Uni-Select Inc. reports strong performance of the Canadian Automotive Group in its financial results for the second quarter ended June 30, 2019 as it prepares for Brexit uncertainty for its U.K. business.
“I am pleased with the strong performance of the Canadian Automotive Group and by the execution of the Performance Improvement Plan at FinishMaster U.S. The Parts Alliance U.K. is operating in a difficult environment and we are actively focusing on our cost structure and margins,” said Brent Windom, President and Chief Executive Officer, Uni-Select Inc. and President and Chief Operating Officer, Canadian Automotive Group.
“We continue to work on our Performance Improvement Plan and Strategic Alternatives Review, and we are pleased with the results obtained by our Canadian operations in the execution of optimization initiatives. With regards to FinishMaster U.S., the execution of the PIP is on track with 11 company-owned stores integrated this quarter and we are now confident to realize more savings than originally anticipated. In the U.K., the operating context is challenging with the uncertainty surrounding Brexit, and we are therefore implementing initiatives to reduce our cost base. We fully expect the combination of these actions to lead to tangible benefits in the second half of the year. As a result, we are reiterating our guidance for 2019,” concluded Windom.
OPERATIONAL OVERVIEW
Performance Improvement Plan
In January 2019, the Board of Directors and Management initiated the development of a broad performance improvement and rightsizing plan for the FinishMaster U.S. segment with the objective of realigning its operations to address changing market conditions, including ongoing consolidation by national accounts and pricing pressures.
This plan is expected to generate additional annualized hard cost savings of $10.0 million by the end of 2019, through the consolidation of company-owned stores (approximately $5.0 million), optimization (approximately $4.5 million) and spending reductions (approximately $0.5 million). The company-owned stores to be integrated are expected to produce marginal sales erosion since the strategy is to transfer sales activities to nearby locations, optimizing the logistical processes and cost efficiency.
The 25/20 Plan and the FinishMaster U.S. segment performance improvement and rightsizing plan combined together are now referred to as the PIP.
Due to the uncertainty and challenging macroeconomics in the U.K., the Corporation decided in July 2019 to expand the PIP in The Parts Alliance U.K. segment and, as a result, will be adjusting the cost structure model and productivity of this segment.
These initiatives are expected to generate $5.0 million annualized savings. As well, recent optimization initiatives at the FinishMaster U.S. segment are expected to generate savings of $5.0 million, in addition to the $10.0 million mentioned above. Through this plan and initiatives, the Corporation now expects to generate annualized cost savings of $45.0 million by the end of 2020 (from $35.0 million), of which, more than 60% has been realized as at June 30, 2019.
In addition to the savings realized in 2018, the Corporation realized annualized savings of $10.5 million since the beginning of the year, mainly from the FinishMaster U.S. and the Canadian Automotive Group segments.
The one-time total cash cost of implementing the PIP has therefore been revised and is now expected to be $16.5 million (from $13.5 million), mainly for severance, consulting fees and moving costs.
The Corporation is also expecting to write down certain assets of approximately $4.0 million, mainly for the FinishMaster U.S. segment. During the six-month period of 2019, the Corporation recognized restructuring and other charges totalling $8.0 million, of which, $3.3 million is non-cash for the write-down of assets.
During the six-month period, the Corporation reduced its workforce and integrated 19 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.
SECOND QUARTER RESULTS
GO TO THE UNI-SELECT Q2 PRESENTATION
Consolidated sales of $456.2 million for the second quarter, when compared to the same quarter last year, were affected by a foreign currency conversion impact amounting to $11.0 million or 2.4%, as well as by the impact of a different number of billing days of $3.9 million or 0.8%. Consolidated organic growth for the quarter was $5.6 million or 1.2%.
The Canadian Automotive Group and the FinishMaster U.S. segments generated organic growth of 5.5% and 0.7% respectively, while The Parts Alliance U.K. segment faced macroeconomic challenges and reported a negative organic growth of 3.2%.
The Corporation generated adjusted EBT and adjusted EBT margin of $13.9 million and 3.0%, respectively, compared to $22.3 million and 4.8% in 2018. This variance is mainly attributable to the compression of the gross margin in the FinishMaster U.S. segment, and to a reduced volume of sales in The Parts Alliance U.K. segment, impacting rebates.
Furthermore, adjusted EBT margin is affected by the recent opening of greenfields and distribution centres, as well as by higher borrowing costs. However, they were partially compensated by higher volume rebates from the Canadian Automotive Group segment, overall savings realized from the PIP and reduced short-term and long-term compensation due to the overall performance.
Net earnings and adjusted earnings were respectively $6.3 million and $10.4 million, compared to $17.9 million and $18.4 million in 2018. Adjusted earnings decreased by $8.0 million compared to the same quarter last year, due to a lower adjusted EBT and a change in the proposed U.S. tax regulations announced in December 2018.
Segmented Second Quarter Results
The FinishMaster U.S. segment is reporting organic growth for a fifth consecutive quarter. Sales are up 0.7% organically compared to the same quarter in 2018. This performance is attributable to the sales team efforts on driving growth, while navigating through a restructuring and the consolidation of 11 company-owned stores.
EBT was $10.4 million, compared to $17.1 million for the corresponding quarter of 2018. Adjusted EBT was $11.6 million or 5.5% of sales compared to $17.1 million or 8.1% of sales for the same quarter last year, a decrease of 260 basis points attributable to the compression of the gross margin from the combination of an evolving customer mix and pricing pressure.
They were partially compensated by an improved absorption of fixed costs related to organic growth and by realized benefits from the PIP. Sales for the Canadian Automotive Group segment were $143.4 million, an increase of 2.8% from 2018, fuelled by organic growth of 5.5% and by the contribution of business acquisitions, exceeding the effect of the Canadian dollar on its conversion to the US dollar and a different number of billing days.
The organic growth is attributable to improved loyalty programs, growing customers, promotion of private brands, as well as timing in sales of paint, body and equipment. EBT for this segment was $10.6 million, up 53.0% from 2018.
The adjusted EBT was $11.2 million or 7.8% of sales, compared to $6.9 million or 5.0% of sales, an increase of 280 basis points attributable to a different timing in rebates and to an improved performance of companyowned stores, stimulated by the optimization initiatives recently implemented. Sales for The Parts Alliance U.K.segment were $100.5 million. Once adjusted for the effect of the British pound on its conversion to the US dollar, sales decreased by 4.2% compared to the same quarter last year.
This variance is mainly attributable to a negative organic growth of 3.2% and a different number of billing days. EBT and adjusted EBT for this segment were $(1.4) million or (1.4)% of sales, compared to $6.5 million or 5.8% of sales for the same quarter last year.
The variance is mainly due to a lower volume of sales, impacting rebates and reducing the absorption of fixed costs. In addition, the EBT margin is affected by recent investments in greenfields and the opening of a distribution centre, both of which will reach their optimal productivity levels within 12 to 24 months after their openings.
SIX-MONTH PERIOD RESULTS
Consolidated sales of $876.2 million for the six-month period, when compared to the same period last year, were impacted by the conversion effect of the Canadian dollar and the British pound into the US dollar and by a different number of billing days. Consolidated organic growth for the six-month period was $15.9 million or 1.8%.
The Canadian Automotive Group and the FinishMaster U.S. segments generated organic growth of 5.1% and 1.9% respectively, while The Parts Alliance U.K. segment faced macroeconomic challenges and reported a negative organic growth of 2.2%. The Corporation generated adjusted EBT and adjusted EBT margin of $21.0 million and 2.4%, respectively, compared to $36.4 million and 4.1% in 2018. This variance is mainly attributable to the compression of the gross margin in the FinishMaster U.S. segment, and to a reduced volume of sales in The Parts Alliance U.K. segment, impacting volume rebates.
Furthermore, the adjusted EBT margin was affected by the opening of greenfields and distribution centres, as well as by higher borrowing costs. They were partially compensated by higher volume rebates from the Canadian Automotive Group segment, overall savings realized from the PIP and reduced short-term and long-term compensation due to the overall performance. Net earnings and adjusted earnings were respectively $5.0 million and $15.5 million, compared to $28.3 million and $30.5 million in 2018. Adjusted earnings decreased by $15.0 million compared to the same period last year, due to a lower adjusted EBT and a change in the proposed U.S. tax regulations announced in December 2018.
Segmented Six-Month Period Results The FinishMaster U.S. segment is reporting a growth in sales of 1.1%, compared to the same period in 2018, resulting from the organic growth of 1.9%, partially offset by the impact of a different number of billing days.
This performance is essentially attributable to the sales team initiatives. EBT was $14.1 million, compared to $32.6 million for the corresponding period of 2018. Adjusted EBT was $20.6 million or 4.9% of sales compared to $32.6 million or 7.9% of sales for the same period last year, a decrease of 300 basis points attributable to the compression of the gross margin from the combination of an evolving customer mix and pricing pressure.
They were partially compensated by an improved absorption of fixed costs related to organic growth and by realized benefits from the PIP. Initiatives as part of the PIP are ongoing, as planned, with the integration of 14 company-owned stores during the six-month period and generated $5.7 million annualized saving.
The Canadian Automotive Group segment is reporting a growth in sales of 2.5% compared to the same period in 2018. This growth is supported by organic growth of 5.1% and the contribution of business acquisitions, exceeding the effect of the Canadian dollar on its conversion to the US dollar and a different number of billing days.
Reported organic growth is attributable to initiatives focused on customer service, as well as timing in sales of paint, body and equipment. EBT for this segment was $13.3 million, up 86.5% from 2018. Adjusted EBT was $14.8 million or 5.8% of sales, compared to $7.1 million or 2.8% of sales, an increase of 300 basis points attributable to a different timing in rebates and an improved performance of the company-owned stores, stimulated by the optimization initiatives recently implemented.
Sales for The Parts Alliance U.K. segment were $202.9 million. Once adjusted for the effect of the British pound on its conversion to the US dollar, sales decreased by 2.4% compared to the same period last year. This variance is mainly attributable to a negative organic growth of 2.2% and a different number of billing days. EBT and adjusted EBT for this segment were $0.9 million or 0.5% of sales, compared to $13.7 million or 6.2% 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 greenfields and the opening of a distribution centre, both of which will reach their optimal productivity levels within 12 to 24 months after their openings.
OUTLOOK
The information included within this section contains guidance for Uni-Select in 2019, excluding any potential impact from the review of strategic alternatives. The Corporation recognizes that certain factors and uncertainties have impacted results for 2018 and will continue to provide a prudent view of 2019 guidance.
Uni-Select guidance maintained
- 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, we anticipate 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, Uni-Select now expects 2019 to remain difficult for the remainder of the year and will be adjusting the cost structure model and productivity starting in the third quarter of 2019.
Uni-Select says it will, however, continue to optimize its network and selectively open greenfield company-owned stores to foster 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 should start to materialize in the second part of the year. Guidance for 2019 takes these factors and uncertainties into consideration.
Update on Strategic Review Process
In September 2018, the Uni-Select 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, it has not determined a definitive schedule.
Given the nature of the process, the Uni-Select 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.
On January 1, 2019, the Uni-Select applied, for the first time, IFRS 16 – Leases using the modified retrospective transition approach and did not restate comparative amounts of the year prior to its adoption as permitted.
As a result, the 2019 interim condensed consolidated financial statements present significant variances when compared to 2018.
The 2019 interim condensed consolidated statement of earnings includes reduced rent expenses from the elimination of the classification as operating leases, higher finance costs from the interest expense on lease liabilities and higher depreciation of right-of-use assets. Consequently, the Corporation considers that EBT is the preferred comparative measure to explain its results and performance, rather than EBITDA as previously used.
CONFERENCE CALL
Uni-Select hosted a conference call to discuss its second-quarter results for 2019 on August 7, 2019, at 8:00 AM Eastern. A recording of the conference call will be available from 11:00 AM Eastern on August 7, 2019, until 11:59 PM Eastern on September 7, 2019. To access the replay, dial 1-855-859-2056 followed by 8696021.
A live webcast of the Uni-Select quarterly results conference call will also be accessible through the “Investors” section of their website at uniselect.com where a replay will also be archived. Listeners should allow ample time to access the webcast and supporting slides.
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