Uni-Select Inc. reported its financial results for the third quarter ended September 30, 2018.
“Our third quarter results demonstrated our focus on execution with improved organic sales growth in all our business units, higher adjusted EBITDA and strong cash flow generation. During the quarter, we deleveraged our balance sheet, bringing our funded debt to adjusted EBITDA ratio to 3.1x and we amended and extended our credit facility to increase flexibility,” said André Courville, Interim President and Chief Executive Officer of Uni-Select.
“On September 18, we announced the formation of a Special Committee of independent members of the Board of Directors to oversee a review of strategic alternatives. Since then, the Special Committee and the Board of Directors have had multiple meetings with its advisors and management to identify, review, analyze and evaluate a comprehensive range of alternatives with the goal of maximizing value for our shareholders.
“We continued to execute on our 20/20 cost savings initiative launched a year ago to generate annual recurring savings of $20.0 million by 2020. To date, we have realized $12.0 million in annualized savings or 60% of the target. In the spirit of continuous improvement and to further drive efficiency, we have identified an additional $5.0 million in cost savings, bringing the total recurring savings to at least $25.0 million by 2020. To achieve the remaining $13.0 million in cost savings, we will need to incur restructuring and other charges estimated at between $9.0 and $11.0 million.”
“In conclusion, we have the management team and strategy in place to drive the business forward. We will continue to open greenfields and actively pursue select acquisitions, all in an effort to drive our operations to generate continued growth and increased profitability with the aim of maximizing shareholder value. All of this would not be possible without the on-going support of all stakeholders, including our employees and shareholders,” concluded Mr. Courville.
• Sales up 13.4% to $448.8 million, driven by the contribution of TPA and organic growth;
• Consolidated organic growth(1) of 3.4% with positive organic growth(1) in all 3 segments;
• EBITDA(1) of $29.7 million; adjusted EBITDA(1) of $34.9 million, up 3.0%;
• EPS of $0.25, adjusted EPS(1) of $0.37, same as 2017;
• Launched strategic alternatives review;
• 2018 guidance reiterated; and
• Expanded the 20/20 initiative to at least $25.0 million of recurring cost savings by 2020
THIRD QUARTER RESULTS
Consolidated sales for the third quarter were $448.8 million, a 13.4% increase compared to the same quarter last year, driven by the sales generated from business acquisitions of $47.8 million or 12.1%, essentially from The Parts Alliance UK segment. All three segments reported positive organic growth for the quarter, producing a consolidated organic growth of 3.4%.
The Corporation generated an EBITDA and EBITDA margin of $29.7 million and 6.6%, respectively, compared to $32.2 million and 8.1% in 2017. Adjusted EBITDA was $34.9 million (7.8% of sales) for the quarter, compared to $33.9 million (8.6% of sales) in 2017, an increase of 3.0%.
The adjusted EBITDA margin decreased by 80 basis points due to competitive pressure in the FinishMaster US segment, while in 2017, the Canadian Automotive Group segment benefited from a product line changeover incentive.
These impacts were partially compensated by a superior absorption of fixed costs as a result of higher sales volume. Net earnings and adjusted earnings were respectively $10.6 million and $15.5 million, compared to $11.2 million and $15.9 million in 2017.
Adjusted earnings decreased by 2.0% compared to the same quarter last year, due to additional finance costs as well as higher depreciation and amortization, entirely related to business acquisitions and investments in capital. These elements were partially compensated by the contribution of The Parts Alliance UK segment and the reduction of the income tax rate for the US operations.
Expanded 20/20 Initiative (25/20 Plan)
On November 14, 2018, in the spirit of continuous improvement and to further drive efficiency, the Corporation announced the expansion of its 20/20 cost savings initiative by at least $5.0 million.
The new plan, now referred to as the 25/20 Plan, builds on the 20/20 initiative and expects to generate at least $25.0 million of recurring cost savings, on an annualized basis, by 2020. At the end of the third quarter of 2018, $12.0 million in annualized cost savings were realized under the initial initiative. The 25/20 Plan includes certain cost reduction measures across the three operational segments. It will focus on various optimization initiatives, such as the closure or integration of a dozen locations, supply chain optimization as well as workforce reduction.
The slight workforce reduction of less than 5% of total employees will be spread across all business segments and will be related to site integration and optimization actions.
These initiatives are expected to benefit margins in the Canadian Automotive Group as well as The Parts Alliance and support margins at FinishMaster. To achieve the remaining $13.0 million in recurring cost savings, we will need to incur total restructuring and other charges comprised mainly of cash costs of between $9.0 and $11.0 million. These restructuring and other charges will be recognized in the fourth quarter of 2018 and in the following six quarters.
The FinishMaster US segment is reporting positive organic growth for a second consecutive quarter with sales of $214.2 million, up 3.7% from the same quarter in 2017, entirely from organic growth. This performance is attributable to the efforts from the sales team on driving growth by developing business
volume and onboarding new accounts. EBITDA for this segment was $21.3 million, compared to $24.4 million in 2017.
The EBITDA margin decrease of 180 basis points was impacted by competitive pressure on the gross margin during the quarter. This element was partially compensated by savings arising from the 20/20 initiative, including the integration of four stores, the alignment of employee benefits to its evolving cost-to-serve model and an improved absorption of fixed costs related to the organic growth.
Sales for the Canadian Automotive Group segment were $131.1 million, compared to $133.6 million in 2017, a decrease of 1.9%, reflecting the impact of a weaker Canadian dollar against the US dollar and the number of billing days, partially compensated by business acquisitions and organic growth of 0.5%. The EBITDA margin decrease of 80 basis points compared to the same quarter in 2017, is mainly attributable to a different revenue mix at a lower gross margin, while benefiting from a product line changeover incentive in the comparative quarter of 2017. Integration efforts to optimize the company-owned stores are ongoing, including the 20/20 initiative, store rebranding, store processes and implementation of the new point of (POS) system. These elements were partially compensated by a reduction of the performance-based compensation.
The Parts Alliance UK segment recorded sales of $103.5 million, an increase of 85.8%, benefiting from a full quarter of sales in 2018 and an organic growth of 9.4%. The organic growth was driven by the recent of greenfields, expanding the footprint in the UK and providing a superior service for national accounts. The EBITDA margin increased by 220 basis points, mainly benefiting from cost actions taken during the last quarter of 2017 related to the 20/20 initiative and improving payroll productivity. Furthermore, the fixed costs were leveraged by a full quarter of operations and organic growth. These elements were partially by investments in greenfield stores affecting the EBITDA margin until reaching the optimized operation level and a different customer mix affecting the gross margin.
NINE-MONTH PERIOD RESULTS
Consolidated sales for the nine-month period were $1,332.5 million, a 29.0% increase compared to the same period last year, driven by the sales generated from business acquisitions of $284.8 million or 27.5%, mainly from The Parts Alliance UK segment. Consolidated organic growth was 1.2%, all three segments reporting positive organic growth for the nine-month period, a direct result of sales initiatives, opportunities generated by future price and opening of greenfields.
The Corporation generated an EBITDA and EBITDA margin of $92.2 million and 6.9%, respectively, compared to $84.9 million and 8.2% last year. Adjusted EBITDA was $98.1 million (7.4% of sales) for the period, compared to $89.5 million (8.7% of sales) in 2017, an increase of 9.6%. The adjusted EBITDA margin decreased by 130 basis points, affected by pressure on the gross margin in the FinishMaster US segment and the integration efforts undertaken to optimize the network of company-owned stores in the Canadian Automotive Group segment. These impacts were partially compensated by savings resulting from the 20/20 initiative in the FinishMaster US segment and an improved cost absorption at The Parts Alliance UK segment benefiting from a full nine-month period of operations.
Net earnings and adjusted earnings were respectively $38.9 million and $46.0 million, compared to $35.9 million and $43.5 million last year. Adjusted earnings increased by 5.9% compared to the same period last year and mainly resulted from the contribution of The Parts Alliance UK segment and the reduction of the income tax rate for the US operations. These elements were partially offset by additional finance costs as well as depreciation and amortization, entirely related to business acquisitions and investments in capital.
The FinishMaster US segment recorded sales of $626.5 million, up 1.8% from the same period in 2017, supported by business acquisitions representing a growth of $7.3 million or 1.2%. The positive organic growth of 0.6% for the period is resulting from sales initiatives, customer investments and opening of two greenfields. EBITDA for this segment was $62.7 million, compared to $71.7 million in 2017. The EBITDA margin decrease of 170 basis points is the result of competitive pressure on gross margin and lower special buys for the period.
Sales for the Canadian Automotive Group segment were $381.4 million, compared to $361.9 million in 2017, an increase of 5.4%, resulting from business acquisitions, the impact of the Canadian dollar on its conversion to US dollar and organic growth. The organic growth of 0.9% for the period is principally from customers taking advantage of future price increases. The EBITDA margin decrease of 100 basis points is mainly due to the integration efforts undertaken to optimize its growing network of company-owned stores and the internalization of the servers, which was a favorable one-time saving in 2017.
These elements were partially compensated by higher volume rebates, additional contribution from the acquired stores, as well as a reduction of the performance-based compensation.
The Parts Alliance UK segment recorded sales of $324.6 million, an increase of 482.8%, as the figures of last year included sales since the acquisition on August 7, 2017. The organic growth of 9.4% benefited from the opening of greenfields. The EBITDA margin increased by 350 basis points, benefiting from cost actions taken during the last quarter of 2017 improving payroll productivity, as well as from an improved absorption of fixed costs related to a full nine months of operations. The higher EBITDA margin for the period, when compared to the current quarter, is explained by seasonality, the peak season being the first semester, enabling an improved leverage of its fixed cost base. The opening of greenfields impacted the EBITDA margin by 20 basis points for the period, as expected.
On November 14, 2018, the Uni-Select Board of Directors declared a quarterly dividend of C$0.0925 per share payable on January 15, 2019 to shareholders of record as at December 31, 2018. This dividend is an eligible dividend for income tax purposes.
The information included within this section contains guidance for Uni-Select in 2018, excluding any potential impact from the review of strategic alternatives:
Consolidated adjusted EBITDA margin 6.75% – 7.25%
Consolidated organic sales growth 0.8% – 2.6%
Consolidated effective tax rate 22.0% – 24.0%
Segment Organic Sales Growth
FinishMaster US 0.5% – 2.0%
Canadian Automotive Group 0.0% – 1.5%
The Parts Alliance UK 6.0% – 8.0%
The above-mentioned information is related to the 2018 financial year and may differ from quarter to quarter due to seasonality.
As well, Uni-Select anticipates investments between $26.0 million and $29.0 million in 2018 on capital leases for vehicle fleet, hardware equipment, software and others.
• Uni-Select will continue to actively pursue its strategic alternatives review with its advisors to complete the review as expeditiously as possible. Given the nature of the process, the Corporation does not intend to provide further updates until the Board of Directors approves a definitive transaction or strategic alternative, or otherwise determines that further disclosure is appropriate. There are no guarantees that the review of strategic alternatives will result in a transaction, or if a transaction is undertaken, as to its terms or timing.
• Realized $12.0 million of annualized savings or 60% of the 20/20 initiative target since the launch in the third quarter of 2017.
• Starting in the fourth quarter of 2018, expanded the scope of the 20/20 initiative to at least $25.0 million of recurring cost savings by 2020 (25/20 Plan).
• To achieve the remaining $13.0 million in recurring cost savings, the Corporation will incur restructuring and other charges in the fourth quarter of 2018 and over the following 6 quarters, estimated at between $9.0 and $11.0 million.
• Maintain our goal of reducing our leverage to 2.5 times funded debt to adjusted EBITDA.
• Continue to open greenfields and actively pursue select acquisitions.
• Drive our operations to generate continued growth and increased profitability.
• Reiterated our guidance for 2018.
• We thank all stakeholders, including our employees, shareholders and the management team for their on-going support.