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Edited Transcript of UNS.TO earnings conference call or presentation 2-May-19 12:00pm GMT

Q1 2019 Uni-Select Inc Earnings Call

Boucherville May 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Uni-Select Inc earnings conference call or presentation Thursday, May 2, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* André Courville

Uni-Select Inc. - Former Interim President, CEO & Director

* Brent Windom

Uni-Select Inc. - President, CEO & Director

* Eric Bussieres

Uni-Select Inc. - Executive VP & CFO

* Me Louis Juneau

Uni-Select Inc. - Chief Legal & Administrative Officer and Corporate Secretary

* Neil Croxson

The Parts Alliance Ltd. - President & COO

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Conference Call Participants

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* Daryl Young

TD Securities Equity Research - Mining Research Associate

* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Analyst

* Jonathan Lamers

BMO Capital Markets Equity Research - Analyst

* Zachary Evershed

National Bank Financial, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Uni-Select Inc. first quarter results conference call. (Operator Instructions) Thank you.

Louis Juneau, Chief Legal Officer and Corporate Secretary, you may begin your conference. (foreign language)

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Me Louis Juneau, Uni-Select Inc. - Chief Legal & Administrative Officer and Corporate Secretary [2]

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(foreign language) Good morning, everyone, and thank you for joining us for the Uni-Select's first quarter conference call. Presenting this morning are André Courville, former Interim President and Chief Executive Officer; and Eric Bussières, Executive Vice President and Chief Financial Officer. Following their comments, we will open the call for questions.

Joining us today for questions are Brent Windom, the newly appointed President and CEO of Uni-Select and President and COO of the Canadian Automotive Group; Chris Adams, President and COO of FinishMaster U.S.A.; and Neil Croxson, President and COO of The Parts Alliance U.K. 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 2, I would like to remind you about the caution regarding forward-looking statements, which is applied to our presentation and comments. All amounts are expressed in U.S. dollars, except as otherwise specified. Before we begin, I would like to highlight that on January 1, 2019, the corporation applied for the first time, IFRS 16 lease 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. Please refer to the Adoption of IFRS 16 section of the MD&A for further details.

With that, let me turn the call over to André.

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André Courville, Uni-Select Inc. - Former Interim President, CEO & Director [3]

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(foreign language) Thank you. Good morning, everyone. Thank you for joining us today. First, I would like to congratulate Brent for his nomination as President and CEO of Uni-Select. He has a profound understanding of the industry, and his skill set is perfectly aligned with what the organization require at this time. We are delighted to have him on board to guide the corporation in the future. I would also like to congratulate Eric for his promotion to Executive Vice President and CFO, and Louis for his promotion to Chief Legal and Administration Officer and Corporate Secretary.

That said, let me start by providing an overview of the first quarter results on Page 4. We continued to face challenges in the first quarter from ongoing margin pressures at FinishMaster and from the uncertainty created by Brexit on The Parts Alliance business. This was only partially offset by the solid performance of the Canadian Automotive Group and from the benefit of the Performance Improvement Plan.

Our revenues for the quarter were impacted by the foreign exchange conversion to U.S. by 3%. However, our consolidated organic sales growth was 2.5%. Adjusted net earnings stood at $5 million or $0.12 per share, down versus $12 million or $0.29 per share last year. Eric will provide further details about the first quarter results and financial position in a few minutes.

Please turn to Page 5 on the update of the Performance Improvement Plan. Recall that in January, building on the work of the 25/20 Plan, we initiated an in-depth review of U.S. operations with the objective of identifying specific performance improvement and rightsizing actions to address the changing market conditions and to position the FinishMaster U.S. segment for the future. The plan is expected to generate additional annualized savings of $10 million by the end of 2019 and focuses on 4 streams: consolidation of company-owned stores, optimization, margin recovery and spending reductions.

The 25/20 Plan and the FinishMaster U.S. segment rightsizing plan combined together are now referred to as the Performance Improvement Plan. The combined Performance Improvement Plan is now expected to generate a total of $35 million in annualized cost saving by the end of 2020, of which $21.4 million has been realized as of March 31, 2019. This reflects hard work from our whole team, and I wish to congratulate them on that.

On Page 6, we have identified the FinishMaster expected annualized savings over the next quarters. As you can observe, the bulk of the savings are expected in the latter part of the year.

Now turning to Page 7. In September 2018, the Board announced the formation of a Special Committee of independent members of the Board to review -- to oversee, sorry, a review of alternative strategies -- strategic alternatives. As we indicated at the outset of this process, we have not determined a definitive schedule. However, we continue to work diligently on this front.

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.

On that note, I'd like to turn the call over to Eric for the review of the first quarter results.

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [4]

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Thank you, André, (foreign language) and good morning, everyone. Please turn to Page 9. Before I comment on the results, I would like to remind you about the impact of seasonality on Uni-Select results. As you can see, the first quarter is generally a soft quarter for FinishMaster and the Canadian Automotive Group, while it is a strong quarter for TPA. However, this year, TPA had a softer quarter than normal, which I will explain in a few minutes.

Furthermore, with the adoption of IFRS 16 on leases, the geography of certain items on the statement of earnings are impacted. Under the new standard, most leases are no longer treated as operating leases, resulting into a higher EBITDA, while increasing the finance costs for the interest expense on lease liability and a higher depreciation linked to the right-to-use build assets.

It is for those reasons that we consider the earnings before tax as a preferable and comparative measure to explain our results and performance if IFRS 16 had a negative impact of leases than 20 basis points on the earnings before taxes. Accordingly, we caution you that it becomes difficult to compare our 2019 adjusted EBITDA to last year. We have, however, provided a pro forma adjusted EBITDA on Page 11 to help you understand the year-over-year results.

Let me begin with our consolidated first quarter results on Page 10. Consolidated sales of $420 million for the current quarter included a foreign currency conversion impact amounting to $12.6 million or 3% compared to the same quarter last year. Consolidated organic growth for the quarter was $10.5 million or 2.5%.

The Canadian Automotive Group and the FinishMaster U.S. segment generated organic growth of 4.9% and 3.1%, respectively, while The Parts Alliance U.K. segment had a softer quarter and reported a negative organic growth of 1%.

Adjusted earnings before tax stood at $7.1 million or a margin of 1.7%. This lower margin than last year is mainly explained by the ongoing pricing pressure and evolving customer mix at FinishMaster reduced sales from volume at TPA and the opening of greenfield. It was partly compensated by a strong performance in our Canadian operations.

In the quarter, we took $7.1 million in special charges, of which $6.5 million is related to the restructuring and other charges mostly at FinishMaster in the context of our Performance Improvement Plan. Of the $6.5 million, $3.8 million were cash costs. Finally, in terms of our network, we acquired 1 store, integrated 4 stores and opened 3 greenfields.

Please turn to Page 11. As you can see, on a pro forma basis, the adjusted EBITDA, pre-IFRS, in the first quarter of 2019 would have stood at approximately $21.6 million, down 22% as compared to the $27.6 million last year for the same reason mentioned before.

Let me go through each business segment in more details. Please turn to Page 12 for FinishMaster. The revenue increased to $205 million, up 1.6% from last year driven by organic growth of 3.1%, partly offset by the lower number of billing days. We are encouraged by the top line performance at FinishMaster as it is the fourth consecutive quarter of positive organic growth.

These results are due to the sales team effort on driving growth by developing business volume and onboarding new customers, namely MSOs and large national accounts. In fact, we experienced this growth despite client collision claims being down about 1% year-over-year.

As expected, the adjusted earnings before tax margin continue to be under pressure. In line with our expectation, the earnings before tax stood at 4.4% as compared to 7.7% last year mainly impacted by higher portion of national account customer coupled with pricing pressure with Refinish activities.

It should be noted that the impact of IFRS 16 on FinishMaster earnings before tax was almost 0 and that approximately 140 basis points of lease expense were shifted from operating expense to interest and amortization expense. These elements were partly compensated by an improved absorption of fixed costs in relation to organic growth and by realized cost savings from the Performance Improvement Plan.

Consequently, as mentioned last quarter, we are in the process of adjusting our cost-to-serve model to this new reality. We successfully started to implement the $10 million rightsizing plan in the quarter with the integration of 3 stores. The integration process of stores to our customer is mostly seamless, and we expect a marginal impact on our revenue from those activities.

For the balance of the year, we focused on implementing the rightsizing plan with the bulk of the $10 million in annualized saving expected in the later part of the year, as explained by André earlier.

Turning now to Canada on Page 13. Our first quarter sales were up 2.2% to $113.1 million primarily driven by organic growth of 4.9% acquisitions and partly offset by FX. It is important to note that a portion of our organic growth is partly due to the timing and sales of paint body and equipment and the benefit from recently signed long-term agreements with customers. Brent and his team have been working on several initiatives to increase members' loyalty, and we are starting to see the benefits.

In the quarter, we continued to execute the Performance Improvement Plan. We merged the distribution center of Saskatoon and Calgary into a larger one in Calgary. This will permit a broader selection of inventory while optimizing the supply chain process.

We also opened a BUMPER TO BUMPER superstore in Montréal metropolitan area and integrated one company-owned store, improving the logistical and servicing process. This led to realized annualized savings of $1.7 million in the first quarter. As indicated before, when we are consolidating, in most cases, we're not losing volume but reducing our cost-to-serve model, providing better service to our customers and optimally improving our margins.

Our adjusted earnings before tax stood at $3.5 million or 3.1% of sales, up from $200,000 or 0.2% of sales last year. This significant increase was driven by the timing of certain rebates, improved performance by the network of company-owned stores, the benefit of the Performance Improvement Plan and FX. The negative impact of IFRS 16 on Canada's earnings before tax was approximately 20 basis points, and approximately 160 basis points of lease expense were shifted from operating expense to interest and depreciation expense.

In addition, in the quarter we started the integration of our latest acquisition, Autochoice Parts & Paints. The integration process is well on its way and on track. Furthermore, we continue to roll out the BUMPER TO BUMPER and to deploy our point of sales to PartsWatch.

As we mentioned on our last call, some of our customers that are served by our stores located in the oil patch out west experienced some challenges, and we expect this softness to continue for the time being.

Now turning to our Parts Alliance U.K. segment on Page 14. Our first quarter revenue were $102 million from $110 million last year. The decrease is primarily due to FX, lower sales of electrical products in relation to a mild winter, the loss of a sales contract in the fourth quarter 2018 and the uncertainty regarding Brexit. These factors were also exacerbated by a strong comparable quarter last year.

In the first quarter, TPA executed its Performance Improvement Plan. It’s inaugurated a new national distribution center situated in the heart of the U.K. This will allow for the ability to grow while improving efficiency. We also opened 2 greenfields, strategically expanding the footprint in the U.K.

Adjusted earnings before tax was down significantly from $7.3 million or 6.6% of sales last year to $2.3 million or 2.3% of sales. The decrease in profitability is primarily due to the lower sales volume originating from the market conditions, mild winter, uncertainties surrounding Brexit as well as the adoption of IFRS 16.

It is noteworthy to know that the implementation of IFRS 16 had a larger impact on TPA as compared to our other businesses or segments due to the nature and the number of leases as well as new agreements signed in the recent past. The impact of IFRS 16 on TPA earnings before tax was approximately 50 basis points, and approximately 200 basis points of leases expense were shifted from operating expense to interest and amortization expense.

Furthermore, investment in the future in greenfield and new national distribution centers negatively impacted the margin by approximately 115 basis points. Going forward, given the current market condition, we expect the second quarter to be softer than last year. The loss of the battery sales contract mentioned last quarter is anticipated to have larger impact in the first half of the year than the second half.

Furthermore, the economy remains soft and Brexit has potentially been delayed until the end of October, thus prolonging the uncertainty. We are closely monitoring market conditions, and we will adapt our cost-to-serve as needed. For now, our focus is on various sales initiatives and also to increase our share of wallet with key customers. Our greenfield rollout plan remains currently unchanged, and we anticipate a total of 5 to 7 net new stores in 2019. And we will adjust our plan depending on market conditions.

Turning to Page 18 for consolidated profits. For the first quarter, we incurred a net loss of $1.3 million or $0.03 per share versus net earnings of $10.4 million or $0.25 per share last year. Adjusted earnings for the quarter totaled $5 million or $0.12 per share versus $12.1 million or $0.29 per share last year. The decrease in adjusted earnings was mainly attributable to lower adjusted earnings before tax and a change in the proposed tax regulation announced on December 20, 2018.

Now let me comment on our quarterly cash flow on Page 19. In the first quarter of 2019, cash flow used for operating activities were $70 million versus $30 million last year. This variation was mainly attributable to large payments to a vendor financing program related to the purchase of inventory made in 2018, partly compensated by reduction in inventory and of corporate tax installments.

We generated $19 million of free cash flow for the quarter compared to $7 million last year. This variance is explained by a lower level of income tax installment, coupled with an increasing operating cash income. These factors were partly offset by higher CapEx mainly due to the 2 DCs. I would like to highlight that today, the Board of Directors declared a quarterly dividend of $0.925 per share payable on July 16, 2019, to shareholders of record as of June 30, 2019.

Turning to Page 20. As at March 31, 2019, our outstanding total debt stood -- net debt, sorry, stood at $627 million versus $419 million 3 months earlier. This increase is a result of the adoption of IFRS 16, which effectively added $118 million to our debt as well as the large repayment for the vendor financing payable mentioned earlier.

Considering the performance of FinishMaster and TPA as well as the onetime cash outflow of $55 million related to a change of payment terms from one of our large supplier, we expect our debt to remain at similar level until the end of the third quarter and expect a reduction in Q4.

Now let me turn to the outlook on Page 22. First, I'd like to say that our guidance remained unchanged. As mentioned last quarter, we provided guidance that did not include the adoption of IFRS 16. Now with this adoption, we expect, for 2019, organic sales growth to be in the range of 1.25% to 3.25%, post-IFRS consolidated adjusted EBITDA margin to be in the range of 7.5% to 8.5% and adjusted earnings before tax to be in the range of 2.5% to 3.5%. We also expect CapEx to be in the range of $25 million to $30 million and the tax rate to be in the range of 23% to 25%.

I will now pass the call over to Brent.

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Brent Windom, Uni-Select Inc. - President, CEO & Director [5]

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Thanks, Eric. André, on behalf of the management team and with our deepest appreciation, we would like to thank you for your support and leadership in the last few months in your interim role. We wish you continued health and success in all your future endeavors. I'd also like to take the opportunity to say that I'm extremely excited with the opportunity to work with our leadership team in my new role to help continue to execute our plans and unlock shareholder value. André?

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André Courville, Uni-Select Inc. - Former Interim President, CEO & Director [6]

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Thank you, Brent. I would like to conclude by saying we are not satisfied with our overall results, but we are taking action to bring Uni-Select back to strong and solid profitability. However, it does take time. We ask for your patience as we work diligently to make it happen. The key to our success would be the execution of our Performance Improvement Plan.

At FinishMaster and our Canadian operation, we will focus on executing the Performance Improvement Plan. While at TPA, we will focus on managing through temporary headwinds. Finally, we thank our stakeholders for their ongoing support at this challenging time.

Today is my last day as a member of this great organization and great management team, and I wish to thank you all for the privilege of working with you during these past 5 years. I wish to thank the financial community, the shareholders and my colleagues at the Board for their support and friendship. I would also like to extend my heartfelt congratulations to our new President and CEO, Brent Windom, Brent has outstanding leadership capabilities, and I'm delighted that the Board selected him to take the reins of the organization.

This concludes our presentation. We are now ready for question and answer. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) (foreign language) Your first question comes from the line of Elizabeth Johnston from Laurentian Bank Securities.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [2]

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I just wanted to go back to Canada Automotive for a few minutes here. One of the things you highlighted this quarter is the timing of sales of paint body and equipment. If you could give a little more information on what you mean by that and if we should expect that to reverse itself in the second quarter.

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Brent Windom, Uni-Select Inc. - President, CEO & Director [3]

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Elizabeth, we really saw an opportunity with the change in the supply from one of our largest paint manufacturers. They're going through a system change, so we had the opportunity to take some of the sales that would normalize in Q1 and Q2. They came a little bit heavier in Q1 so that they wouldn't have a disruption in this business. So we do expect about 50% of the organic growth, which was attributed to the PBE side to sort of normalize in Q2.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [4]

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Okay. So sales were effectively pulled ahead then?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [5]

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Yes.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [6]

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Okay. And just in terms of the -- switching gears here to The Parts Alliance. I know we've talked about the battery sales before, but maybe you could just run us through again what happened. What's going on with those sales and why this is continuing to be a headwind?

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Neil Croxson, The Parts Alliance Ltd. - President & COO [7]

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We had -- previously had a contract to supply batteries to one particular customer. That contract was terminated in Q4 last year. Obviously, we're now comparing it with the Q1 last year where we had those sales. That will continue through Q2 and Q3 and will normalize out in Q4 at the end of this year.

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [8]

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And it was very exacerbated also by the fact that we had a mild winter in the U.K. So understanding that electrical products are a product line that strive when the weather is cold. Having a mild winter in the U.K. did not help the equation on the overall electrical products in the U.K.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [9]

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Okay. So the battery sales, what we're talking about here, that's the contract that was lost at the end of last year?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [10]

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Absolutely.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [11]

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And then separately and in general, as you say, electrical product sales were lower and that's in part related to the milder winter, correct?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [12]

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Exactly.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [13]

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And then continuing on, on the subject here. In terms of uncertainty with respect to Brexit, the way we should be thinking about this, is that just customers deferring spending or driving less? Can you give us a sense of where you're seeing this come through? And is there anything that you can do to mitigate that?

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Neil Croxson, The Parts Alliance Ltd. - President & COO [14]

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Sure. The Brexit effect is obviously the whole economy of the U.K., and that uncertainty is causing people to delay making expenditure. What we have in the U.K. market, however, is a legislation that requires an owner of a vehicle that's over 3 years old to have it inspected once a year. There is a 12-point test that the vehicle has to pass, otherwise, the vehicle is not allowed on the U.K. roads. And that means whilst people can defer having their vehicle serviced and maintained, there comes a point where they're forced to take action. And we see in the history of economic cycles in the U.K. that that will come through eventually.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [15]

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Okay. Great. And then just one more follow-up here on -- just going back to the contract loss, the battery sales we were talking about. If I -- should we think about that as a headwind on organic growth at least in the 2% to 3% range?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [16]

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Yes, that's probably a fair range, probably towards the lower end of your range, Elizabeth.

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Operator [17]

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Your next question comes from the line of Zachary Evershed from National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [18]

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So the increase to your EBITDA guidance, I just want to make sure, is that entirely attributable to IFRS 16? Or were there factors involved?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [19]

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No, no. So I just want to make sure, we're maintaining guidance under pre-IFRS. Those guidance have not changed. The adjustment to the guidance are to reflect the accounting change.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [20]

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Perfect, appreciate that. And in terms of your financial covenants, maybe you could go into a little bit more depth on how IFRS 16 affects your financial covenants? And can you speak to your comfort level on your debt ratios?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [21]

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Sure. So first of all, like most companies, when you enter into a credit agreement with a group of banks, you typically have a provision that states that in the event of an accounting change, the parties will sort of get together and agree on the way forward. Do you preserve the same structure and the same computation that you had before the adoption of the new standard? Or do you need to make the adjustments and accordingly the ratios to it? In our particular case, the decision that was taken in conjunction with the banks is to preserve the structure of the covenants and the computation as it was pre-IFRS.

As it relates to the covenant structure, we have the required flexibility under our bank agreement to operate and conduct our affairs. We will be managing within the covenant ratios that we have. I'd like to remind everybody that this credit facility is a $625 million credit facility that is currently unsecured. It leaves us plenty of flexibility to work on our capital structure if required. And to your point -- or to your question about my little comfort, I am comfortable with the covenant structure that we have currently in place.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [22]

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Excellent. Last one from me. The $55 million cash outflow negatively impacting 2019, how much of that did we see in Q1?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [23]

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A portion of it, but not that much. I will tell you that this is more a question of timing on certain purchases made through the other businesses or other manufacturers in 2018. Keep in mind also that Q1 is a soft quarter from a working capital's perspective historically at Uni-Select, and this year is no different than the other years. As you know, we have to invest in our inventory to gain business just in terms of seasonality to get ready for the spring sales. The other factor this year that is exacerbating a little bit the inventory aspect is the fact that we launched 2 DCs, 1 in Canada and 1 in the U.K. Those DCs were stacked up with the inventory in order to service the customers. So those combined factors sort of resulted to the cash out in the -- on the payables side mainly.

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Operator [24]

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(Operator Instructions) (foreign language) Your next question comes from the line of Daryl Young from TD Securities.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [25]

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With respect to the margins in Canada, is -- and the majority of these incentives, is this related to the ramp-up of the new DC in Western Canada?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [26]

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Not exclusively. I mean there's an impact obviously with the fact that there was an incremental sale on the PBE side, so it's a combination of elements. And I would say they were just normal sales, were good and healthy. So that also helped the quarter in gaining business. I don't know, Brent, if you want to add any color? But...

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Brent Windom, Uni-Select Inc. - President, CEO & Director [27]

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No, I would say all business, all categories were up in Q1.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [28]

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So that would be a normal way to look at incentives and there's not a timing issue or carryover or anything?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [29]

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Well, as I said, there is a timing issue related to PBE, paint body and equipment because as Brent said, there was sales that were crystallized in Q1 that were pulled over from Q2. So that's one element. And the DC, as you mentioned, there is some benefit to the DC but not that much, but there is some.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [30]

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Okay. And then in terms of FinishMaster, we've seen quite a bit of consolidation at the collision repair and the collision per industry. And just curious if you guys are forecasting any impacts to margins going forward because of that.

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [31]

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Well, look, the consolidation is nothing new, right? I mean it's obvious that in the last 5 years, there's been significant consolidation in the paint body and equipment industry in the U.S. No, I think that the announcement of the Caliber-ABRA merger is just a further testimony to that consolidation. As we know, we've been adjusting our cost to serve. And in fact, in view of this market reality of consolidation in the industry, it's really hard for us to predict the speed in which further consolidation may or may not happen. But what we're doing on our side is to manage our business so that we can adapt our cost to serve to ensure that we are a profitable business and a sustainable business in that environment.

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Daryl Young, TD Securities Equity Research - Mining Research Associate [32]

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And can you remind us what the percentage of your businesses is MSOs and large MSOs as well?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [33]

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Yes. Well, first, remember how we define MSOs, and I think it's just very important. At FinishMaster, we define MSOs as anybody that operates 3 body shops or more. So in that group of category, you have a wide variety of customers from a regional operator of 5 shops to a Caliber-ABRA of this world. That's the first color I would say. The combined elements of that portfolio is roughly 51%, 52% of our total sales, and then you have to mix the traditional industrial products that constitute the reminder.

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Operator [34]

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Your next question comes from the line of Jonathan Lamers from BMO Capital Markets.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [35]

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I'd like to ask Brent a question. Welcome to the CEO role. Could you comment on how you see your role as CEO of these 3 geographically dispersed businesses going forward?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [36]

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Well, Jonathan, I would say, over the next few weeks and days, I'm going to be working with the leadership team and we'll define exactly that. I mean because clearly I'll be helping them execute the plans that they already have in place that they've been working on and certainly looking at how we can continue to improve the shareholder value as well as the overall operating business.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [37]

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And how do you think about evaluating request for capital from each of these 3 divisions?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [38]

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I would say that's, less than 48 hours in, a little difficult for me to answer at this moment. But certainly, I think we'll -- I need to understand the needs before I ask the questions. So I don't really understand that at this point, but I will in the next few days with Eric.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [39]

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Okay. That's fair. I have a few questions about the segmented results. First, on the U.K. auto parts business, so it was mentioned that 150 basis points of the margin decline was from this new distribution center that's ramping. Could you expand on what the company is trying to do there? When this DC opened? How long the ramp cost might continue? And I mean the high level, is Parts Alliance trying to move to a 3-step distribution model from its 2-step model?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [40]

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No. So 2 things to clarify first. The dilution of the margin is linked to 2 key elements here: the greenfield and the DC opening. Okay? So those 2 factors combined, they already impact on the margin 151 basis points. Second element, as we mentioned before, the DC in the U.K., the midpoint DC was built for 2 purposes. First is to handle the private label because when you receive private-label products, you receive containers of and we needed a place where we could receive and be more efficient from a private-label optimization and distribution perspective. That's the primary function of that DC. The second element, in view of the Brexit uncertainty, we also on purpose increased our level of inventory to make sure that there was no supply disruption linked to the operations in the U.K. versus the Brexit uncertainty. And I would like to ask Neil if he has anything that he'd like to add to that.

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Neil Croxson, The Parts Alliance Ltd. - President & COO [41]

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No, I think you put it very eloquently, Eric, in terms of the core purposes behind it. I would summarize it as saying it allows us to secure our supply synergies is a big part of our strategy. And in terms of that Brexit stock, it's all part of a process where we can improve service to our customers by having better availability of stock into our network.

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [42]

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And Jonathan, if I may apologize, I think you mentioned 151 basis points, it's 115 basis points, 1-1-5, just to make sure that we have the right number in terms of dilution.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [43]

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And when was the lease signed for this facility? And when did you start operating there?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [44]

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Yes. The facility started operating in January. The lease, Neil, was signed I guess a couple of...

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Neil Croxson, The Parts Alliance Ltd. - President & COO [45]

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In the summer last year, we spent the last quarter of 2018 preparing that site for operations, which began first week of January.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [46]

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Okay. And on that battery contract, was that again less than 2% of sales this quarter that was lost?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [47]

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It was around 2% to 2.5%.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [48]

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Okay. Switching to Canada, do we have the contribution to the Q1 margin from the favorable rebate timing this quarter?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [49]

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In terms of dollars, you mean?

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [50]

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Dollars or percentage margin. And if not, maybe you can just comment on whether we see this as a -- whether we should see this as a sustainable benefit to the business or something onetime in nature?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [51]

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No. I think I just want to clarify on the -- the main element here was the pull of sales from Q2 on the PBE side to Q1. So this is more a timing element. Again on a 12-months basis, it neutralized itself. So do we still expect a better Q2 than Q1? The answer is yes. That's the behavior in the Canadian business, the Q1 is always softer than Q2, and we expect very similar behavior this year.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [52]

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There was quite a notable margin improvement in the business, and it was highlighted that the performance of the corporate stores improved. Could you just update us on where the company is with its PartsWatch implementation and the other initiatives to improve the margin in the corporate stores?

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Brent Windom, Uni-Select Inc. - President, CEO & Director [53]

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Certainly. We're pretty successful in the PartsWatch implementation. We're down to only one store left from the original store group, other than the exclusion of the acquisition of Autochoice. So we're coming close to the end of the first phase of PartsWatch as we knew it. I would tell you that it's really not only just a system change, but we've also made significant improvements, as we mentioned in the previous quarters, with the leadership team inside the stores, the rigor in which we're managing the stores and the way the stores are really behaving. And we continue to see that improvement over time. So...

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [54]

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Yes. And I guess the other thing, Jonathan, as it relates to margin, keep in mind, we also have some benefits with the Performance Improvement Plan that has been implemented in Canada in Q4 and in Q1 this year -- Q4 last year and Q1 this year, right? So as part of the margin improvement, that is certainly a sustainable structural change that we put to the business.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [55]

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And on the Performance Improvement Plan, was there some benefit included in the FinishMaster's result this quarter?

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [56]

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Very little because we closed 3 branches towards the end of the quarter. So from a run rate perspective, it's under $0.5 million in terms of run rate savings in Q1. And as you can see on Page 6 of our document posted for this call, you see a schedule of the expected savings per quarter and the net benefit by the end of the Q4.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [57]

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At a high level, could you comment on what might cause results to -- sorry, realized savings from the Performance Improvement Plan to come in greater or less than the $35 million that you're targeting long term? I know there's quite a few moving parts there, but I just wanted...

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [58]

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Yes. Well, look, the way I'm thinking about this, Jonathan, is I think we have a very solid plan on the rightsizing with FinishMaster. The plan is very detailed. It's being operationalized as we speak. So my level of confidence is actually pretty high that we will achieve those savings and potentially more than that. As it relates to the 2 other businesses, the Canadian business did the harder part in Q4 and Q1 this year. There will be incremental savings over time, but probably not in the size and the magnitude that we did in Q4 and Q1.

The U.K., as you may recall, did some activities back in late 2017, did further integration of various corporate stores in 2018 which also helped the overall cost structure. And with the opening of the DC in the U.K., it will lead us to have additional opportunity over time. So do I see the $35 million by the end of 2020? The answer is yes. Could it be more potentially? That's a no for now. I think it's still a little bit early in a sense that there is 1 year and 3 quarters to ago. But as I said, the significant portion of that plan is squarely in our hands and we operate it.

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Operator [59]

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There are no further questions at this time. (foreign language) I will turn the call back over to the presenters.

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André Courville, Uni-Select Inc. - Former Interim President, CEO & Director [60]

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Thank you. We would like to thank all of you who have been listening and for -- and the ones for your questions. And we'll see you next quarter, except for me. So have a good day.

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Eric Bussieres, Uni-Select Inc. - Executive VP & CFO [61]

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Thank you. Bye-bye.

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Brent Windom, Uni-Select Inc. - President, CEO & Director [62]

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Thank you.

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Operator [63]

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This concludes today's conference call. You may now disconnect. (foreign language)