Uni-Select Inc. reported its financial results for the third quarter ended September 30, 2019, with the Canadian Automotive Group registering modest gains, and the corporation a slight loss due to currency and economic factors.

“Our third quarter results were in line with our expectations despite continued macro economic and refinish industry challenges in some key markets,” said Brent Windom, President and Chief Executive Officer, Uni-Select Inc. and President and Chief Operating Officer, Canadian Automotive Group.

“Since becoming CEO of Uni-Select, we’ve taken concrete steps to navigate through these headwinds, stabilizing the business where required and strategically investing in our business, optimizing our network, opening greenfield company-owned stores in the U.K. and accelerating our Performance Improvement Plan (PIP), which is now expected to generate over $50 million in savings by the end of next year.

“FinishMaster’s profitablity gradually improved on a sequential basis despite a soft market environment and increasing competition in certain markets; in the U.K., while our business faces the prolonged uncertainty surrounding Brexit, the cost saving initiatives recently put in place started to impact the third quarter and will materialize in a more meaningful way starting in the fourth quarter; and for its part, the Canadian Automotive Group continued its growth momentum and increased profitability,” says Windom.

THIRD QUARTER RESULTS

Consolidated sales of $450.8 million for the third quarter, when compared to the same quarter last year, were affected by a foreign currency conversion impact amounting to $6.8 million or 1.5%.

Consolidated organic loss for the quarter was $1.9 million or 0.4%.

The Canadian Automotive Group segment generated organic growth of 1.3%, while The Parts Alliance U.K. and the FinishMaster U.S. segments faced headwinds, reporting negative organic growth of 2.6% and 0.5%, respectively.

Uni-Select generated adjusted EBT and adjusted EBT margin of $14.3 million and 3.2%, respectively, compared to $20.9 million and 4.7% in 2018.

This variance is mainly attributable to the contraction of the gross margin as a result of an evolving customer mix in the FinishMaster U.S. segment and a reduced volume of sales in The Parts Alliance U.K. segment.

As well, recent opening of greenfields and higher borrowing costs impacted the adjusted EBT margin. However, overall savings realized from the PIP coupled with higher volume rebates from the Canadian Automotive Group segment partially compensated for these elements. Moreover, benefits from the PIP started to materialize during the summer, as expected, which improved the quarterly adjusted EBT margin by 20 basis points when compared to the second quarter and 150 basis points when compared to the first quarter.

Net earnings and adjusted earnings were respectively $24.6 million and $10.7 million, compared to $10.6 million and $15.5 million in 2018. Adjusted earnings decreased by $4.8 million compared to the same quarter last year, mainly due to a lower adjusted EBT.

Segmented Third Quarter Results

The FinishMaster U.S. segment reported sales of $215.7 million, an increase of 0.7% compared to 2018, benefiting from the effect of a different number of billing days. This segment experienced a softer quarter, facing an aggressive competitive landscape and softness in the refinish market, while consolidating eight company-owned stores, offsetting the growing national account business and price increases.

As a result, organic growth was negative 0.5%. EBT was $12.4 million, compared to $16.7 million for the corresponding quarter of 2018. Adjusted EBT margin decreased by 160 basis points from 7.8% in 2018 to 6.2% for the current quarter, resulting from an evolving customer mix and pricing pressure affecting the gross margin. These impacts were, in part, compensated by realized savings from the PIP, sequentially improving the adjusted EBT margin since the beginning of the year, from 4.4% reported for the first quarter to 6.2% for the current quarter, representing an increase of 180 basis points.

Sales for the Canadian Automotive Group segment were $137.2 million, an increase of 4.7% compared to 2018, from the contribution of business acquisitions, the effect of a different number of billing days and organic growth.

The organic growth of 1.3% is attributable to loyalty programs, additional volume from current growing customers and promotion of private brands, which were, in part, offset by a different timing in the sales of paint, body and equipment. EBT for this segment was $25.9 million, compared to $6.2 million in 2018. Once adjusted for the net gain on business disposal and other special items, the EBT margin increased by 40 basis points to 5.1% from 4.7% in 2018, stimulated by an improved performance of company-owned stores and additional volume of sales.

Sales for The Parts Alliance U.K. segment were $97.8 million. Once adjusted for the effect of the British pound on its conversion to the US dollar, sales decreased by 0.3% compared to the same quarter last year.

This variance is mainly attributable to a negative organic growth of 2.6% affected by a challenging macroeconomic climate, a prolonged period of uncertainty surrounding Brexit and the loss of a sales contract, offsetting the effect of a different number of billing days and the contribution of business acquisitions.

Adjusted EBT for this segment was $1.8 million or 1.9% of sales, compared to $4.3 million or 4.2% of sales for the same quarter last year. The variance is mainly due to a lower volume of sales and rebates, reducing the absorption of fixed costs. In addition, the adjusted EBT margin was affected by recent investments in the expansion and optimization of the network, which are expected to reach their optimal productivity levels within 12 to 24 months after their openings.

The accretive initiatives put in place during the quarter as part of the PIP, partially counteracted these negative impacts and significantly improved the adjusted EBT margin by 330 basis points when compared to the second quarter.

NINE-MONTH PERIOD RESULTS

Consolidated sales were $1,327.0 million for the nine-month period, representing an increase of 1.9% on a constant currency basis, when compared to the same period last year. Consolidated organic growth for the nine-month period was $14.2 million or 1.1%.

The Canadian Automotive Group and the FinishMaster U.S. segments generated organic growth of 3.9% and 1.1% respectively, while The Parts Alliance U.K. segment reported a negative organic growth of 2.3%.

Uni-Select generated adjusted EBT and adjusted EBT margin of $35.3 million and 2.7%, respectively, compared to $57.3 million and 4.3% in 2018. This variance is mainly attributable to the compression of the gross margin, affected by pricing pressure and evolving customer mix in the FinishMaster U.S. segment as well as reduced volume of sales in The Parts Alliance U.K. segment.

Furthermore, the adjusted EBT margin was affected by the opening of greenfields and higher borrowing costs. These elements were partially compensated by overall savings realized from the PIP, higher volume rebates from the Canadian Automotive Group segment, as well as reduced incentive plans charge due to the overall performance and the share price. Net earnings and adjusted earnings were respectively $29.6 million and $26.2 million, compared to $38.9 million and $46.0 million in 2018.

Adjusted earnings decreased by $19.8 million compared to the same period last year, mainly due to a lower adjusted EBT.

Segmented Nine-Month Period Results

The FinishMaster U.S. segment is reporting a growth in sales of 0.9%, compared to the same period in 2018, essentially resulting from organic growth of 1.1%. This performance is attributable to sales team initiatives, growing national business and price increases. EBT was $26.5 million, compared to $49.3 million for the corresponding period of 2018.

The adjusted EBT margin decreased by 250 basis points from 7.9% in 2018 to 5.4% for the current period of nine months, the gross margin being affected by an evolving customer mix and pricing pressure. These factors were partially compensated by savings realized from ongoing initiatives as part of the PIP and the integration of 22 company-owned stores.

The Canadian Automotive Group segment is reporting a growth in sales of 6.5% on a constant currency basis, compared to the same period in 2018, supported by organic growth of 3.9% and the contribution of business acquisitions of 2.6%.

Organic growth is attributable to initiatives focused on customer service and additional volume from current growing customers. EBT for this segment was $39.2 million, compared to $13.4 million in 2018. The adjusted EBT margin increased by 200 basis points to 5.5% from 3.5% last year, benefiting from an improved performance of company-owned stores, stimulated by the optimization of initiatives recently implemented as part of the PIP, as well as additional volume of sales.

Sales for The Parts Alliance U.K. segment were $300.7 million. Once adjusted for the effect of the British pound on its conversion to the US dollar, sales decreased by 1.7% compared to the same period last year. This variance is mainly attributable to a negative organic growth of 2.3%, affected by a challenging macroeconomic climate, a prolonged period of uncertainty surrounding Brexit and the loss of a sales contract, offsetting the contribution of business acquisitions.

Adjusted EBT for this segment was $2.8 million or 0.9% of sales, compared to $18.0 million or 5.6% of sales for the same period last year. The variance is mainly due to a lower volume of sales, impacting rebates and the absorption of fixed costs.

In addition, the adjusted EBT margin is impacted by recent investments in the expansion and network optimization, which are expected to reach their optimal productivity levels within 12 to 24 months after their openings.

DIVIDENDS

On November 13, 2019, the Uni-Select Board of Directors declared a quarterly dividend of C$0.0925 per share payable on January 21, 2020, to shareholders of record as at December 31, 2019. This dividend is an eligible dividend for income tax purposes.

OUTLOOK

The information included within this section contains guidance for Uni-Select in 2019, excluding any potential impact from the review of strategic alternatives. Organic growth will remain positive for the year but lower than the guidance primarily due to softness in the U.K. business and Uni-Select expects profitability will be in the lower part of the range or slightly below.

Initial Uni-Select guidance post IFRS-16 adoption

• Consolidated organic sales growth 1.25% – 3.25%
• Consolidated adjusted EBITDA margin 7.5% – 8.5%
• Consolidated adjusted EBT margin 2.5% – 3.5%
• Tax rate 23.0% – 25.0%

The above-mentioned information is related to the 2019 financial year and may differ from quarter to quarter due to seasonality.

As well, Uni-Select anticipates investments between $25.0 million and $30.0 million in 2019 on right-of-use assets relative for vehicle fleet, hardware equipment, software and others.

These figures exclude additions from right-of-use assets for real estate.

For 2019, on a consolidated basis, it anticipates revenues to increase modestly and profitability to decrease, mainly due to the FinishMaster U.S. segment.

More specifically, the overall results from the Canadian Automotive Group segment are expected to be more favourable when compared to last year, considering the planned integration of some company-owned stores and distribution centres, as well as the contribution of the 18 company-owned stores from the acquisition in November 2018 of Autochoice Parts and Paints Limited.

With The Parts Alliance U.K. being affected by the current uncertainty surrounding Brexit, the corporation expects the last quarter of 2019 to remain difficult, while the cost structure model and productivity should improve from the initiative started during the third quarter of 2019. Uni-Select says it will, however, continue to optimize its network and selectively open greenfield company-owned stores to increase its presence in the U.K. market.

As for the FinishMaster U.S. segment, 2019 is expected to remain a challenging year, since benefits related to the PIP, specifically improved EBT margins, should start to materialize in the second part of the year. Guidance for 2019 takes these factors and uncertainties into consideration.

CONFERENCE CALL

Uni-Select hosted a conference call to discuss its third quarter results for 2019 on November 13, 2019, at 8:00 AM Eastern. A recording of the conference call will be available from 11:30 AM Eastern on November 13, 2019, until 11:59 PM Eastern on December 13, 2019.

To access the replay, dial 1-855-859-2056 followed by 8563806. A live webcast of the quarterly results conference call will also be accessible through the “Investors” section at uniselect.com where a replay will also be archived. Listeners should allow ample time to access the webcast and supporting slides.

Update on Strategic Review Process

In September 2018, the Board announced the formation of a Special Committee of independent members of the Board to oversee a review of strategic alternatives.

As was indicated at the outset of this process, we have not determined a definitive schedule. Given the nature of the process, Uni-Select says it does not intend to provide further updates until such time as the board 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.

Update on the Performance Improvement Plan

Uni-Select initiated its Performance Improvement Plan (PIP) continuing its in-depth review of operations with the objective of identifying specific performance improvement and rightsizing actions to address the changing market conditions and to position the FinishMaster US segment for the future. In August 2019, Uni-Select announced an expansion of the PIP with an in-depth analysis of the operations and cost structure of The Parts Alliance U.K. segment during the third quarter of 2019—in the face of uncertainty relating to Brexit—and were able to identify several cost-saving improvements.

Additionally, certain initiatives in the Canadian Automotive Group segment will allow us to further optimize the supply chain. Benefits from the expanded PIP started to materialize during the summer, as expected, with improved quarterly adjusted EBT margin. Since the beginning of the year, the Corporation realized annualized savings of $23.7 million, of which, more than half were generated during the third quarter, mainly from the FinishMaster U.S. and The Parts Alliance U.K. segments.

Annualized savings realized since the inception amounted to $42.4 million as at September 30, 2019. By the end of 2020, the corporation is expecting total annualized cost savings of $50.0 million (compared to our previous target of $45.0 million).

During the nine-month period of 2019, the Corporation streamlined its workforce and integrated 27 company-owned stores. In addition, to optimize its logistical processes, the Corporation has integrated three smaller distribution centres into two larger ones, permitting increased competitiveness and efficiency.

These new distribution centres were operational during the first quarter of 2019. This resulted in the recognition in 2019 of restructuring and other charges totalling $12.5 million, of which $3.7 million is non-cash for the write-down of assets.