AutoCanada Inc. (TSX: ACQ), a prominent player in the automotive retail sector, has disclosed its third-quarter financial results, revealing a year-over-year sales decline of 1.8% to $1.6 billion, and a 20% decrease in adjusted EBITDA to $53.2 million.
The Canadian market remained flat, while U.S. revenue saw a 13.2% drop. In response to a challenging economic environment, the company is pursuing a $100 million cost-saving initiative, with pilot programs already underway. The earnings call, led by CFO Sam Cochrane, touched on inventory management, strategic divestitures, and operational efficiency measures.
Key Takeaways
- AutoCanada's Q3 sales fell to $1.6 billion, a 1.8% decrease, with a 20% drop in adjusted EBITDA.
- Canadian operations maintained flat revenue at $1.4 billion, while U.S. operations faced a 13.2% decline.
- The company is targeting $100 million in cost savings by 2025, with pilot programs in place.
- Challenges persist in the market, but recent interest rate cuts may offer some relief.
- Inventory strategy adjustments are in progress, focusing on consumer demand for smaller vehicles.
- Costs to achieve the savings target could be 30% to 35% of the total, involving technology and severance expenses.
Company Outlook
- AutoCanada plans to continue its transformation efforts, despite anticipating ongoing market challenges.
- The company has paused acquisitions to prioritize operational efficiency and cost-saving strategies.
Bearish Highlights
- The automotive industry is facing headwinds from inflation, a softening labor market, and higher interest rates.
- Decreased demand for vehicles and finance products has impacted the company's financial performance.
Bullish Highlights
- AutoCanada is strategically divesting underperforming assets and restructuring operations for improved financial health.
- Interest rate cuts could potentially ease some market pressures, providing a more favorable environment moving forward.
Misses
- The company experienced a revenue decrease in both Canadian and U.S. markets, with the latter facing a more significant drop.
Q&A Highlights
- Cochrane confirmed stable used vehicle sourcing through trade-ins and a strategic shift towards OEM financing products.
- Operational expense savings are expected from initiatives such as tighter discretionary spending and vendor negotiations.
- A strategic review of U.S. assets is underway, aligning inventory levels with consumer demand trends.
In summary, AutoCanada is navigating a period of economic uncertainty with strategic initiatives aimed at streamlining operations and achieving significant cost savings. While the overall industry outlook remains cautious, the company's proactive measures and focus on operational efficiency may position it for recovery as market conditions evolve.
Full transcript - None (AOCIF) Q3 2024:
Operator: 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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. 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 conference call over to Mr. Paul Antony, Executive Chairman of AutoCanada, Inc. Please go ahead, Mr. Antony.
Paul Antony: Thank you, operator. Hello everyone and thank you for joining us. I want to begin by noting that today's call was prerecorded. So, while I won't be able to join for the live Q&A, our CFO, Sam Cochrane, will be able at the end to 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 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 (NYSE:STLA) dealership allowing us to concentrate on core areas where we see the greater 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 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 $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?
Sam Cochrane: Thank you, Paul and good evening everyone. During the third quarter, we recorded total sales of $1.6 billion, down 1.8% year-over-year. Adjusted EBITDA of $53.2 million, down 20% from Q3 last year and a diluted earnings per share of $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 $1.4 billion for Q3, with gross profit down 4.7% to $240.7 million and adjusted EBITDA down 5.6% to $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 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 27th, we received an amendment to our senior credit facility that gives us additional comfort headroom for the period from September 30th, 2024 to September 30th, 2025. This covenant amendment gives us ample financial flexibility to execute our transformation plan with Bain next year. As of September 30th, 2024, we had $184 million outstanding on our $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 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 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 we'll 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.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of David Ocampo from Cormark Securities. Your line is now open.
David Ocampo: Thanks. Good evening Sam.
Sam Cochrane: Hey David.
David Ocampo: 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 I'm just curious how long that pilot program is and what is it for?
Sam Cochrane: Yes. Good question. So, I mean, we're really looking for just the effectiveness of the -- 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 like 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.
David Ocampo: Got it. And then I haven't seen the full MD&A, but I'm scrolling up the press release here. I did notice the 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?
Sam Cochrane: Yes, 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 hand breaks 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 into the right, but they aren't permanent in nature. No.
David Ocampo: Got you. And then just last one for me here, about $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 at term cost? Just some examples around that would help.
Sam Cochrane: Yes, I mean, listen, it's -- right now, with the hand brakes, 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 architype in 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 law tenants 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 a cheaper service because we're benefiting from the scale. So, things like that, right? Hopefully, that gives you an idea.
David Ocampo: Okay, that's helpful. I'll hop back in the queue.
Sam Cochrane: Okay. Thanks David.
Operator: Your next question comes from the line of Luke Hannan from Canaccord Genuity. Your line is now open.
Luke Hannan: 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 GPU, specifically, used GPUs, like 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 like what exactly is the difference between OEM and bank F&I products when it comes to a margin perspective? I mean there was a 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 of order of magnitude what that is?
Sam Cochrane: Yes, good question. So, when OEM has like an incentive rate, right, and 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 a sort of as a dealer financing, one we're -- 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?
Luke Hannan: It was on the -- 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 from the auction channel, I should say? Or are you seeing more folks trade in their vehicles?
Sam Cochrane: Yes, I wouldn't say the auction channel is definitely not the -- not even near the majority of what we're seeing. We are getting most of the from trade-ins and sort of other channels like that. I think the lumpiness you're seeing in the used GPU is a little bit there 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.
Luke Hannan: Got it. Thanks. And then maybe coming back to the $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 and you would 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 what that looks like?
Sam Cochrane: Yes. So, it's a good question. So, just to take a step back. So, in September, we deployed temporary hand break cost saving initiatives, which we 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 hand breaks over time as we start to see some of that, which we've talked about. And the $100 million goal to exit 2025. You're right, it's not like we reached that date and it's over. There'll still be other things that we're going to be doing past that date, like 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 and 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 to what 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.
Luke Hannan: 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?
Sam Cochrane: Yes. Yes, it's a good question. I mean, whenever you're taking a sample, we just -- the U.S. went to an election cycle and empty [ph] seated did as well. We were doing poll or taking samples, it's never perfect. But you just try to get a representation, right 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 you were just trying to take the best we could and representative sample of our stores to sort of learn the best we can before we kind of roll this out.
Luke Hannan: Thanks.
Operator: [Operator Instructions] Your next question comes from the line of Krista Friesen from CIBC (TSX:CM). Your line is now open.
Krista Friesen: Thanks for taking my questions.
Sam Cochrane: Yes, no problem.
Krista Friesen: Can you 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?
Sam Cochrane: Yes, 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. And 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 drag on incentives across the board from most volume manufacturers. So, it's really good to see. And yes, there's been some tightness there. I think over time, where we want to be on inventory on new, does the 90 makes sense, right? So, we're maybe a little bit higher than that. It's 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.
Krista Friesen: 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 the focus of some of these underperforming dealerships?
Sam Cochrane: Yes, I don’t think. Thanks for the question. So, the U.S. strategic review remains ongoing. There's really not more I can say about at this time. But for good brands and good flagship. 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 yes, 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.
Krista Friesen: 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 the 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 at Bain, if you can speak to the differences between plans there?
Sam Cochrane: Sure. Now I won't be an expert on the Elevate as a little bit new, but let me give my best shot at this. So, Project Elevate, I believe, originally was -- 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 are driving 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 $100 million of run rate OpEx that's going to be exiting 2025. Now, I will caution everyone, that's all going to happen Jan. 1. So, the impact of that $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 like Bain is super-focused on OpEx only and Elevate what sort of the whole kitchen was brutal.
Krista Friesen: Yes. No, that certainly makes sense. And I turn back in the queue. Thank you.
Operator: [Operator Instructions] Your next question comes from the line of Maxim Sytchev from National Bank Financial. Your line is now open.
Maxim Sytchev: Hi, good evening.
Sam Cochrane: Hello.
Maxim Sytchev: Hi. A couple of questions, if I may. The first one, can you provide any color in relation to the cost to achieve these synergies of $100 million because I mean I presume investments in systems, things like that, like any color on that would be helpful. Thanks.
Sam Cochrane: Yes. 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 fees related to sort of getting the cost out of the business. So, maybe there's some contracts you have to get out of these kind of things. So, these are the kind of costs we expect. And then there's obviously the fee of bank, which will be a material part of those costs. So, those are some of the costs that are associated with getting the $100 million. Was that your question?
Maxim Sytchev: No. Well, I mean, how big will the costs be overall so that investors can calculate the return on reason?
Sam Cochrane: Yes, again, like how big will it be? I mean it's really early days, been through some of these things before. I think, for lack of a better guess right now, 30% to 35% of the whole is usually around what I'd expect in jurisdictions in which we're doing this. So, hopefully, that gives you a sort of a rule of thumb, but 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.
Maxim Sytchev: Okay, perfect. And then in terms of -- do you think right now the inventories that you have on hand, does that properly reflect sort of the demand backdrop, I think, a couple of quarters ago, not enough used car were sort of at a lower price point. So, I would probably kind of be calibrated right now across the business?
Sam Cochrane: 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 we know these trends goes, they ebb and flow. So, we're going to -- we're working actually on just sort of getting better at seen around the corner and another part of the Bain project is to help setting inventory targets and sort of how we cure those the inventories. 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 days' supply there is about what it should be, maybe even a little light on the used side. So, hopefully, that answers your question.
Maxim Sytchev: Yes. No, I mean, it certainly feels better. And the last question that I had was around working capital investment because when I look at -- I think it was $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 full MD&A is not out yet?
Sam Cochrane: Yes. So on the working capital side, I mean, -- it ebbs and flows. I think we had CDK last quarter. And this quarter, it seems paid and getting paid to us. So, it's really honestly just a timing difference. I wouldn't read too much into it.
Maxim Sytchev: And so -- and how should we think about Q4 then? Like should we expect an unwind as we typically see this by year end?
Sam Cochrane: Yes, I would expect a sort of normal seasonal unwinding, yes.
Maxim Sytchev: Okay. Okay. That's great, that's it for me. Thank you so much.
Operator: There are no further questions at this time. I will now turn the call back to Samuel Cochrane for closing remarks. Please go ahead.
Sam Cochrane: Yes. Thank you, everyone, for joining the call and have a great night. Appreciate everybody. Good night.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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