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By Jeff Sanford

Toronto, Ontario -- February 27, 2017 -- Tuesday Ticker provides a weekly update on the most important financial news in the collision repair sector and the automotive industry, condensed into one package. This week we look at the tighter alignment between Caliber Collision and CCC Information Services, earning reports from BASF and Genuine Parts Company, Axalta’s investor conference and much, much more!

- An interesting deal turned up this past week. Los Angeles-based private equity fund Leonard Green & Partners has reportedly taken a “small minority stake” in Caliber Collision. Leonard Green, along with massive Texas-based private equity firm TPG, owns claims management software provider CCC. Caliber, of course, is owned by the private equity arm of Toronto-based public sector pension fund, OMERS. A Leonard Green partner, Jonathan Seiffer, has been appointed to the Caliber board. Seiffer also sits on the boards of Mister Car Wash Holdings, Motorsport Aftermarket Group and the Tire Rack. Another Leonard Green principal Jeffrey Suer is now reportedly, “actively involved” in Caliber. OMERS bought Caliber in 2013 from another Toronto-based private equity firm, Onex. CCC doesn’t operate in Canada, but it’s in very wide use in the US as an estimating platform. It will be very interesting to see what comes out of a tighter alignment between Caliber and CCC.

- BASF reported earnings this past week. While the company's performance improved over the year, the company realized a decrease in sales of 18 percent over the course of 2016. It should be noted that this is a decrease in the company’s total sales, and is not necessarily reflective of its automotive refinish division or related business.

“As the year progressed, we were able to increase BASF’s growth. Our sales volumes rose from quarter to quarter,” said Dr. Kurt Bock, Chairman of the Board of Executive Directors of BASF SE, at the annual press conference in Ludwigshafen, Germany. In the fourth quarter of 2016 sales increased by 7 percent percent to €14.8 billion compared with the same quarter of 2015, mainly due to higher volumes. Overall, net income rose, hitting €4.1 billion and exceeding the previous year’s level of €4.0 billion. Earnings per share increased from €4.34 to €4.42. The dividend proposed is €3.00 per share.

BASF’s share price was also up on the year, ending 2016 at €88.31, about 25 percent higher than at the end of the previous year. With dividends reinvested, the performance of BASF shares rose by 30 percent. The company's sales were affected by lower raw material prices, especially in the chemicals segment. Sales volumes remained stable overall. It was also reported that BASF is, “... exploring options for tapping Iran’s recently opened energy market, making it the latest in a long line of German firms looking to expand into the Islamic Republic. Chief Executive Kurt Bock said Friday that the company ... is currently examining business opportunities in Iran after being courted by Iranian authorities.”

- Axalta hosted a conference for investors in New York recently, a so-called “investor day” event. Companies hold these events as a way to get their story out to Wall Street fund managers. Company executives also rang the opening bell at the New York Stock Exchange to kick off the event. The presentation outlined the impressive numbers that define the company, but also offered an interesting look at the business case at Axalta.

The company was spun out of Dupont. The Carlyle Group purchased the business in 2013 and brought it public a year later. The Carlyle Group exited the company in 2016. Warren Buffett's Berkshire Hathaway is now the single largest shareholder, with 9.7 percent of outstanding stock. Today the company has more than 100,000 customers and 4,000 distributors. It has $4.1 billion in sales, 46 manufacturing centres and 13,000 employees across 150 countries. The company's core business of providing refinishing products to collision repair centres still represents the single largest market for Axalta (41 percent of the business) but the company has also expanded into other end markets and completed six acquisitions last year. It's paying down debt and enjoyed ratings upgrades from bond rating firms, S&P and Moody’s. Axalta has also lowered its income tax rates through, “key structural initiatives.” The presentation also notes that the company's products have been used to paint “28 million OEM vehicles.”

As well, “Refinishing, which accounts for about 40 percent of revenue, is expected to grow in the next year, a beneficiary of the more than 1.2 billion vehicles on the road, globally.” Shares in the company currently trade at about ten times earnings, which is lower than peers like PPG (which trades at 11 times earnings).

- All of the major paint manufacturers seem to be enjoying solid market support of late. In the weeks since PPG reported its latest financial earnings, shares are up by about 5 percent, according to a media report. That performance beats the overall market. PPG Industries reported adjusted earnings of $1.19 per share for the fourth quarter of 2016, up 1.6 percent from the year-ago figures of $1.16. PPG has a 20-year agreement with the Pittsburgh Penguins to put its name on what is now called PPG Paints Arena. But it announced last week that it is expanding that marketing program by becoming the “official paint brand,” of the NHL. The deal will see PPG logos featured on the ice at some games. The brand name will also be displayed, “... on scoreboards, in programs and on dasher boards — the steel or aluminum boards that surround the rink,” according to a report. PPG will also be able to use the NHL “shield and logos” on paint packaging, in-store point-of-sale displays, social media and digital marketing. “The NHL has a very loyal fan base and we can engage them through coupons, contests and other promotions,” said Bryan Iams, PPG Vice President, Corporate and Government Affairs.

- Genuine Parts Company, the parent of NAPA, also announced earnings this week. Paul D. Donahue, CEO of Genuine, hosted a conference call. The company reported that total sales in the fourth quarter were up 2.7 percent to $3.78 billion, while net income was $152.5 million and earnings per share was $1.02 compared to $1.07 in the fourth quarter of 2015. For the year, total sales were $15.34 billion, which is up slightly from the year before. Net income came in at $687 million, while earnings per share were $4.59, down slightly from the $4.63 generated in 2015.

According to Donahue, “... there is no question the U.S. sales environment was challenging throughout the year, our international operations in Canada, Mexico and Australasia, outperformed the stronger, more positive results ... the slight increase in fourth quarter sales was driven by a stronger December ... Our commercial growth in the fourth quarter was driven by sales to our NAPA AutoCare Center customers, which grew to 17,200 members in 2016, an increase of nearly 500 members from 2015. This growth area was offset by slight sales declines to our major accounts and fleet customers, which experienced weaker demand patterns throughout most of 2016 ... We believe our DIY or retail sales growth in the fourth quarter was at least partially due to December's turn in the weather, which drove increased demand for cold weather parts, like batteries, starters, and heating and cooling products.”

Overall, according to Donahue, “The fundamental drivers for our business remain sound. The size of the vehicle fleet continues to grow. The average age of the fleet remains in excess of 11.5 years. Lower fuel prices remained favorable for the consumer, and miles driven continues to post substantial gains. He also noted that, “At NAPA Canada, sales held steady with low single-digit sales growth in the fourth quarter. This team performed fairly well, given the tough conditions in 2016, and we anticipate a more favorable overall sales environment in 2017. Similar to the U.S. and Australasia, the total vehicle fleet is growing due to the record new vehicle sales and gas prices remaining at historically low levels. These fundamentals bode well for NAPA Canada's continued growth prospects in 2017.”

The board of directors announced an increase in the cash dividend payable to an annual rate of $2.70 per share, up from a dividend of $2.63 per share last year. Remarkably, GPC has paid a cash dividend every year since going public in 1948, and 2017 marks the 61st consecutive year of increased dividends paid to shareholders. That's impressively consistent performance.

- Robert L. Wagman, CEO of LKQ, hosted a conference call this week as well. The company reported that for the full-year of 2016, revenue reached $8.58 billion, an increase of 19.3 percent, as compared to $7.19 billion for full year of 2015. Net income for full-year 2016 was $464 million, an increase of 9.6 percent, as compared to $423.2 million for 2015. Earnings per share for full-year 2016 was $1.50, an increase of 8.7 percent (compared to $1.38 for the same period of 2015).

Discussing the company's North American operations, Wagman noted that, the “... segment had organic revenue growth for parts and services of 3 percent during the fourth quarter, performance consistent with what we've witnessed throughout all of 2016 ... For full-year 2016, North America had organic revenue growth for parts and services of 2.9 percent, which is 40 basis points [4 percent] above the full year 2.5 percent collision and liability-related auto claims reported by CCC.”

This means that LKQ seemed to grow faster than the market as a whole. Wagman also said that, “It's important to note that when looking at our North America growth, there continued to be variations across the platform ... There were geographic differences with the Central and West regions continuing to perform much better than our Northeast and Midwest regions where we witnessed mild weather conditions ... In wholesale aftermarket, certain part types like our core Keystone fenders, hoods, bumpers, and lights grew faster than the overall North America growth rate, while paint and related products, cooling products and aluminum wheels experienced year-over-year declines. So, there were definite spots of strength and spots of weakness.”

Also interesting to note is that the company's “ongoing intelligent parts solution initiative with CCC” has seen the revenue and number of purchase orders processed through the CCC platform during 2016 grow 66 percent and 63 percent respectively year-over-year. On an annualized basis, the revenue from this initiative is now tracking over $47 million.

- Advance Auto Parts also announced its financial results this past week. Total sales for the fourth quarter increased 2.4 percent to $2.08 billion, as compared with total sales during the fourth quarter of 2015 of $2.03 billion. The sales increase was driven by the comparable store sales growth of 3.1 percent. However, Income was $125.6 million during the fourth quarter, a decrease of 20.3 percent versus the fourth quarter of fiscal 2015.

Related Market Notes

Embattled airbag maker Takata has had a rough year. Basically the only way that you wouldn’t have heard about their troubles is if you’ve been living in a cave, on the planet Mars, with your eyes shut and your fingers in your ears. Even then, you probably would have heard something by now about the largest recall in the history of the automotive industry. Now it seems the company is going to be sold off. According to a corporate press release, “... a third-party committee, entrusted to devise restructuring plans for the air-bag maker, has recommended Key Safety Systems Inc., a U.S. auto parts maker operated under a Chinese company, to be a sponsor to support Takata.”

The costs associated with the recall are, “... expected to mount to about ¥1 trillion, far exceeding Takata’s capacity to repay with its net assets — total assets minus debts — standing at only ¥124 billion as of the end of September,” according to a report. No wonder then that shares in Takata recently went “no bid” on the stock market. It is an extremely rare event that a company listed on a stock exchange would not find buyers for the stock. Even in the case of a bankruptcy, some traders will still pick up stocks for just pennies on the dollar in the hope they can get something out of a bankruptcy proceeding. But reflecting the unique nature of the Takata situation, shares have had no buyers for days at a time of late.

The Chinese company that may end up with Takata is KSS, an auto parts maker under the umbrella of Ningbo Joyson Electronic Corp. of China. It seems likely that members of Takata’s founding family, including Chairman and Chief Executive Officer Shigehisa Takada, would have to resign from managerial positions as part of the deal.


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