to say that you’re seeing those sorts of pressures alleviate, and over time, you still expect to be able to hold less inventory on your books going forward? Or how should we read into that?
Anthony Pagano
Yes. I think you should certainly look at it as we’re trying to minimize the amount of inventory we carry to generate as many turns as possible. Naturally, we – the inventory levels sort of ebb and flow with the buying and us protecting ourselves. As supply chain burdens ease and we can start getting comfortable that the lead times we see from our suppliers are going to be consistent, then we will be at a point where we could 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’re buying more to protect ourselves, you’ll typically see the payables moving in sync with that.
Luke Hannan
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 authorized amount. But can you share with us what’s sort of helping to close that gap? And what future, I guess, actions or initiatives could you take to further close that gap and improve that working capital as well for you?
Anthony Pagano
Yes. I think if you look back at the history of the company, Luke, company got itself in some amount of trouble with the use of those vendor finance facilities. So we’re 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 partners to get paid on their – I guess on their receivables, our payables, sooner without impacting our balance sheet. So it’s something we talk to our vendor partners about often, and we see a certain interest in it.
Luke Hannan
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 number of bidders that would be at the table with you guys in competing for these assets?
Brian McManus
Yes. Good question. We continue to see opportunities across all three business units. And I think it’s probably a little premature to really see if that effect has come through yet. And part of it, of course, is at what stage we may 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. And like we said, we’re going to be very disciplined in how we deploy our capital
Luke Hannan
Makes sense. Thank you very much.
Anthony Pagano
Thank you.
Brian McManus
Thanks, Luke.
Operator
Thank you. Your next question will be from David Ocampo at Cormark Securities. Please go ahead.
David Ocampo
Thanks, good morning everyone.
Anthony Pagano
Hi, David.
David Ocampo
I just wanted to start on FinishMaster. Most of the improvements we’ve seen in recent quarters have mostly been from pricing, as 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.
Anthony Pagano
Yes. So there’s two things 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% and 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 get back some of the areas we lost in is still a work in progress, I would say. The team continues to push on it. We’re seeing areas of opportunity. Are we completely satisfied? Not yet. But the team continues to push hard on it.
David Ocampo
Got it. Makes sense. And then just kind of following up on Luke’s question on the M&A environment, and you guys could provide your – the amount of liquidity that you guys have. But just to give up 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 – or 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? I know you guys didn’t give a number in the past, but has that changed to you where you want to keep less debt on the balance sheet than you had in the past?
Anthony Pagano
Look, I think as we see where interest rates are going and the overall economic conditions, we’re certainly pleased to have a strong balance sheet. So we haven’t provided guidance in the past, as you said, of how much we’d be willing to add leverage to it. We’re certainly able to at this point in time. But we are going to be, again, disciplined in ensuring that the opportunities make sense for us before we’re going to act on anything. Because we worked hard to get our balance sheet in the position it’s in and believe that it will be advantageous to us in the future as these opportunities come about.
David Ocampo
Got it. And then just as a quick one for me. On the favorable product mix, are you guys referring to – at least on the CAG side, is that more white labeled products?
Anthony Pagano
Correct. Yes. Private label.
Brian McManus
Private label.
David Ocampo
Yes, got it. Okay, that’s it for me. Thanks guys.
Anthony Pagano
Thank you.
Operator
Thank you. Next question will be from Zachary Evershed at National Bank Financial. Please go ahead.
Zachary Evershed
Good morning. Congrats on the quarter.
Anthony Pagano
Hi, Zach.
Zachary Evershed
So it looks like you’re targeting organic growth through volume. Any insight into whether pricing will be sticky into 2023, if we do see raw materials and other cost inflation items ease up?
Anthony Pagano
Every indication that we have currently is that there’s going to continue to be some price increases coming through, even into the end of this year potentially. That being said, and I think I mentioned it on the first question. In certain areas of our business, and in particular, some of the parts businesses, we could see little a bit of reduction in price flowing through. So I think overall, it’s balanced to somewhat inflationary.
Zachary Evershed
Makes sense. Thanks. And then on the private label question, you’re 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?
Brian McManus
I think, as we’ve said in the past, Zach one, we’ve made a concerted effort to – or a 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 other thing we’ve said is it’s been one area where we’ve been able to control our destiny a bit more, and we’ve been able to control our levels of inventory. So in an environment, whether suppliers potentially didn’t have products or where we weren’t getting the fill rates we wanted to, we had product available on the private label side, which probably helped accelerate the uptake of those somewhat.
Anthony Pagano
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. So we’re pleased with that.
Zachary Evershed
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?
Anthony Pagano
I think dwindling is probably not the right word, Zach. I would say that they’re probably likely to be less of a contributor than they were this year. There’s a bunch of reasons for that. The shift to private label would be one, right. So you would pick up margin on one side, but lose rebates on the other, and net-net, you’re ahead. So I guess that would be sort of how I would think about it. And the operational improvements is something that we continue to focus on, and it’s going to be – as Brian mentioned, it’s going to be part of our DNA and our way of doing business into the future.
Zachary Evershed
Great color. Thanks. I’ll turn it over.
Operator
Thank you. Next question will be from Daryl Young at TD Securities. Please go ahead.
Daryl Young
Hey good morning everyone. Apologies. I had some tech issues so I missed the first part of the call, but – so if I ask a question, my apologies. But on the U.K. business, it looks – the margins held in better than I maybe would have expected. Are you making progress on some of the fuel pass-throughs and offsetting some of the inflationary conditions there at the, call it, the operating level?
Brian McManus
It’s a good question. I would say the biggest impact under the, call it, uncontrollable cost is certainly fuel and energy cost, and U.K. is the area I would say we’re feeling it the most. We’re a little disappointed in terms of the controllable cost part of that, as I said in my comments. So that we’re dealing with right now. And so I think as we move forward over the coming quarters, we’ll work to improve that part of the equation in terms of our cost to serve.
Daryl Young
Okay. And then just on FinishMaster. Some of the paint companies have – manufacturers have started to highlight some logistical and raw material issues in the U.S. It doesn’t seem like you’re 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 on the margin?
Anthony Pagano
I mean, I have to – I’ll start this by giving a lot of credit to our team in FinishMaster U.S. because they’ve been managing through these issues for at least the last six months. And they’ve done a fantastic job of sort of dealing with that, finding alternative products and SKUs from the manufacturers that could work that were 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 that’s more concerning than it has been in the past.
Daryl Young
Okay. And not leading to any sales, say, left on the table or backlog unfilled demand or anything like that?
Anthony Pagano
Nothing that – I mean, there’s going to be pockets of it, Daryl, and sometimes in unexpected areas. But it’s nothing that’s causing a large impact on our results.
Daryl Young
That’s great. That’s it for me. Thanks guys.
Anthony Pagano
Thanks, Daryl.
Brian McManus
Thanks, Daryl.
Operator
[Operator Instructions] And your next question will be from Sabahat Khan at RBC. Please go ahead.
Sabahat Khan
All right. Great. I guess 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 costs that could have gone better that you were talking about 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?
Brian McManus
No, I think it’s – to answer the operational, it’s definitely more operational. Look, we’re pleased with certain parts. We’re seeing some good organic sales coming through. But I think back to my original point I made earlier in terms of the controllable cost aspect of it, we’ve seen in our other businesses sort of 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 of in the UK. And the team over there is solid. They’re – they’ve all pulled together and already starting to see some positive changes. So it’s under control, and we’ll improve as we go forward.
Sabahat Khan
Okay. Great. And then I guess with the balance sheet getting better, free cash flows in a good shape. The backdrop also is a bit more volatile kind of in the market at least. Maybe if you can just talk about the willingness of potential targets to sell, your willingness to transact kind of in the current environment. Just how likely is it that there’s M&A even against the current backdrop?
Brian McManus
Again, we’re seeing opportunities in the various business units, and we’re still very interested to deploy capital. Again, we’ll be disciplined with where we deploy it. But I think often in these times is where we can see some good opportunities.
Sabahat Khan
Okay. Just a one last one. Obviously, a lot of moving parts to the supply chain with paints, parts. I guess, do you have a view at all on, could we be in a normal state at some point early next year? Are you seeing any meaningful improvement in any one business or region as opposed to others? I know it’s a hard question, a bit philosophical, but just want to get your perspective on your outlook at this point.
Brian McManus
I think we’re seeing it improve overall. And again, you could kind of almost answered your own 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 have experienced pre-pandemic in terms of the overall supply chain. So, hard to predict what’s going to happen. There’s 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.
Sabahat Khan
Great. Thanks very much for the color.
Brian McManus
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 everyone for listening. We look forward to updating you on our progress at our year-end 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 do ask that you please disconnect your lines. Have a good weekend.
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