Uni-Select's (UNIEF) CEO Henry Buckley on Q2 2016 Results - Earnings Call Transcript

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Uni-Select Inc. (OTC:UNIEF) Q2 2016 Results Earnings Conference Call July 28, 2016 8:00 AM ET

Executives

Louis Juneau - Chief Legal Officer and Corporate Secretary

Henry Buckley - President and CEO

Eric Bussières - CFO

Steve Arndt - President and COO, FinishMaster

Gary O’Connor - President and COO, Automotive Canada

Analysts

Charles Perron - Desjardins Securities Inc.

Anthony Zicha - Scotia Bank

Leon Aghazarian - National Bank Financial

Sara O’Brien - RBC Capital Markets

Jonathan Lamers - Bank of Montreal

Operator

Good morning, ladies and gentlemen. Welcome to the Uni-Select Details for the 2016 Second Quarter Results Conference Call.

I would now like to turn the meeting over to Mr. Louis Juneau. Please go ahead.

Louis Juneau

Thank you, Wayne. Good morning, everyone. And welcome to Uni-Select 2016 second quarter financial results conference call. Before we proceed with the presentation, I would like to remind you that certain information discussed during this call may constitute forward-looking information within the meaning of securities legislation.

Caution should be used in the interpretation of such information. For details, please refer to our disclaimer regarding forward-looking information in our latest Annual Report available on SEDAR, as well as in the press release issued yesterday.

Joining me here in Boucherville, this morning, are Henry Buckley, President and CEO; Eric Bussières, CFO; Steve Arndt, President and COO, FinishMaster; and Gary O’Connor, President and COO, Automotive Canada.

I will first turn the call over to Henry, who will discuss the key highlights of the last quarter. Eric will then discuss a few important financial information elements for Q2. After their presentation, we will open up the call to questions. Over to you, Henry.

Henry Buckley

Thank you, Louis. And good morning, everyone. Thank you for joining us. I want to begin my remarks today by expressing how pleased I am with the performance of both our businesses in terms of executing our strategy and delivering results.

On a consolidated basis, total sales for the quarter grew 14.6% with FinishMaster at 26.5% and the Canadian Automotive Group at 5% on a Canadian dollar basis. Also, on a consolidated organic basis for the quarter, we achieved growth of 0.1%, driven by 2.1% at FinishMaster and negative 2.3% growth for Automotive Canada. Our EBITDA margin reached 9.2%; earnings grew to $16.8 million; we achieved earnings per share of $0.40.

Our teams are highly focused on executing our plan which is accelerating profitable growth, a balance of organic and acquisitive growth, effectively integrating our acquisitions and building the best team in the business.

FinishMaster delivered strong performance in the quarter, both growing organically and also acquiring key businesses to expand their geographic coverage and build density in key U.S. markets. Our teams are doing an excellent job in integrating these businesses into our FinishMaster family. The integration team and our formal integration processes are delivering on our planned business results and synergy capture. We’re pleased to add these new businesses, new team members and new customers to our business. Our acquisition benefits will continue to grow as we fully integrate these companies over the planned period, absorb integration costs and see the full benefits of our synergies from these growing businesses.

Our focus continues to be on growing organically, and our teams are adding new customers and expanding business with existing customers in both our key segments, traditional collision repair centers and our MSO, multi-shop operator customers.

In Canada, we continue to be focused on growth. While we achieved overall growth in the quarter, our organic growth was below our expectations. The impact of the slowdown in the oil and gas segment in the Prairies is the primary driver. The balance of the year outlook remains optimistic, as we execute on our organic sales growth strategies. We’re bringing on new independent jobber customers and we’re seeing strong results from our newly launched sales force. We believe the overall market is soft. However, we’re focused on gaining market share.

In addition, we’re seeing healthy organic growth from our growing corporate store network. We’re now up to 50 locations, have a leadership team in place, and are focused on building out this platform nationally. We have installed robust integration processes and are also delivering on our planned synergies.

Our new Canadian branding initiative is well underway and we continue to be dedicated to delivering first class customer experience in both our automotive aftermarket brands, Bumper To Bumper and Auto Parts Plus. These strategies add significant value to our independent jobbers, our corporate stores and our installer customers. More than ever before, we’re sending a strong message that we are Canada’s Parts People.

In terms of acquisitions, we completed several key acquisitions over the course of Q2. At FinishMaster, we announced three transactions helping expand our geographic coverage and building density in key markets. Firstly, the Annex Group with nine locations, six in California and three in the Seattle, Washington area. We then added the Gladwin Paint Company with eight locations across several key metropolitan markets in Texas. We closely followed this by acquiring Zitco, Inc., with one location and significant presence in Minneapolis. We’re thrilled to welcome these new talented team members to the Uni-Select family, and help us accelerate profitable growth.

Before I conclude my remarks and discuss our priorities and focus going forward, let me now turn the call over to Eric Bussières. Over to you, Eric.

Eric Bussières

Thank you, Henry. Good morning everyone. To begin, let me preempt my comments by mentioning that the results discussed on this call are compared to last year adjusted results which included two months of operation of Uni-Select USA Inc. and Beck/Arnley Worldparts sold on June 1, 2015.

As you have certainly noticed, the lower Canadian dollar has continued to impact our results, yet not operationally. In Q2 alone, the declining Canadian dollar penalized sales by $5.7 million or 2% at the consolidated level, which translates into a negative impact of 4.5% on the sales for our automotive products. You will also have noticed from analyzing our results that our sales performance was impacted by a difference in the number of billing days between Q2 2016 and Q2 2015. The additional billing day in Q2 this year had a positive comparative impact of $2 million or 0.7% of sales.

We are pleased by the progress in our EBITDA margin generated by our two operating units, with a 12.4% margin in our U.S. paint and related product segment and 7% in our Canadian automotive product segment for consolidated EBITDA margin of 9.2%. Included in our operating results, we spent approximately $300,000 in the transaction cost during the quarter and year-to-date $800,000, mainly in our U.S. paint and related product segments. These transaction costs do not include the related integration cost.

Our accounts receivables level increased by $15 million against last quarter. Over 50% of this increase is attributable to business acquisition and the remaining from ongoing operation following the increase in the volume of sales realized during the second quarter. Inventory increased by 13.6 million compared to last quarter. And this increase is entirely related to our various business acquisitions closed during the quarter. Following the various acquisitions, goodwill and tangible increased by approximately $46 million and $25 million respectively. Amortization of intangible against the last quarter increased by $700,000.

Cash flow from operating activities totaled $38.1 million; and like the preceding three quarters, we had one last payment under the vendor financing program for the sold operation equivalent to $2.6 million. Accordingly, cash flow from ongoing operating activities before this payment were positive $40.7 million. I would also like to point out that the quarterly free cash flow increased by 19% from $25.9 million last year to $30.8 million, mainly due to income tax refunds and lower CapEx.

At the beginning of the second quarter -- sorry, at the beginning of the quarter, we purchased on a full split basis 405,970 common shares at an average price of $28.27, [ph] or $21.45 in the equivalent U.S. dollars for total consideration of C$11.4 million Canadian or US$8.9 million. As you know, our share price was fairly volatile during the first quarter in the month of April. As a result, we took the opportunity to purchase some shares since we felt it was a nice return for our shareholders. As of June 30th, we had 627,420 shares available under our NCIB program that will be expiring on August 05th.

Subject to Board approval and regard to the approval, a new NCIB program for 2016-2017 is expected to be in effect during the month of August. We’re updating our guidance for 2016. However, please recall that starting in 2017, we will no longer be providing the guidance.

For the U.S. paint and related segment, we’re adjusting our guidance for organic growth from 4% to 6%, to a range of 3% to 4% for the Canadian automotive product segment from a low mid single digit to flat; at an average exchange rate of 0.76 Canadian dollar to U.S. dollars for the full year, we now expect sales to range between $1.2 billion and $1.225 billion.

We’re increasing our EBITDA margin guidance for 2016 from a range of 7.75% to 8.75% to a range of 8.25% to 9%. Our guidance on CapEx remained unchanged at $20 million with an acceleration of investments during the second half of the year with three key initiatives.

As of June 30th, our outstanding total net debt stood at $166.3 million. Cash mainly used to financing a series of accretive business acquisitions and share buyback under the NCIB. Excessive to liquidity is strong with $234 million in available credit facility. In addition, we had $18.3 million of cash held in escrow or 64% in support of the various purchases at the end of the second quarter. Uni-Select is in a strong position to actively seek and seize opportunities through key acquisitions to extend our geographic coverage and build density in key markets at FinishMaster. In Canada, we will continue to invest in our distribution capability and our corporate stores network.

This completes my financial review, back to you Henry.

Henry Buckley

Great, thank you Eric. Let me conclude my remarks today by reaffirming our strong commitment to pursuing our profitable growth efforts, both organically and through accretive business acquisitions. This is our commitment to our shareholders and the number one objective pursued by each of Uni-Select’s 3,000 plus teammates. On this note, I’m pleased to announce our Board approved a dividend or $0.85 per share, payable October 18, 2016 to shareholders of record, September 30, 2016.

Turning to the third quarter of 2016, we will continue working toward building our leadership positions in both businesses. We are truly committed to accelerating initiatives to drive organic growth and facilitating the effective integration of our newly acquired companies and building the best teams in the business.

In closing, I wish to sincerely thank the entire Uni-Select team for their continued commitment and passion towards delivering the industry’s best customer experiences.

We’re now ready to answer your questions. Operator, please, Wayne?

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Benoit Poirier. Please go ahead.

Charles Perron

This is Charles Perron filling in for Benoit. Thanks for taking my questions and congratulation for the results. So, maybe first, I was wondering if you can shed more light on the organic growth performance during the quarter in the automotive division. And if you can maybe discuss your expectations for the back half of the year, and if you think organic growth maybe return to positive territory in 3Q and 4Q with your market share gain strategy that you discussed previously?

Henry Buckley

Yes, thanks Charles. I can ask Gary to help us with that question for organic in Canada.

Gary O’Connor

There, is no doubt that we’re seeing right now -- obviously, we have a big business section -- segment in the Prairies, which is really hurting our results, what’s going on in the Prairies. So, that’s negatively affecting us. Over and above that, we see that the car count in the installer garage and that seems to be somewhat lower in the second quarter, so which translates to lower sales obviously.

Going forward, at some point, this usually picks back up and people have to get their cars repaired, so they will -- it can delay for awhile but they usually come back at some point. So, it’s hard to say exactly how third and fourth quarter will work out, but we’re working diligently to make sure that we have a bigger presence in those markets, so we can get market share.

Henry Buckley

Yes, just on this because this is obviously one of the things that we’re looking at for both businesses, our organic growth. This is absolutely key strategy for us. In Q2, we saw some softness in the markets. We still believe we’re gaining significant market share here. We’re seeing positive growth from our corporate stores. We’re seeing that a number of independents, as Gary said in the Prairies that are seeing softer there, but pulling our competition and things like hurt us subjectively. It’s been a softer market in second quarter. So, as we look at the balance of the year, we’re bringing on some new independent jobbers, customers. And I think that bodes really well for us organically.

We’re far from given up on the balance of the year, we’re halfway into the year. We’re seeing a little softness in the economy but that doesn’t mean we’re throwing in the towel yet, far from it. We’ve got a lot of stuff on the table to accelerate through the balance of the year. So, we still remain positive on it. We adjusted the guidance to flat, just make sure we’re reflecting the reality of where we’re today. We had a positive 1.5 in the first quarter, we had a negative in second, we’re picking up through the balance of the year. So, we’re not ready to throw the towel in yet.

Charles Perron

And maybe now on the cash deployment [ph] opportunity. You’re not debt free anymore, but free cash was solid and you’re still having some flexibility in terms of balance sheet. How should we be thinking in terms of priority going forward between M&A, share buyback and dividend? And maybe more on the M&A, how would you quantify your pipeline and the valuations in the sector versus what they were three months ago?

Henry Buckley

The answer is going to be same all the way through the year. Right now, yes, we have done some accretive acquisitions throughout the course of the year. We’re very pleased with that on a couple fronts. One is that we’ve bought some truly accretive businesses and they’re adding to our ability to grow our business both in the U.S. paint segment and build up the corporate store network in Canada. That mission is not going change. We’re still going to continue to do that. We have the flexibility in the balance sheet to do that. I think Eric shared it very, very well in the first quarter, we saw some softness in the share price. And that’s an opportunity there to really add some value to shareholders and we did continue to buy shares back in that quarter. And if that happens again throughout the balance of the year, we’ll continue to do that, as our NCIB allows. So, clearly that is something we’ll consider.

We’ve had a consistent track record of dividends, and we don’t see that changing at this point, but that’s up to the Board to discuss and determine every quarter. So, really, it goes right back down to us focusing on our M&A pipeline and we’ve a strong M&A pipeline in both businesses. So, both in the U.S. paint and the related products segment and then in the Canadian automotive segment. We’re making sure that we’re highly focused on adding the right companies to build out on our strategy. We’re not interested in just adding any company, it’s got to be the right fit for our business, we’re going to have to be disciplined in terms of what we pay for, and we’re highly focused on integrating those businesses. So, I don’t think you’ll see any change of direction on this moving forward. We’re going to continue do just that.

Charles Perron

And maybe a last one form me. I was wondering if you could discuss the performance in the automotive EBITDA margin. As I know you guys have been adding new corporate stores and the accretive acquisitions, but I was wondering if you had to make some discount on pricing to support sales volume, especially probably in Western Canada. And also at the same time, if you believe last year’s EBITDA margin for 3Q and 4Q, somewhat [ph] a good proxy for your expectations second half of this year with the strategy in place?

Eric Bussières

Well, I’ll answer the first part of it. No, we have not changed our pricing strategy to move volume. That just moves the problem from one quarter to another. So, we’ve been very consistent and very conservative in how we go to market. So, we haven’t done any of that. As part of the second part of your question…

Henry Buckley

So, on that, on the returns for the automotive business in Canada, I think we shared with you, got more seasonality in the automotive business. So, in Q2 and Q3, there are stronger EBITDA returns in Q2 and Q3 and we have slightly lower in Q4 and Q1. And we don’t expect that churn to change. The only thing that could change a little bit is what the economy does, as we’ve discussed in terms of the softness at the current moment and also some of the impact that we have by accelerating some of our customer growth. So, those are two variables that we’ll deal with every quarter, but our outlook still remains positive as we’ve discussed.

Operator

Thank you. The following question is from Anthony Zicha. Please go ahead.

Anthony Zicha

A couple of questions in terms of regional performance. So, if we were to look at the organic growth rates or if you can maybe give us some color on the markets, what was happening in Quebec and Ontario and Alberta? And maybe if you can give us a bit of color on the competitive landscape and also maybe some color on the car dealerships. How are they progressing in this -- are they losing market share to you?

Gary O’Connor

I’ll take that again. Actually, the Quebec marketplace is doing fairly well. Ontario, it’s a tough market and a lot of competition, very competitive. Having said that, we’ve recently signed some new customers which will really help us going forward. And there is no doubt Alberta is suffering. We do have a few bright spots across the province but overall it’s really being affected by what’s going in the oil sands and the whole economy. And talking from a competitive -- our competitors working hard like we’re. But having said that, like Henry mentioned, they’re struggling the same way we’re, they’re affected by the economy the way we’re, so they’re not gaining market share for as far as we can see. So, it’s just a tougher market environment right now from the economy of the consumers. And as for the car dealers, they keep on doing what they’re doing. We don’t believe they’re gaining any market share. They’ve got a finite number of shops that they can deal with and customer base. The only negative we can see that there seems to be a lot more newer cars on the marketplace, and obviously that affects our wheelhouse we go to market, but nothing has changed there dramatically.

Henry Buckley

That’s good for us long-term. As you know, the new car sales really affects us. As soon as, they head sort of four years and beyond, we got the benefit of oil changes and things like that through the installer base in the early years. But as that current part grows, we’re pretty enthusiastic about the long-term prospects there.

Again, going back to the market, it’s one quarter, right? We’re -- little softness in the quarter, little choppy in different spots, as Gary in Ontario, little bit, not much, and our outlook there is not any different than it has been. We’re going to have to continue to do what the oil and gas segment like everybody else is. We’re not immune to that. We don’t see it getting much worse. We think it’s bottomed out, but who really knows. But overall, we still a pretty good market in it. We’re focused on gaining market share and everything we can see so far tells us we’re doing just that.

Anthony Zicha

And with the weakness of the Canadian dollar, do you expect some of the manufacturers to implement price increases in the second half of the year?

Henry Buckley

No, that’s something that we don’t see. We talk to the manufacturers. And I think obviously in the quarter as the Canadian dollar strengthened against the U.S. dollar; that shied all of the U.S. manufacturers away from putting price increases in the year. So, we haven’t see price inflation this year, like we was a bit last year, we didn’t see it this year. We don’t forecast it for the balance of the year. Now, coming to fourth quarter, they may change their mind and install something for the end of the year. But, we haven’t seen any notifications of that yet.

Anthony Zicha

Can you remind us what percentage of sales there in Canada do you have related to private label, and have you see any change in consumer behavior?

Eric Bussières

Private label, Tony, is about 7% to 8% of our sales in the Canadian segment.

Gary O’Connor

And I don’t think -- the consumers hasn’t changed. I mean obviously we have been trying to really grow that part of our that segment from a margin perspective and we have put really great quality and excellence coverage and so, we’re be pushing that. But they’ll never be 20% of our business with the line of the products we have…

Henry Buckley

We’re national brand house. So, this is very complementary for us. And we’ll continue to build that out but we’re a national brand player.

Operator

Thank you. The following question is from Leon Aghazarian. Please go ahead.

Leon Aghazarian

Just to kind of come back to that same question; it’s being asked in a different ways for the Prairies. What was the organic growth has been, excluding the Prairies?

Henry Buckley

We didn’t do that calculation this month. It was a bit choppy over the quarter, so it’s spread out – it’s probably -- it wasn’t an awesome quarter across the other regions, probably zone [ph] flat but we didn’t do the calculation to verify that.

Leon Aghazarian

I think you have provided that in Q1, so just wondering if you have that for Q2 as well. So, okay. If you could just move onto the U.S. side, I mean organic growth there as well was under 2% range, you were trending more upwards closer to 4% range, and we see that there you’ve kind of slightly amended the guidance from 4% to 6% to 3% to 5%. Can you talk just little bit about, what’s going on there as well?

Henry Buckley

Sure. Steve to answer that one.

Steve Arndt

The paint industry is a little flat right now, the number of repairs that are going through shops are flat to slightly up. We’re -- we feel really comfortable about where we’re at with gaining market share and growing. Our pipeline is very robust in that. So, a little tick down; Henry said it, it’s one quarter, one month, but we’re very optimistic on and where we will be headed in the third and fourth quarters.

Leon Aghazarian

And just one final one from me would be just on your inventory, right, we see that there was the Annex, Gladwin that goes some fairly sizeable acquisitions there. What’s kind of comfortable level you have for inventory right now and what can we expect in terms of working capital going forward for the balance of the year?

Henry Buckley

Are you talking strictly on the U.S. side or in the consolidated Canada, U.S. side?

Leon Aghazarian

Both for the consolidated side.

Eric Bussières

Well, look, I think from a working capital perspective, we expect to maintain and improve even a little bit our working capital for the remainder of the year. Obviously, if there’s sizeable acquisitions that materialize in Q3, Q4, that will have an impact on our free cash flow. In terms of inventory level, I will say that my expectation is that we should see some slight reduction in inventory over time simply by the time that we digest acquisitions we made and start optimizing the inventory level following those acquisitions. So, I’m fairly optimistic that the working capital will continue to improve itself.

Henry Buckley

We are focused on churn. I think nothing has changed in terms of Automotive Canada. We popped up the inventory, did make sure our fill rates were top shelf. They are that stabilized and we’re in good shape in Canada. And in FinishMaster, we continue to digest those acquisitions. And our churn targets internally, we’re working through those. But again, it’s an imperative that we have the inventory, we buy the companies. It takes the time to install the new pricing we get from vendors as we churn the inventory and at the same time, that’s the time when we moderate what inventory levels are where. So, I think as Eric says, you will see that come down a little bit but you’ll probably see it go up again, as we acquire more companies over time.

Leon Aghazarian

One final one then, so how was the integration coming along with the Annex and Gladwin for example? I mean where would you see you are kind of in integration cycle on that?

Steve Arndt

We are right on our plans. We’ve got a great plan that’s put together and we have a integration team that’s dedicated. This is what they do full time. And each one is a little bit different, based on their size, based on the complexity of the companies, but we’re on plan and I would say maybe a little bit of ahead with Annex right now. So, we’re very comfortable with the direction we’re going with integration.

Henry Buckley

I’d say that implies -- in fact, I think I’ve shared with all of you, we have a very disciplined approach to acquisitions, both in terms of our processes, in terms of dedicated people doing it, and we’re executing on the game plan, which also includes reviewing it on a constant basis. So, we were just with Steve and his team reviewing the detailed integration activities of all of the acquisitions we’ve made, not just Annex or Gladwin, all of them, they’re all at different stages. So, we expect to layer in the synergy benefits over time. So, if that includes looking at the inventory benefits, our buy price, our product synergy versus what the target was or the acquired the company was buying for, that happens as we cycle through the inventory. So, as you look at that over time, you will see that those benefits accrue kind of over sort of six and then nine months, if you think about it on return [ph] basis. Anything, whether it’s consolidation opportunity that could happen over one to two years, back office and IT, three to six months. Those are the kind of timeframes that we have for all of the acquisitions. And again, I got to tell you, we’re very pleased with the way it’s going, both in the U.S. and Canada as we review these acquisitions and drive integration success. That’s to me one of the highlights of what we’re doing strategically today, and we’re well on track in both businesses.

Operator

Thank you. The following question is from Sara O’Brien. Please go ahead.

Sara O’Brien

Can you comment on the acquisitions that were added in the quarter? I am not sure if I missed this somewhere, but how much revenue and EBITDA have you added on, in Q2 specifically?

Henry Buckley

We never highlight any of those individual transactions, either in terms of sales volume or in terms of EBITDA. I know everybody like us to do that. We don’t do that. And we’ll continue to have that playbook. That’s something that we clearly don’t want into [ph] the market. So, we’ll continue to be a little quite that way. And we’re just very confident in terms of being able to integrate those ones, and it’ll be reflected in our results as we move forward.

Sara O’Brien

And I guess the debt level was little higher than I expected. That’s why I am asking. I just wondered if the revenues were significantly greater than maybe the street expected and therefore the multiple page resulted in a higher transaction price. Debt wise, was there a surprise or is it tied back to the acquisition prices?

Eric Bussières

It’s all tied back to acquisitions mainly and obviously, ongoing normal operating activities that we have. For us, the debt level is in line with our expectations, and we have certainly paid all those acquisitions within the range that we indicated in the past. So, we not exceeded any of the range that we telegraphed to everyone through our multiples that we would pay for those businesses.

Sara O’Brien

And then, just on the margin, both for Canada and FinishMaster, were there any surprises to the management team in terms of the performance of both? I guess for Canada, I would have expected a bit higher and for FinishMaster a bit lower, but internally were there any variances versus expectation?

Eric Bussières

No, not really. Look, the reality is that the FinishMaster margins are robust and solid and continue to perform. And as we said, the acquisitions are accretive and therefore that’s the benefit that we see on our EBITDA margin. In Canada, look, obviously, the quarter was little bit softer than we would have liked, and that we talked about the softness on the organic growth side. So that has an indirect impact on the overall sales volume and thereby indirectly on the margin. Now, are we unhappy with the margins, absolutely not. I think it’s a good performance for the Canadian Automotive Group. And as we’re building our network of corporate stores, I think we’ll see some margin expansion over time.

Sara O’Brien

And then maybe just on -- you commented that barring any large acquisitions in the back half of the year, working capital changes should be improving. Just wondering what kind of pipeline do you see ahead in terms of both Canada and FinishMaster. Is it still very tuck-in oriented or could there be larger transactions in the near future?

Henry Buckley

We’ve got a great pipeline of both businesses. So, we’re very happy with that. And as you can see, it will be variable. And again it goes back finding the right acquisitions at the right time, at the right price. So, we’re very disciplined in what we pay. And again, as Eric said, we don’t go out of those ranges. We’re not forcing anything into quarters or timeframes. When we find the right companies, the right fit, we install them.

So, our hope and expectation is to do more in the back half of the year. Nothing to announce at this point. And in terms of size, I’m sure everybody love us to do big acquisition, but we’re equally as happy as small and medium size tuck-ins. There, quite frankly, we’re getting very good at being able to acquire those companies and to digest them/integrate those businesses into sour network. And that’s something that we’ll continue to do moving forward. And if one of those big opportunities comes up, sure, we’re very much keen to look at it. But we’re not sitting there having that as our number one focus in our playbook. We’re happy to go in and do exactly what we’ve been doing over the last 12 months, which is find nice, quality tuck-in businesses and grow and integrate them and grow them effectively. That’s probably our primary strategy. Again, big one comes along, we’ll be happy to look at it.

Sara O’Brien

And do you feel confident that there are number of more sort of Annex, Gladwin types available in FinishMaster territory -- or in the territory you want to get into for FinishMaster?

Henry Buckley

Yes, for both businesses. We’ve got a great pipeline of both businesses. And FinishMaster has it Canada has it, and we’re -- Canada for example we’re now upto 50 corporate stores. And we’ve put ourselves in a walk mode for a minute just to make sure we have all of our integration efforts in place, our brand is in place; we’ve hired the right team to install our integration -- and integrate those businesses and a leadership team to run those corporate stores. So, we’re exceptionally pleased with that, I mean exceptionally pleased with where we are today on that. And that will allow us to acquire more of those stores over time. So, our pipeline is strong in both businesses. Steve’s got a great pipeline. It’s just got to be the right fit for us that fits in with our strategy, geographic expansion and our density plays. So, we’re happy with both.

Sara O’Brien

And maybe lastly, just in your comments, there was a mention of Q3 leadership focus, what did you mean by that? Where do you need to sort of amp up the leadership team?

Henry Buckley

That was more about market leadership than it was leadership team. We’re currently happy with our leadership team in both businesses. I think the one I just described was the corporate stores. If you think about where we were in Canada, we were very good at running independent jobbers. And our focus has been to ensure that if we’re going to be in the corporate store business, we’re going to be exceptionally good at it, both in terms of strong leadership and we’ve a strong VP GM for corporate stores in Canada, we’ve added the integration folks both in terms of leadership, merchandising, IT integration; we’ve decided on what our JMS system is for the Canadian store business. That’s all in place today. We just hired General Manger for Western Canadian stores. So, we’re exceptionally pleased with the leadership team in Canada on the corporate store side and we’ve also got a great team on the independent jobber side. So, we’re very confident in that team. And Steve’s got equally robust team in the U.S. paint segment.

So, from that part of it, we’re strong. I think our focus is making sure we maintain our leadership positions in both those markets and gain market share. That’s kind of thing that sits in the front of our heads every single day, making sure we’ll have to adapt to markets, as they grow and contract. But moreover, we need to make sure that we’re focused on leadership gains in each one of the businesses, gain market share.

Operator

Thank you. The following question is from Jonathan Lamers. Please go ahead.

Jonathan Lamers

I think net debt to EBITDA leverage has increased to about 1.7 times or close to that level. Does the Company continue to target a leverage range of 2 to 2.5 times?

Eric Bussières

Yes, we’re maintaining those guidance. And as I said and as we’ve explained before, typically we had to burn cash in Q1, and we generate cash in Q2, Q3, Q4. The reality is that by the end of Q2, we typically have recovered the cash we burned in Q1, and then we start generating cash in Q3, Q4. What I am pleased with this quarter is that in fact we end up cash positive after two quarters,

a little bit higher than what we initially envisioned at the beginning of the year. So from that perspective, we do expect additional cash flow generated in Q3, Q4, which if there is no other acquisitions, would translate over time deleveraging where we’re at the end of the quarter. In terms of guidance, we think we’re maintaining, that we’re pretty comfortable with the leverage just 2 and 2.5 times. And we’re even willing go higher in the event of larger acquisition that would justify such a leverage.

Jonathan Lamers

For FinishMaster, I know there has been a lot of comments about the organic sales growth, but has the pace of that customer recruitment changed at all for FinishMaster this year versus last year?

Steve Arndt

Jonathan, this is Steve. Our pipeline for organic customer growth is still as robust as it was last year. We are actually ahead of target for our goals, for new customer attraction. So, it’s therefore -- I think if there is any area -- and that’s traditional customers, any area that we maybe a little bit slow, and this just the acquisition and integration of MSO customers, and that’s really more on their side of the growth that they’re having. So, we’re very pleased with the attraction of new customers that we get on right now.

Henry Buckley

I think Steve, a big issue there is the MSO customers, that’s a massive opportunity for us, but that will fluctuate based on their activity. So, I think you’ve seen this in previous quarters where there has been lots of MSOs that are acquiring companies with that opportunities as those big MSOs acquire some of the traditional business to be able to acquire and integrate those businesses into the FinishMaster network. And that volume will fluctuate. We can see that ramp up in a quarter, two quarters, and we’ll see it soften at a different level. So, that’s something that we have left sort of influence over. We love it, when they acquire and we can integrate those businesses, and we’ll take it every single day. But our day to day job is to make sure we’re out there block and tackle selling all those traditional customers making sure we don’t lose any market share, we gain market share in all those MSOs. But the grabby for us is when they really truly expand and that’s something as Steve said, we don’t have sort of direct influence over.

Jonathan Lamers

Can you comment on the buying conditions you’re seeing ahead of Q3 versus the favorable buying conditions in the first half of the year?

Henry Buckley

You’re talking FinishMaster or Canada or…

Jonathan Lamers

FinishMaster.

Henry Buckley

I think the FinishMaster continues to optimize buying conditions, no matter what. I mean, we always use our scale, a lot of our buying conditions will depend on things like price increases where we can buy ahead of those; everybody does it. I think we do very, very good at it in terms of making sure we get ahead of that curve, and we’ve got a solid track record of being able to buying ahead, take any benefits from that and make sure we dissipate that inventory over time. So I think nothing changed. We continue to pursue that and take any opportunities we can.

Jonathan Lamers

And one question on the Canadian business, can you tell us consumers in the Prairie provinces are differing vehicle maintenance. And based on -- if so, I mean based on past recessionary periods that you’ve seen, is there typically a catch up period once the economy begins to recover?

Eric Bussières

There is no doubt that there’s a delay with the consumers, but I think the bigger impact is all the oil activities. I mean we were really strong in the oil patch and there’s a lot of vehicles that are used in the oil patch, and we’re really working that. And then, when that [ph] slows down that hurts us, probably lot more than what consumer is going through, although there’s some impact there. So, it’s a cycle, it’ll comeback, actually we’re starting to see a bit of activity in some areas where they’re starting to drill again, and that’ll help us. So, it is a cycle we have to go through. This maybe a little longer cycle than the past but we strongly believe that it will come back to acceptable levels.

Henry Buckley

I think it’s a function of the parking lot too. At the end of the day, as Gary, there is less people in Alberta today. The people living in those communities that are oil and gas affected, there was outmigration out of that province. So, you see a lot more -- a lot less “pickup trucks” in the parking lot now than you did see two years ago. So, to your question, when we start to see an uptick and they start to rehire, there’s going to be more of pickup trucks in the parking lot moving forward. That’s kind of the primary driver I would say as opposed to consumer behavior. I think people have been laid off going back a year ago, at some point you need to your car repaired. And I think that there may be some delay there but I think that’s a minor point compared to the size of the parking lot that’s out there in the field today.

Operator

Thank you. [Operator Instructions] There are no further questions registered. I would like to return the meeting to Mr. Buckley.

Henry Buckley

Great. Thanks, Wayne. So, I think we just -- we look back and reflect on the quarter. We’ve said very, very clearly, we’re very-very happy with the number of things. Are we sitting here happy with the organic growth? No. But I can assure you, Steve, Gary and the entire team is focused on that. And remember, this is one quarter. This is not the long term. We’re highly focused on building this business, both in Canada and U.S. for the long term. And one of things that excites me most about our progress is the fact that if you’re going to be in the acquisition game, which we have, we’ve demonstrated, we’ve acquired a huge number of companies over the last 18 months, circa 25, 26 companies today. I think the key has been able to integrate those businesses successfully, capture the benefits and be able to tuck them in and make them part of the family. And that’s something that I’m extraordinarily pleased in terms of progress we are on. We’ve got the right team in place. We’ve got the right processes in place. We’re executing on it. We’re measuring our progress and we’re tracking that. And that’s something, and I’m absolutely delighted about, in terms of the success we have.

So, as we build out our business for the long run, which is our focus, we’re establishing a very strong position in the U.S. market with FinishMaster. We’re the leader in that business and our job is to extend that lead. And we’re very clearly doing that and we’re committed to pursuing that goal moving forward. The same goes for Canada. In Canada, we’ve got a strong position in this marketplace. We’re building that out in terms of growing our business with our independent customers. We’re doing so by building out a network of corporate stores. We’re 50 today and we’re aiming much higher on that on a national basis, over time. And the combination of those two things followed by the focus on our branding is really positioning us extraordinarily well to grow the Canadian business and extend our leadership position in the Canadian marketplace. So, looking out on the long-term beyond just what the quarter does, I am very pleased with our progress in terms where we’ve got to today. And I am optimistic about how the future looks for us. So, really appreciate your support. Thank you for the questions. And we’ll look forward to talking to you in the next quarter in October. Thank you everyone.

Operator

Thank you. That concludes today’s conference call. Please disconnect your lines at this time. And we thank you for your participation.

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