Thank you for joining AutoCanada's conference call to discuss financial results for the third quarter of 2024. I'm John, your moderator for today's call. Before we begin, I'd like to remind everyone that today's discussion may include forward-looking statements, which are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. I encourage you to review AutoCanada's filings on SEDAR+ for a discussion of these risks, the third-quarter news release, financial statements, and MD&A. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question at this time, please press *1 on your telephone keypad. If you'd like to withdraw your question, please press * followed by the number 2.
I'd like to remind everyone that this conference call is being recorded today, Wednesday, November 13, 2024. Now, I'd like to turn the call over to Mr. Paul Antony, Executive Chairman of AutoCanada, Inc. Please go ahead, Mr. Antony.
Thank you, Operator. Hello, everyone, and thank you for joining us. I want to begin by noting that today's call was pre-recorded, so while I won't be able to join for the live Q&A, our CFO, Sam Cochrane, will be able to, at the end, take your questions. During the third quarter of 2024, the Canadian automotive industry continued to experience the effects of softer market conditions. Affordability pressures driven by inflation, a softening labor market, and higher interest rates have impacted consumer preferences. We're seeing these dynamics reflected in lower gross profit per unit, as well as reduced demand for finance and insurance products, as consumers focus on more cost-effective personal transportation solutions. While recent rate cuts may offer some relief on affordability, we anticipate that the lingering impact of inflation will continue to shape consumer behavior in the near term.
As part of our response to these challenging conditions, we made progress in the strategic review of non-core assets that we launched at the beginning of the quarter. This review has led to several actions that will help us streamline operations and focus resources where they're most impactful. Key steps we've taken this quarter include the divestment of two Stellantis dealerships, allowing us to concentrate on core areas where we see the greatest strategic and financial potential. A restructuring of our RightRide operations, which involved closing seven unprofitable locations.
We've repositioned the remaining stores to operate with a lighter inventory model, focusing on providing tailored credit solutions for credit-challenged customers seeking used light vehicles. Tightened restrictions on discretionary spending and hiring across the company, ensuring that we're efficiently allocating resources. A pause on all acquisitions and capital return initiatives, allowing us to prioritize our transformation plan and ensure that every dollar we invest supports our key objectives, which are to enhance profitability, reduce leverage, and secure a foundation for sustainable growth. These initiatives, while initially modest in their financial impact, will contribute positively to our profitability as we continue refining and executing our transformation plan. As previously announced, we've partnered with Bain to help guide this process, and we expect to fully implement this roadmap during 2025. Subsequent to quarter end, we have formally launched our transformation with four pilot dealerships in Western Canada.
While it's early in the process, we expect to achieve at least CAD 100 million in run-rate OPEX savings exiting 2025. I want to emphasize that our review of non-core and unprofitable assets, which is a separate initiative from the Bain transformation project, remains ongoing. We are committed to making the necessary changes to position AutoCanada for long-term success. Before I turn the call over to Sam, I'd like to express my gratitude to our employees and OEM partners for their support and resilience as we continue to navigate this challenging period. Your commitment has been instrumental, and I look forward to seeing us build on this momentum together. With that, I'm going to hand the call over to Sam for his prepared remarks. Sam?
Thank you, Paul, and good evening, everyone. During the third quarter, we recorded total sales of CAD 1.6 billion, down 1.8% year over year, Adjusted EBITDA of CAD 53.2 million, down 20% from Q3 last year, and a diluted earnings per share of CAD 0.25. Our business performed as expected during the quarter, with adjusted EBITDA down due to a softening used vehicle market, industry-wide new GPU decline, and continued losses in the U.S. operations driven by structural issues. Canadian operations reported flat revenue at CAD 1.4 billion for Q3, with gross profit down 4.7% to CAD 240.7 million and Adjusted EBITDA down 5.6% to CAD 61.2 million. New vehicle sales grew 4.5%, while used sales fell 5.5% due to inventory challenges. New vehicle and F&I gross profit per unit dropped 20% and 2.1%, respectively, offsetting a 24.5% rise in collision and modest growth in parts and service.
Operating expenses as a percentage of gross profit increased 2.2%, but higher flooring costs contributed to the Canadian Adjusted EBITDA decline versus Q3 last year. Structural issues in our U.S. operations caused the third-quarter revenue to drop 13.2% year over year to $188.2 million, with gross profit down 35.4% to $24.3 million and an Adjusted EBITDA loss of $8 million versus a $1.9 million gain in Q3 2023. The decline was driven by lower new, used, and F&I GPU, which outweighed a 4.8% rise in parts and service gross profit. On September 27, we received an amendment to our senior credit facility that gives us additional covenant headroom for the period from September 30, 2024, through September 30, 2025. This covenant amendment gives us ample financial flexibility to execute our transformation plan with Bain next year.
As of September 30, 2024, we had CAD 184 million outstanding on our CAD 375 million revolving credit facility, with a total net funded debt-to-bank EBITDA covenant ratio of 4.53. As Paul highlighted in his opening remarks, our outlook is for the market conditions to remain somewhat challenging in the near term. While recent rate cuts may help somewhat with affordability, the Canadian consumer is still feeling the effect of inflation from the past few years. We anticipate that upcoming fourth-quarter sales and gross profit will reflect these dynamics, as well as the usual fourth-quarter seasonality. As we navigate these challenging business dynamics, we will remain highly focused on expense control and will continue to prioritize the strategic realignment of our business in partnership with Bain. Through disciplined execution, we aim to build resilience, reduce leverage, enhance profitability, and secure a foundation for sustainable growth. That concludes our prepared remarks.
At this time, I'd like to turn the call over to the Operator to open the line up for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press * followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press * followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from the line of David Ocampo from Cormark Securities. Your line is now open.
Thanks. Good evening, Sam.
Hey, David.
I just had a question, first question here, just on the pilot programs that you're running at four dealerships. Just curious what milestones you guys are looking for before rolling that out to the rest of the group, and just curious how long that pilot program's going to last for?
Yeah, good question, so, I mean, we're really looking for just the effectiveness of the architecture we're running as a pilot, so it's not like we're going to take a long period of time with it, but we're going to give it three, four months to be able to sort of see how the changes are impacting our bottom line, and we're also looking at those changes. We picked a sample of stores that kind of are representative of our whole, so I think it will give us a good idea going forward how to sort of tweak it before we kind of go with the whole dealership group.
Got it. And then I haven't seen the full MD&As, but I'm just going off the press release here. I did notice a reduction in OPEX this quarter as you guys paused some of the discretionary spending. Should we view that as a permanent reduction, or do those costs come back as you turn back on the discretionary spending at your respective dealerships?
Yeah, I think in the short term, those are going to stay on. So I think you're going to see those. And by the short term, I mean at least the next couple of quarters. So I think you can kind of work those into the model. Going forward, we will start to release those handbrakes as we see progress in the transformation and the project with Bain. So it's not like you're going to see a bunch of lumpiness in it. It still should be sort of down and to the right, but they aren't permanent in nature. No.
Gotcha, and then just a little ask for me here, that CAD 100 million that you guys alluded to in your prepared remarks, it is a big number. So maybe you could help us understand some of the areas where you're looking to trim costs. Just some examples around that would help.
Yeah, I mean, listen, right now with the handbrakes, it's just really heightened controls on hiring and on sort of T&E spend. And then we'll get the right balance as we release those going forward. On top of that, store archetype and stores, it's really what's the spans and layers, what is the right headcount, how many people should be per deal selling, how many people should be doing X, Y, and Z in the dealership, right? Lot attendants, detailers, right? All those sort of details, what is the model, and how does that model impact results? And that's sort of what we're doing in the pilot in the short term. And then there's other things like centralized procurement, centralized shared services.
So we might have 83 different contracts right now for a certain thing in each dealership, where we could have one contract with better payment terms, better sort of cheaper service because we're benefiting from the scale. So things like that, right? Hopefully, that gives you an idea.
Okay. That's helpful. I'll hop back into queue.
Okay. Thanks, David.
Your next question comes from the line of Luke Hannan from Canaccord Genuity. Your line is now open.
Hey, thanks. Good afternoon. I wanted to ask about what you're seeing right now in the market when it comes to a couple of interesting dynamics, one being the headwinds that you're seeing in GPUs, specifically used GPUs. Are you guys still relying heavily on the dealer channel when it comes to sourcing inventory, or are you seeing more consumers or more trade-ins, rather, from folks? And then separately, can you remind us, what exactly is the difference between OEM and bank F&I products when it comes to a margin perspective? I mean, there was commentary in the press release that shifting towards OEM F&I products and away from bank products, lower margin, but can you just give us an idea, order of magnitude, what that is?
Yeah, good question. So when OEM has an incentive rate, right, and we do the financing through that rate, we definitely do. We're able to make some profit off of that deal, but it's not as lucrative sort of as a dealer financing one where it's sort of one that we're sourcing. I don't know if we've ever given sort of the absolute magnitude, but I would say it's significant. It's much better to have it through our channels. So that answers that question. What was the first question again?
It was on what you're seeing in the used channel, specifically when it comes to are you sourcing more of your used vehicles from the dealer channel still, or from the auction channel, I should say, or are you seeing more folks trade in their vehicles?
Yeah, I wouldn't say the auction channel. It's definitely not even near the majority of what we're seeing. We are getting most of them from trade-ins and sort of other channels like that. I think the lumpiness you're seeing in the used GPU has a little bit of the provision that got set last quarter, and now that's been smoothed out as we kind of put that new policy in place. So I think there's some lumpiness in used, but how we're getting the inventory hasn't changed much, no.
Okay, got it. Thanks. And then maybe coming back to the CAD 100 million cost savings target that you have out there. I mean, David asked about the rough buckets of that, but can you give us a sense of, I mean, the order of timing there, roughly? I mean, I know that you've left it that you'll be able to hit that on a run-rate basis at some point in 2025, but I imagine there's certain costs that you're going to be able to take out much quickly than others, which may take more time, either vendor negotiations or it might be something else that's inhibiting that. Can you give us a sense of?
Yeah.
Yeah, what that looks like?
Yeah. So that's a good question. So just to take a step back, so in September, we deployed temporary handbrake cost-saving initiatives, which we've talked about, right, including tighter discretionary spending and hiring, additional rigor around general OPEX and sort of those kind of items, right? And they're just giving us better control while we kind of get the Bain project going at scale. And then we'll eventually start to release some of those handbrakes over time as we start to see some of that, which we've talked about. And the CAD 100 million goal to exit 2025, you're right, it's not like we reach that date and it's over. There'll still be other things that we're going to be doing past that date. Some vendor negotiations might take time beyond that. So it's not like we're all of a sudden 2026, declare victory.
We're going to keep this culture going into 2026, and we'll continue to push for more savings and sort of actually benefit from our scale. And I think that's really what the Bain project is, is how can we better benefit from our scale because we are quite large in terms of a Canadian dealership group, and we just have to do a better job benefiting from that. And then as far as timing in 2025, the first question I got there, we have a pilot in four stores. We're going to look at that over Q1 and really start to make decisions based on those results. It's really early still, but what are we going to be looking for? Bottom line, impact, morale, CSI, how our customers feel.
We're going to be looking at all these things as we sort of tweak from the pilots and learn from the pilots and then sort of roll that out across our dealership group. Does that make sense? So that's sort of the order of operations. And then, by the way, we can walk and chew gum. So while we're doing the pilots, we're also going to be looking at how do we benefit more from shared services, how do we benefit more from centralized procurement on stuff like electronic key vendors or parts, right? So it's really just getting that going.
Okay, thanks. My last question here, and then I'll pass the line. What is it about those four stores where you have the pilot programs in place right now that, in your view, make them representative of the rest of the network? In other words, what gives you the confidence that whatever you're seeing in those four stores is going to be applicable for the rest of your operations where you're going to apply those principles?
Yeah. Yeah, it's a good question. I mean, whenever you're taking a sample, we just went, the U.S. just went through an election cycle, and B.C. did as well. When you're doing polling or taking samples, it's never perfect, but you just try to get a representation, right, of size, of brands. You try to get a different flavor. So when you're doing the pilot, you're not picking four very similar stores. So that's the point I was trying to get across, is we were just trying to pick the best we could, a representative sample of our stores to sort of learn the best we can before we kind of roll this out.
Okay, thanks.
As a reminder, if you have any questions, please press * on your telephone keypad. Your next question comes from the line of Krista Friesen from CIBC. Your line is now open.
Hi, thanks for taking my question. I was wondering if you could.
Yeah, no problem.
Just provide some commentary on how we've heard from the OEMs that they're looking at keeping inventory a lot tighter this go around, and if you're starting to see that and how that might be impacting your business?
Yeah, I mean, you see our new day supply up to 96 this quarter. It's actually down a little bit sequentially, quarter over quarter. And that's sort of what you're seeing there. We're also seeing incentives from OEMs, finally in Canada, which has sort of led to a decent October. So we're actually starting to see some traction on incentives across the board from most volume manufacturers. So it's really good to see. And yeah, there's been some tightness there. I think over time, where do we want to be on inventory on new? Does 90 make sense, right? So we're maybe a little bit higher than that. So a little bit of tightness in bringing our new in line.
Considering supply and the old chip shortage of the past is sort of behind us, having that more, for lack of a better term, just-in-time inventory is okay with us, especially with those incentives to sort of start moving sort of older cars.
Okay, that makes sense. And then I appreciate that you guys made some good progress on the asset sales during the quarter. Can you just give us an update there on kind of what you're seeing in the market and maybe specifically in the U.S. for your U.S. assets and what the appetite is like there to dispose of some of these underperforming dealerships?
Yeah, no, thanks for the question. So the U.S. strategic review remains ongoing. There's really not much more I can say about this time, but for good brands and good flagships, there's good flagship value in there, so you're always going to get some interest. But really not going to dive too much more into that. But yeah, the two deals we did in Canada in the quarter, the two Stellantis ones, there's lots of interest for car dealerships, and so we were able to get a good deal there.
Okay, that's great. Maybe just one last one for me. If you can maybe comment kind of high level, what would you say the biggest differences are between Project Elevate that was kind of introduced around this time last year and Bain coming in with their suggestions? And it feels like you're able to make maybe more progress with Bain if you can just speak to the differences between plans there.
Sure. Now, I won't be an expert on the Elevate as I'm a bit new, but let me give my best shot at this, so Project Elevate, I believe, originally was a, it's a five-year plan, right? It's a lot more than just OPEX and has a lot of focus on other metrics, top-line metrics and other things that drive growth, and so it's complementary, and we're going to continue down that path. But we saw a need for, given where we're at as a business and where the macro is, we just saw a need for deleveraging, right, and so as part of that deleveraging, we're looking at these underperforming assets that we just talked about, and as another part of that, we really need to urgently just get our OPEX down.
And as you see, we announced the CAD 100 million of run-rate OPEX that's going to be exiting 2025. Now, I want to caution everyone. That's all going to happen January 1, so the impact of that CAD 100 million is going to be muted in 2025, but we'll get to enjoy the full impact of that in 2026. Does that give you an idea? Bain is super focused on OPEX only, and Elevate was sort of the whole kit and caboodle.
Yeah. No, that certainly makes sense, and I'll jump back in the queue. Thank you.
Once again, if you have any questions, please press * on your telephone keypad. Your next question comes from the line of Maxim Sytchev from National Bank Financial. Your line is now open.
Hi, good evening.
Hello.
Hi. A couple of questions, if I may. The first one, can you provide any color in relation to the costs to achieve these synergies of CAD 100 million? Because I mean, I presume investments in systems, things like that, any color on that would be helpful. Thanks.
Yeah, there's going to be some costs associated with potentially some technology. Obviously, there's going to be costs related around severance and legal fees and other kinds of fees related to sort of getting the cost out of the business. Maybe there's some contracts we have to get out of, these kinds of things. So these are the kinds of costs we expect. And then there's obviously the fee to Bain, which will be a material part of those costs. So those are some of the costs that are associated with getting CAD 100 million. Was that your question?
I mean, how big will the costs be overall so that investors can calculate the return on these investments?
Yeah, I get it. How big will it be? I mean, it's really early days. I've been through some of these things before. I think, for lack of a better guess right now, 30%-35% of the whole is usually around what I'd expect in jurisdictions in which we're doing this. So hopefully, that gives you sort of a rule of thumb, but I'm not going to really dig into the phasing of that at this point or anything like that. But we'll be back in the spring, and we'll provide definitely a deeper dive on this and look forward to that.
Okay, perfect. And then in terms of, do you think right now the inventory that you have on hand, does that properly reflect sort of the demand backdrop? I think a couple of quarters ago, not enough used cars were sort of at a lower price point. So are we properly kind of recalibrated right now across the business?
I mean, listen, I think our used mix could always be upgraded. I think customers have changed preference, and I think that affordability is still a big issue, and we're seeing sort of light truck, compact truck, compact cars being more in favor than luxury and sort of the larger trucks, but when all these trends go, they ebb and flow, so we're working, actually, on just sort of getting better at seeing around the corner, and another part of the Bain project is help setting inventory targets and sort of how we procure the inventory, so we're looking to get sharper there, but I wouldn't say our mix is totally off. I think we have a decent mix, and our inventory day supply there is about what it should be, maybe even a little light on the used side, so hopefully, that answers your question.
Yeah, no, I mean, it certainly feels better. And last question that I had was around working capital investment because when I look at, I think it was CAD 44 million drag in the Q. Can you just elaborate what was sort of the spectrum of that non-cash working capital swing? Because again, like the MD&A is not out yet.
Yeah, so on the working capital side, I mean, it ebbs and flows. I think we had CDK last quarter, and this quarter, it seems we're getting paid to us, so it's really, honestly, just a timing difference. I wouldn't read too much into it.
How should we think about Q4 then? Should we expect an unwind as we typically see this by year-end?
Yeah. Yeah, I would expect sort of normal seasonal unwinding, yeah.
Okay. Okay, that's great. That's it for me. Thank you so much.
There are no further questions at this time. I will now turn the call back to Samuel Cochrane for closing remarks. Please go ahead.
Yeah. Thank you, everyone, for joining the call, and have a great night. Appreciate everybody. Good night.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.