Uni-Select Inc. (OTCPK:UNIEF) Q4 2022 Earnings Conference Call February 16, 2023 8:00 AM ET
Company Participants
Max Rogan – Chief Legal Officer and Corporate Secretary
Brian McManus – Executive Chair and CEO
Anthony Pagano – CFO
Conference Call Participants
David Ocampo – Cormark Securities
Benoit Poirier – Desjardins Capital Markets
Luke Hannan – Canaccord Genuity
Daryl Young – TD Securities
Zachary Evershed – National Bank
Sabahat Khan – RBC Capital Markets
Operator
Good morning, ladies and gentlemen, and welcome to Uni-Select Inc.’s 2022 Fourth 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] Also 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.
Max Rogan
Thank you. Good morning everyone and thank you for joining us for Uni-Select’s fourth quarter and year end conference call. Presenting this morning are Brian McManus, Executive Chair and CEO of Uni-Select; and Anthony Pagano, our 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 two, 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 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 fourth quarter and year end results conference call. Please turn to slide four.
In 2022, Uni-Select generated sales of $1.73 billion, driven by solid organic growth of 10.7%. We also achieved significant profitability improvements with a 26% increase in adjusted EBITDA to $185 million and a 67% rise in diluted adjusted EPS to $1.74.
The year also marked an important turning point for the business as we gradually transition to growth by making acquisitions in Canada and opening select greenfield stores in the UK. These expansion opportunities were financed by strong cash flow generation, stemming from operational improvements and working capital discipline.
During the year, we were also able to reduce our long-term debt by nearly $80 million, keeping us on a strong footing to pursue acquisition opportunities that may present themselves.
Moving on to slide five for key highlights of the fourth quarter. On a consolidated basis, sales increased 6.2% to $425 million from $400 million last year, primarily due to organic growth of 10.6%. All business units reported organic sales growth, which was mainly attributable to price increases reflecting the current inflationary environment.
Adjusted EBITDA reached $39 million or 9.2% of sales versus $37 million or 9.4% of sales last year as price increases, a better product mix, and scaling benefits were offset by certain inflationary costs.
Diluted adjusted EPS remained stable year-over-year at $0.32, primarily reflecting variations in effective tax rates for the period.
In the UK, I am pleased to report the appointment of Sukhbir Kapoor as President and COO of GSF effective January 3rd. Sukhbir brings more than 30 years of leadership experience in the aftermarket industry and is off to a running start with GSF.
I now turn the call over to Anthony to complete the financial review. Anthony?
Anthony Pagano
Thank you, Brian. Let’s move on to page seven for FinishMaster. Sales increased 3.4% to $173 million in the fourth quarter, while organic growth was 5%, mainly driven by the effect of price increases.
Adjusted EBITDA reached $14.4 million or 8.3% of sales compared to $15.6 million or 9.3% of sales for the same period last year. This variation reflects the adverse timing of vendor rebates versus prior year, as well as normal course bad debt expenses incurred in 2022 as opposed to a recovery in 2021.
Higher fuel costs and higher performance bonuses also weighed on the results. These factors were partially offset by price increases and higher sales driving scaling benefits.
Turning to page eight for the Canadian Automotive Group. Sales in the fourth quarter reached $150 million, up10.6% from $136 million last year. Excluding a significant $10.7 million headwind from favorable — from unfavorable translation effects due to the value of the Canadian dollar versus the US dollar, sales rose 18.5%. This solid improvement includes organic growth of 10.5%, driven by higher prices and a 9.1% sales increase from acquisitions.
Adjusted EBITDA was $18.1 million or 12% of sales, up from $16.8 million or 12.4% of sales last year. This slight 40 basis point decrease reflects FX losses, higher delivery and travel costs, as well as higher performance bonuses. These items were somewhat offset by price increases, a more favorable product mix, and scaling benefits from higher sales.
Turning now to page nine for GSF. Sales in the fourth quarter increased 4.7% to $101 million compared to $96 million for the same period last year. This increase reflects strong organic growth of 20.6%, driven by price increases, the contribution of 10 greenfield stores opened earlier in the year, as well as higher e-commerce sales. These factors were partially offset by a negative currency translation effect of $15.4 million.
Adjusted EBITDA was $10.2 million or a margin of 10.1% versus $7.4 million or a margin of 7.6% last year. This 250 basis point improvement stems from higher sales driving scaling benefits and the timing of vendor rebates, which were partially offset by inflationary costs related to fuel, utilities, and payroll. As Brian mentioned, we have new leadership at GSF, and we are optimistic about the potential of our UK network.
Turning to page 11 for comments relating to our cash flow. We generated approximately $45 million in cash flow from operations in the fourth quarter of 2022 compared to $28 million in the same period last year. This strong improvement is due to sound working capital management and improved profitability.
After accounting for net investments in merchant advances and capital investments, we generated free cash flow of $40 million in the fourth quarter, up from $20 million for the same period last year. This brought our total free cash flow for the year to $152 million versus $92 million last year.
This solid cash flow performance reflects efforts made across all areas of the business. Our teams worked hard to improve operational efficiency and to focus on working capital, enabling Uni-Select to deliver strong cash flow. I want to thank all of them for this excellent performance.
Turning to our financial position on page 12. At the end of the year, total net debt stood at $234 million, which included $96 million of IFRS 16 lease obligations related to buildings. This represents decreases of $30 million and $75 million, respectively, over the past three and 12 months.
Driven by lower net debt and higher adjusted EBITDA, our total net debt to adjusted EBITDA ratio continued to improve, decreasing to 1.3 times at the end of Q4 from 1.4 times at the end of Q3.
We also closed 2022 with $281 million of available liquidity, subject to compliance with financial covenants, which positions us favorably to pursue potential opportunities.
In summary, we are pleased with the progress made in 2022 across all three of our business units.
I will now turn the call back to Brian for concluding remarks. Brian?
Brian McManus
Thank you, Anthony. Please turn to slide 14. As we enter 2023, we are confident that our business strategy will continue to generate positive momentum for Uni-Select. Our key priorities remain on improving profitability by driving organic growth through higher volume across our business units, continuing to focus on operational improvements, and delivering synergies from recent acquisitions.
We still expect to encounter headwinds from persisting currency translation impact, labor and inflation challenges, as well as ongoing but moderating supply chain issues. I am fully confident that our strong team, who share our vision and values of ownership, teamwork, and respect, will continue to produce solid results.
For these reasons, we anticipate higher adjusted EBITDA and adjusted EPS in 2023 compared to 2022. Discipline, efficiency, and accountability are increasingly part of our DNA as we empower our people to take actions oriented towards the creation of shareholder value.
In closing, I want to thank all of our employees for a solid year. Their efforts and teamwork are essential elements in continuously improving the way we manage our business, thus providing greater 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. Please go ahead.
David Ocampo
Thanks. Good morning everyone.
Brian McManus
Morning David.
Anthony Pagano
Morning David.
David Ocampo
My first question is on the GSF margins. They were up quite a bit, and I’m not sure if that’s just the Brian effect with him taking over last quarter. But maybe you guys can talk about the sustainability of those levels and what makes you so positive on a go-forward basis? Is it because you guys think you can bridge the gap or narrow the gap a little bit more between CAG and GSF?
Brian McManus
Yes. Thanks David and I definitely won’t take credit on that. It’s the team over there that’s been doing a great job. I think a lot of it is the scaling benefits we’re getting from the higher sales. And we’ve seen good results on volume as well as some of the price effect over in GSF.
And so we’re optimistic that — again, we always like to point you to the LTM when you’re thinking about sort of the go-forward margins, and so we’re comfortable that it will hold going forward.
David Ocampo
Okay, that’s good. And then I’ve been getting quite a bit of questions on pricing for some of the components and products that you guys are selling. Are you guys still seeing inflation on some of the parts? Or is there potential deflation on some of the components that you guys are selling?
Brian McManus
For the most part, it’s come down a bit. I’m not going to say there’s zero deflation, I think there are certain areas where we’ve seen that. But in general, we’re still feeling some price pressures across the three divisions in terms of potential price increases coming through over the coming quarters.
Anthony Pagano
Yes, I’d say it’s balanced, David. I mean there’s nothing particular to call out, no concern on our minds.
David Ocampo
Got it. And then last one for me. I guess there’s still a little bit of economic uncertainty out there. Are you guys seeing that as a tailwind for your private label products? Is there more of a push there since I know it’s kind of mid-price good value type products?
Anthony Pagano
Yes, David there’s — I think, a few things. There’s sort of a secular tailwind that we’ve been seeing in terms of aging of the car park. And I think certainly, any economic factors that would have people hold on to their cars longer would be a good thing.
Hard to comment on how that would translate into private label demand given that our positioning of private label products sort of varies between the businesses and between the various product categories. But I think overall, any potential economic softness should pose a bit of a tailwind to us.
David Ocampo
Okay. That’s my questions. Thanks a lot guys.
Brian McManus
Thanks David.
Operator
Thank you. Next question will be from Benoit Poirier at Desjardins Capital Markets. Please go ahead.
Benoit Poirier
Yes. Good morning Brian, good morning Anthony.
Brian McManus
Hi Benoit.
Benoit Poirier
Could you maybe provide some color on each business segment heading into 2023, especially in terms of sales initiatives that will drive volume and organic growth in 2023?
Brian McManus
Yes, I think I’ve already discussed GSF in terms of we feel we’re going to continue to see sales increase because of the focus there. And I think it’s — our goal in FinishMaster, as well as CAG, to continue to push on topline growth. I don’t want to get into the specifics in terms of strategies or things like that, Benoit. As you know, we’re pretty guarded with that type of stuff.
Benoit Poirier
Okay. And looking at GSF, now that Brian, a new President has been appointed, how does it change the things moving forward for the strategy, the focus still to drive volume and slow down a bit on greenfield location?
Brian McManus
Yes, that hasn’t changed. Sukhbir brings with him a good track record, a good history and certainly will focus on the operational aspects of the business over there. So, it’s very — still much aligned with our thought before we’re going to tackle any more greenfields.
We just want to get the ones that we started built last year up and running to a level that we’re comfortable that it makes sense and obviously focus on our existing branches as well. So, definitely no different plans in terms of where we’re going with GSF.
Benoit Poirier
Okay. And Tony from a free cash flow standpoint, 2022 has been a great performance, a lot of efforts on the working capital management. Could you discuss about sustainability for 2023? And maybe talk about the new routing software inventory optimization efforts?
Anthony Pagano
Yes, Benoit, I won’t get into the individual specific initiatives. But I think what I would say is there’s been a bit of a — well, not a bit, there’s been a quite substantial rightsizing over the last 18 months. And I think what you’ll see going forward is us kind of growing the working capital in line with sales, maybe getting a little bit of efficiency out of it. But I wouldn’t expect any releases of working capital or any meaningful releases of working capital over 2023.
Benoit Poirier
Okay, perfect. And last one for me. When we look at e-commerce sales, you made a call out for GSF. From what I understand, it’s almost the first time where you’ve been discussing about e-commerce sales. Is this only specific to GSF? Or what would be the overall strategy when it comes to e-commerce, Brian?
Brian McManus
Yes, it’s a good question, Benoit. It is currently only specific to GSF, and it is something that we plan in the coming quarters to start in CAG as well.
Benoit Poirier
Okay, that’s it. Thank you for the time.
Brian McManus
Thank you.
Operator
Your next question will be from Luke Hannan at Canaccord Genuity. Please go ahead.
Luke Hannan
Thanks. Good morning everyone. I wanted to start on the — what you’re seeing now in the business as far as labor pressures labor pressures. Where are you seeing them currently? And maybe how it’s evolved over the course of the last year? Is its imply at a point now where it’s just simply higher compensation to attract that talent? Or is there some other sort of inhibiting factor? And if so, I’m curious to know if that differs across each of your segments?
Brian McManus
I would say not only differs across each 1 of our business units. It would also differ geographically, depending what region we’re operating in. And even within the region, it would differ depending on the type of jobs we’re looking for. So, it’s really a factor of the labor market in a region and sort of we’re where people are competing for the same type of labor.
But I would say not a lot has changed in the last little while. It’s still a very competitive market out there for employees. And we’re holding our own. We’re making the changes we need to do, and we believe we’re an attractive company to work for. So, it’s — but yes, it still remains a challenge.
Luke Hannan
Got it. And then my second question here on vendor rebates. I’m curious to know what, if anything, specifically impacts timing here? Is it just when you hit those certain sales levels or targets? Or is there something else that causes that fluctuation quarter-to-quarter structurally?
Anthony Pagano
Yes, it’s really — there’s a few things. It’s sort of case-by-case when we earn them or when we’re able to actually reconcile the amount or the purchases with the supplier. So, nothing sort of structurally that I would call out. It’s typical ebbs and flows in the business. And look, as we’ve said, the best way to think about sort of margins is to look at the last 12 months.
Brian McManus
And I think I would just add to that, that you’ll recall, 2021, we were a bit more conservative and left — where we were unsure of whether we’re going to hit some of the rebates. We left some of them until the end of the year, last year into the fourth quarter, whereas this year, we had a bit more experience and comfort. And I think we’re able to, I don’t want to say smooth it out, but we’re more comfortable recognizing rebates a bit sooner.
Luke Hannan
Understood. Thanks for all the color.
Operator
Thank you. Next question will be from Daryl Young at TD Securities. Please go ahead.
Daryl Young
Hey, good morning everyone. First question is on FinishMaster. The results were maybe a little bit lighter than I would have anticipated just given some of the commentary we’re hearing about pricing and raw material price pass-throughs. Is there any additional color you can give us in terms of the volume and price mix or what might be happening at FinishMaster?
Anthony Pagano
Hey Daryl, it’s Anthony. There’s definitely pricing ongoing. I think we’ve been pretty open about our push towards driving through more volume, starting to see some initial wins in a few go I think that what you’re seeing in terms of — was your question related to margin or revenue, Daryl?
Daryl Young
Well, actually both.
Anthony Pagano
So, I think I’ve covered the volume. And then I think what you’re seeing with respect to Brian with the — sorry, with respect to rebates is what Brian mentioned earlier. There was some sort of favorable timing of rebates in Q4 of last year and as well as a bad debt reversal in Q4 of last year. And if you recall at the time, we sort of called those out.
So, what you’re seeing now here is probably a little bit of unfavorability of timing and rebates. We have a bad debt expense or sort of normal course and higher performance bonuses just given the fact that the results for GSF — sorry, for FinishMaster over the year where were quite strong. So, this is sort of in line with what we would have expected.
Daryl Young
Yes. And would FinishMaster be maintaining market share within the industry?
Anthony Pagano
I would say so.
Daryl Young
Okay. And then my second question is just with respect to CAG. Would you guys be tracking the — within the Jobber network, inventory levels within the Jobber network? And would that be sitting at relatively normal levels?
And I’m just trying to think about purchasing patterns for next year. Is there any — is there — would they have been buying in front of the inflationary environment and stockpiling inventory that maybe hampers you going forward? Or is there any dynamics there?
Brian McManus
It’s a good question, a little difficult to answer. I would say, when we had it would be less to do with sort of the inflationary or price changes and probably more to do and you’d have to go back probably over a year ago, when some of the supply constraints were happening with certain parts where we saw a bit of, I don’t want to call it hoarding, but certain Jobbers putting inventory up at that time. But I — my feeling is now it’s more normalized to what we would have seen historically. I think there’s less of that happening.
Daryl Young
Got it, okay. And so that’s not a risk that you would see across other divisions as well, just in terms of customers or buying in safety stock. We’ve seen it across some other distribution businesses where people were aggressively buying, knowing that more inflation was coming down the pipe?
Brian McManus
I would say that it actually probably slowed down over the last several quarters.
Daryl Young
Perfect. That’s all for me. Thanks guys.
Brian McManus
Thank you.
Anthony Pagano
Thank you.
Operator
[Operator Instructions] And your next question is from Zachary Evershed at National Bank.
Zachary Evershed
Good morning everyone. Congrats on the quarter.
Brian McManus
Thanks Zach.
Zachary Evershed
So, you’re seeing great results from cost discipline and operating leverage. Broadly speaking, how much further can you push margins if growth were to stall out? Or is the path forward strictly on a higher topline?
Brian McManus
I think we’ll continue to be disciplined across all our business units on how we approach cost. Obviously, there’s factors beyond our control related to labor inflation, energy cost, fuel, things like that, that will put pressure there and we’ll do our best to try to offset as we continue to drive efficiencies.
But ultimately, to your point, Zach, it’s — the density is going to be the key driver for us and so our ability to drive sales is going to be important.
Anthony Pagano
And the other thing I would add, Zach. There are certain things that we can do and initiatives that we’ve had ongoing for a while that don’t depend on purely costs, right? I mean we’ve spoken at length about private label business and how we see an opportunity there, and it’s being well-received by the customer base. So, that’s something that we hope to continue going forward.
Zachary Evershed
Great color. Thanks. And then how sticky are the prices in each segment? And if we were to see deflation, how well will organic growth stand up?
Anthony Pagano
I think we’ve addressed this one a few times in the past, right? Zach, we’ve gone back as reasonably as we could and can really identify a period of protracted deflation in the products that we — the products that we sell. So, that would be my comment on that.
Zachary Evershed
Thank you. Then just one last one. How is the acquisition pipeline looking for Canada? And are you working on anything in the US or UK?
Brian McManus
We won’t talk to the specifics, Zach. But I would say we’re certainly learning that as much as we may be a willing acquirer. We need willing sellers as well. So the — we’re constantly looking at various opportunities of different sizes, and we’ll see what the coming months or quarters hold for us.
Zachary Evershed
Thanks for taking my questions. I’ll turn it over.
Operator
Thank you. Your next question will be from Sabahat Khan at RBC Capital Markets. Please go ahead.
Sabahat Khan
Yes, great. Thanks and good morning. I just wanted to follow up a little bit more on the US commentary from earlier. I mean as you kind of think about 2023, we’ve been hearing from the paint guys about kind of pricing in the system. Obviously, the macro is a little uncertain.
Can you maybe parse a little bit of the outlook for next year? How are you thinking about volume versus price? The body shops still seem to be backed up a little bit. Could that be a tailwind if that clears up? Just kind of a bit more color on the drivers in that market over the next kind of 12 months.
Anthony Pagano
Yes, this is Anthony, Sabah. I think that’s right. I think the body shops are — do continue to be plugged up. You read the same commentary we do about from the paint manufacturers. I think there will be increasing price. And we also believe that collision rates are still below pre-pandemic levels. So, I think those are three potential drivers for growth going forward.
Sabahat Khan
Okay, great. And then I guess on the UK market. The macro there probably became a bit uncertain ahead of North America. You’ve obviously made a bunch of changes. I guess have you seen kind of the macroenvironment and how your business is affected? Does that kind of tell you anything about how what mayhappen in North America?
There’s view that maybe as people keep their cars longer, it’s probably a tailwind. Is that sort of influenced by what you’ve seen in kind of the UK today? Just curious what the underlying trends there have been more so on the demand side. I’m not even addressing kind of cost side more proactively.
Brian McManus
Yes, it’s a bit difficult to say whether it’s entirely macro, how much of it is macro and how much is just, call it, our team being successful at winning more business. So, probably a mix of both. But it’s a good point you’re bringing up. I think we are seeing demand hold well in the UK despite probably greater economic hardships than we’re facing in North America.
Sabahat Khan
Okay. And then just one last quick one. I guess, just on the capital allocation side, balance sheet improved. You said you’re looking out for M&A still. But I guess if that — if you don’t — that does not materialize for a period of time, is it possible that you may look at other options, like maybe return on capital or something on those lines if acquisition doesn’t materialize in the near to medium term? Or is acquisition still current priority?
Brian McManus
I would say acquisitions would still be a priority for where we — for capital deployment. But to your point, thein terms of returning capital to shareholders, that will be obviously a Board decision. And I can’t say when that point in time will come. But I think we still feel there’s opportunities out there on the acquisition front.
Sabahat Khan
Great. Thanks very much guys.
Brian McManus
Thank you.
Operator
Thank you. And at this time, we have no further questions registered. 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 at our next quarterly call. Have a great day.
Operator
Thank you. 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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