Uni-Select Inc. reported growth from acquisition and organic factors in its financial results for the fourth quarter and the year ended December 31, 2018.
Uni-Select is reporting 2018 sales of $1,752.0 million compared to 2017 sales of $1,448.3 million driven by the full-year contribution of The Parts Alliance UK segment and the strength of organic growth in all three business segments.
Figures in CAD unless otherwise stated.
The corporation reported adjusted 2018 EBITDA of $119.5 million compared to adjusted 2017 EBITDA of $117.5 million, an increase of 1.7%. Fourth quarter adjusted EBITDA was $21.4 million, down 23.4% from $28.0 million in the fourth quarter 2017. Adjusted earnings per share for the 2018 year amounted to $1.22 versus adjusted earnings per share of $1.32 in 2017.
“Uni-Select’s Board of Directors and management are aligned with shareholders in the common goal of enhancing long-term value. Over the past year, we have pursued and delivered on several parallel initiatives aimed at improving operating and financial performance of the Corporation, such as our 25/20 Plan which has provided favourable results. We intend to build on this success,” stated André Courville, Interim President and CEO of Uni-Select. “While 2018 was a year in which we faced challenges, we generated higher sales and adjusted EBITDA, primarily related to The Parts Alliance acquisition and cost savings from our 25/20 Plan. Our adjusted EBITDA margins nevertheless remained under pressure in the US at FinishMaster.”
“In light of changing market conditions, the Board of Directors, in collaboration with management, also initiated an in-depth review of the US operations along with the development of a broad Performance Improvement and Rightsizing Plan, thereby realigning the business model to adapt to a new market reality and positioning the business for long-term success,” said Michelle Cormier, Chair of the Board of Directors.2
In 2018, Uni-Select opened 15 greenfield company-owned stores; integrated 14 company-owned stores while selling one; and added 21 new company-owned stores through two business acquisitions — all contributing to increased revenues for the year.
In addition, the Corporation entered into an amended and restated credit agreement providing for a $100.0 millionupsizing of its unsecured long-term revolving credit facility through the conversion and immediate cancellation of the unsecured term facility outstanding balance.
A little more than a year ago, the corporation announced its 20/20 cost savings initiative to generate annual recurring savings of $20.0 million by 2020 across all three business units. Based on the success of the program, we increased our target, as of the third quarter of 2018, to $25.0 million by 2020. As at December 31, 2018, we have realized $18.7 million in annual savings under this plan.
FinishMaster US Segment Performance Improvement and Rightsizing Plan
In January 2019, the Board of Directors and management initiated the development of a broad performance improvement plan for its US operations with the objective of realigning FinishMaster US to address changing market conditions, including ongoing consolidation by national accounts and pricing pressures. This plan, which is expected to generate additional annualized savings of $10.0 million by the end of 2019, focuses on the following four streams:
- Consolidation of company-owned stores;
- Margin recovery; and
- Spending reductions.
The development and implementation of the Performance Improvement and Rightsizing Plan is being led by Rob Molenaar, who has significant industry-specific and restructuring expertise including deep knowledge of the automotive refinish space with over 25 years of experience at one of the largest global paint manufacturers. He has also been a member of the Uni-Select Board of Directors since 2017. Chris Adams, President and COO of FinishMaster US, will continue to focus on sales and marketing as well as day-to-day operations of the FinishMaster US segment, reporting to the Interim CEO. Mr. Molenaar reports to the Interim CEO and to the Board of Directors.
The 25/20 Plan and the FinishMaster US Segment Performance Improvement and Rightsizing Plan combined together, will now be referred to as the “Performance Improvement Plan” of the Corporation, with targeted annualized savings of $35.0 million.
Update on Strategic Review Process
In September 2018, the Board made management changes and announced the formation of a Special Committee of independent members of the Board to oversee a review of strategic alternatives. The Special Committee, the Board and management continue to actively review, analyze and evaluate a comprehensive range of alternatives with the goal of maximizing value for our shareholders. Given the nature of the process, the Corporation 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.
Initiated President and CEO Search
As the Corporation progresses in the strategic alternatives review, the Board of Directors also initiated a search for a new President and CEO of Uni-Select and mandated the firm Egon Zehnder International Inc. to lead the search. The search is being performed in parallel with the strategic alternatives review and all scenarios relative to that process remain under consideration. During this period, André Courville will continue to act as Interim President and CEO.
FOURTH QUARTER RESULTS
Consolidated sales for the fourth quarter were $419.5 million, a 1.1% increase compared to the same quarter last year, driven by organic sales of 2.3%, generated mainly by the FinishMaster US segment and The Parts Alliance UK segment. The organic growth was partially offset by the foreign exchange rate conversion for the Canadian Automotive Group and The Parts Alliance UK segments and by timing in the Canadian Automotive Group segment related to many installers and jobbers being closed two additional days during the holiday season.
The corporation generated EBITDA and EBITDA margin of $12.8 million and 3.0%, respectively, compared to $25.9 million and 6.2% in 2017 and were impacted by special items of $8.6 million, including restructuring and other charges. Adjusted EBITDA was $21.4 million (5.1% of sales) for the quarter, compared to $28.0 million (6.7% of sales) in 2017, a decrease of $6.6 million. The adjusted EBITDA margin decreased by 160 basis points mainly due to pricing pressure and evolving customer mix in the FinishMaster US segment.
The net earnings (loss) and adjusted earnings were respectively $(2.4) million and $5.4 million, compared to $8.7 million and $11.6 million in 2017. Adjusted earnings decreased by $6.2 million compared to the same quarter last year, due to the lower adjusted EBITDA mentioned above, additional finance costs as well as higher depreciation and amortization, related to investments in capital.
Segmented Fourth Quarter Results
The FinishMaster US segment is reporting organic growth for a third consecutive quarter with sales of $203.4 million, up 2.3% from the same quarter in 2017. This performance is attributable to the efforts of the sales team in driving growth by developing business volume and onboarding new accounts. EBITDA was $11.7 million, compared to $19.6 million for the comparable quarter of 2017. Excluding special items for restructuring and other charges, adjusted EBITDA was $13.4 million compared to $19.6 million for the same quarter last year. The adjusted EBITDA margin decrease of 330 basis points is the result of pricing pressure and evolving customer mix impacting the gross margin during the quarter. This element was partially compensated by savings arising from the 25/20 Plan, including the integration of one company-owned store during the current quarter, the alignment of employee benefits to its evolving cost-to-serve model and an improved absorption of fixed costs resulting from organic growth initiatives.
Sales for the Canadian Automotive Group segment were $122.5 million, compared to $123.0 million in 2017, a decrease of 0.5%, reflecting the impact of a weaker Canadian dollar and negative organic growth of 0.5% that were compensated by sales from recent acquisitions and a higher number of billing days. EBITDA for this segment was $5.9 millioncompared to $6.3 million for the same quarter last year. Excluding special items for restructuring and other charges of $3.3 million, adjusted EBITDA was $9.3 million compared to $6.3 million for the same quarter last year. The adjusted EBITDA margin increase of 250 basis points compared to the same quarter in 2017 is mainly attributable to additional vendor rebates for annual performance. This element was partially offset by foreign exchange losses due to the weaker Canadian dollar and the ongoing integration efforts to optimize company-owned stores, including the 25/20 Plan, store rebranding, store processes and implementation of a new point of sale (POS) system.
The Parts Alliance UK segment recorded sales of $93.6 million, an increase of 0.6% compared to the same quarter last year and reported organic growth of 2.8%. The organic growth was driven by the recent opening of company-owned stores, expanding our footprint in the UK and providing a superior service platform for national accounts. EBITDA for this segment was $2.4 million compared to $3.7 million for the same quarter last year. Excluding special items for restructuring and other charges, adjusted EBITDA was $3.6 million compared to $3.7 million last year. The adjusted EBITDA margin decreased slightly by 20 basis points compared to the same quarter in 2017 and is mainly attributable to additional employee benefits in relation to acquisitions and to the opening of company-owned stores.
TWELVE-MONTH PERIOD RESULTS
Consolidated sales for the twelve-month period were $1,752.0 million, a 21.0% increase compared to the same period last year, driven by sales generated from business acquisitions of $287.0 million or 19.8%, mainly from The Parts Alliance UK segment. Consolidated organic growth was 1.5%, reflecting the impact of sales’ initiatives and company-owned stores openings.
The corporation generated EBITDA and EBITDA margin of $104.9 million and 6.0%, respectively, compared to $110.8 million and 7.6% last year. Adjusted EBITDA was $119.5 million (6.8% of sales) for the period, compared to $117.5 million (8.1% of sales) in 2017. The adjusted EBITDA margin decreased by 130 basis points, primarily due to pricing pressure and evolving customer mix impacting the gross margin in the FinishMaster US segment as well as the integration efforts undertaken to optimize the network of company-owned stores in the Canadian Automotive Group segment. These impacts were partially compensated for by savings resulting from the 25/20 Plan and improved cost absorption at The Parts Alliance UK segment benefiting from a full twelve-month period of operations.
Net earnings and adjusted earnings were respectively $36.5 million and $51.5 million, compared to $44.6 million and $55.1 million last year. Adjusted earnings decreased by 6.6% compared to the same period last year and resulted mainly from additional financial costs associated with a higher average level of debt and by additional depreciation and amortization, mostly related to business acquisitions and investments in capital. These elements were partially offset by lower income tax, mainly related to the lower statutory rates in the US.
Segmented Twelve-Month Period Results
The FinishMaster US segment recorded sales of $830.0 million, up 1.9% from the same period in 2017, supported by organic growth of $11.2 million or 1.4% as well as business acquisitions representing a growth of $7.3 million or 0.9%. The organic growth is resulting from sales initiatives, customer investments and the opening of two company-owned stores. EBITDA for this segment was $74.3 million, compared to $91.3 million in 2017. Excluding special items, adjusted EBITDA was $76.0 million compared to $91.3 million. The adjusted EBITDA margin decrease of 200 basis points is the result of pricing pressure and evolving customer mix impacting the gross margin, partially offset by headcount reductions from 25/20 initiatives. During the year 2018, five company-owned stores were integrated as part of this plan.
Sales for the Canadian Automotive Group segment were $503.8 million, compared to $484.9 million in 2017, an increase of 3.9%, resulting from business acquisitions, a higher number of billing days and organic growth. Organic growth of 0.5% for the period is principally a result of various initiatives to drive growth amidst softer market conditions. EBITDA for this segment was $28.6 million, compared to $31.2 million in 2017. Excluding special items, adjusted EBITDA was $32.0 million compared to $31.2 million. Adjusted EBITDA margin decreased slightly by 10 basis points as a result of integration efforts undertaken to optimize and integrate our growing network of company-owned stores, foreign exchange losses due to the weaker Canadian dollar as well as internalization of servers, which was a favourable one-time cost saving in 2017. These elements were partially offset by higher volume rebates and reduction in performance-based compensation. During the year, six company-owned stores were integrated, and one was sold as part of the 25/20 Plan.
The Parts Alliance UK segment recorded sales of $418.2 million, an increase of 181.2%, as the figures of last year only included sales since the acquisition closing date of August 7, 2017. Organic growth of 5.3% was driven primarily by the opening of company-owned stores. EBITDA for this segment was $27.1 million, compared to $6.0 million in 2017. Excluding special items, adjusted EBITDA was $28.3 million compared to $6.0 million. The adjusted EBITDA margin increase of 280 basis points is the result of cost actions taken during the last quarter of 2017 to improve productivity, as well as from an improved absorption of fixed costs from consolidating a full twelve months of operations. The opening of company-owned stores impacted the adjusted EBITDA margin by approximately 40 basis points for the period.
“The Board of Directors and I would like to thank all stakeholders, including our employees, management team, shareholders, suppliers and customers for their ongoing support. We encountered many unforeseen challenges over the past year, but we have put in place plans to mitigate their impact and position the Corporation to address a changing environment,” concluded Mr. Courville.
The information included within this section contains guidance for Uni-Select in 2019, excluding any potential impact from the review of strategic alternatives and does not take into consideration new accounting standards coming into force in 2019, particularly with respect to IFRS 16 on leases.
The corporation recognizes that certain factors and uncertainties have impacted results for 2018 and will continue to provide a prudent view of 2019 guidance.
As well, Uni-Select anticipates investments between $25.0 million and $30.0 million in 2019 on capital leases for vehicle fleet, hardware equipment, software and others.
For 2019, on a consolidated basis, we anticipate revenues to increase modestly and profitability to decrease, mainly due to the FinishMaster US 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. For The Parts Alliance UK segment, while we expect results for 2019 to improve over 2018, as we pursue our strategy to open greenfield company-owned stores and develop the UK market, the next few months are expected to be somewhat more volatile as a result of the uncertainty surrounding Brexit. As for the FinishMaster US segment, 2019 is expected to remain a challenging year since the benefits related to the performance improvement plan should start to materialize in the latter part of the year. Our guidance for 2019 takes these factors and uncertainties into consideration.
Uni-Select’s conference call to discuss its fourth quarter results for 2018 was held on February 20, 2019, at 8:00 AM Eastern. A recording of the conference call will be available from 11:00 AM Eastern on February 20, 2019, until 11:59 PM Eastern on March 20, 2019. To access the replay, dial 1 855 859-2056 followed by 4785999.
A live webcast of the quarterly results conference call was also accessible through the “Investors” section of our website at uniselect.com where a replay will also be archived. Listeners should allow ample time to access the webcast and supporting slides.