AutoCanada Inc
TSX:ACQ
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AutoCanada Inc
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Good morning. My name is Anidra, and I will be your conference operator for today. At this time, I'd like to welcome everyone to the AutoCanada First Quarter 2021 Earnings Call. [Operator Instructions] I would like to remind everyone that certain statements in this presentation and our call are forward-looking in nature, including, among other things, future performance and the implementation of the Go Forward plan. These include statements involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ material from those expressed in the forward-looking statements. AutoCanada does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligations to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information about possible risks, please refer to our AIF, which is available on SEDAR and our website within Investment Documentation and Filings section. I would now like to turn the call over to Mike Borys, Chief Financial Officer. Please go ahead.
Thank you, Anidra. Good morning, everyone, and thank you for joining us on today's first quarter results conference call. For today's call, I'm joined by Paul Antony, our Executive Chair; Michael Rawluk, President of our Canadian Operation; Peter Hong, our Chief Strategy Officer; Casey Charleson, our Vice President of Finance; and Kevin McPherson, our Director of Finance. We released our Q1 results after the market closed yesterday. A copy of our results is available for download on our website. For today's call, we will be discussing the current state of the business, discussing the financial results and providing an update on both our Canadian and U.S. segments. With that, I'd like to turn it over to Paul.
Thanks, Mike, and good morning, everyone. Before I begin, I'd like to thank our employees and partners who continue to perform at a high level and support us through the challenges of the ongoing pandemic. We're thrilled to report another record-setting quarter. It's powered by the team's unrelenting drive, laser focused on execution. Our operations delivered first quarter records across almost every key metric. Starting with revenue, where we recorded an all-time record first quarter revenue of $969.8 million through adjusted EBITDA of $47.2 million or $36.1 million on a pre-IFRS 16 basis, which was 723% better as compared to Q1 2020. This was a tremendous performance from top to bottom. Our team extended its streak by outperforming the market in Canada for the ninth consecutive quarter. And that's our primary measure for gauging performance, which provided continued validation of the value of the AutoCanada platform that we've built. Last quarter, we discussed key structural advantages that we expect to benefit from. These advantages played a significant role in our performance this quarter. First, digital. Over the last year, we have formed online sales departments at each dealership. These departments are responsible for taking online customers through the entire sales transaction, providing continuity regardless of whether the customer transacts completely online or comes into the dealership. During Q1, nearly 1 out of every 3 retail vehicles sold at AutoCanada dealerships transacted solely through our online sales departments. While our competitors may strive to provide similar experiences, we believe the consistency of our service across dealerships remains unmatched in the marketplace. This is just the beginning, and we'll continue to further develop our omnichannel experience over the coming quarters. Two, scale. From our ability to hire and attract top-tier talented dealerships to supporting and training our dealers, with best practices that have been refined across 49 dealerships and almost every province, we continue to see the benefits of being Canada's only centralized dealership platform of scale. Three, diversification. This quarter highlighted the benefits of our commitment to supporting the entire customer life cycle. Each component of the AutoCanada engine was in motion and played a significant role, from used vehicle sales to RightRide, F&I, parts, service and collision. All of our initiatives are showing traction and are on track for continued growth. Four, balance sheet. The depth of our balance sheet and access to capital enabled us to bulk up on inventory during the winter and continue purchasing vehicles as we prepared for a potential new and used vehicle shortage. Five, data. As we purchase vehicles in the winter, our in-house data science team provided critical analytics and metrics to optimize our inventory distribution. Acquiring inventory was simply step 1 of our process. Utilizing data to determine where inventory should go, whether by dealership, brand or by province, enabled us to maximize our profit potential on each unit. Lastly, through our presence in all provinces of Canada, we have developed an intimate knowledge of the nuances and rules and regulations across the country, enabling us to optimize our approach as required. We'll continue to revisit these themes during the call and in the quarters to come. But for now, we're very pleased with our performance this quarter. We're not here to spike the football. We've already turned our attention towards capitalizing on this positive momentum and consolidating our outperformance in a way that carries us through this year and beyond. The strength of our operating platform and balance sheet has enabled us to continue to develop organically as well as to focus on an acquisition and innovation strategy. Given our strong business position and available market opportunities, we see significant opportunities to grow as an industry consolidator in both the short-term and the long term. With the successful financing actions we recently completed through our credit facility amendment and the add-on debenture, which Mike will speak to shortly, we are primed to move forward on our business strategy. Our employees in Canada and the U.S. continue to work tirelessly and delivered excellent performance. Thank you so much. We have entered 2021 with very strong momentum and we remain well prepared to face any challenges in the current environment. I'll come back to speak more about the business model and strategy in my concluding remarks. But for now, I'll turn it over to Mike.
Thanks, Paul, and good morning, again, to everyone on the call. I'll take some time here to speak to the recent work completed to better position our balance sheet for our acquisition pipeline. Effective April 14, we amended and extended our credit facility for 3 years to 2024. It will always be our intent to maintain a 3-year tenor to our credit facility. The amended credit facility increases our revolver from $175 million to $225 million, and takes our floor plan financing facility up to $1.06 billion from $750 million previously. Including a wholesale leasing facility of $15 million, the aggregate of our bank facilities is $1.3 billion, up from $950 million previously. Given the progress that we are making on Project 50 and used vehicle sales, one of the key changes made in our facility is the ability to take our use line up to 40% of the floor plan facility, essentially doubling our previous used capacity. Concurrent with credit facility amendment and extension, we launched and closed on an add-on offering to our existing 8.75% senior unsecured notes due 2025. Initially launched at $100 million against the backlog of strong demand and being oversubscribed by 3x, we were able to upsize the offering to $125 million at a yield towards a rate of 5.595%. A darn good improvement from the initial offering in February 2020. With the premium to par, the offering netted as proceeds of $133.4 million before fees. On the same-day as the launch of the offering add on, S&P had issued its own research report announcing a 1 notch upgrade to our corporate issuer rate from B- to single B with a stable outlook, and a 2 notch upgrade on our instrument rating from CCC minus to a single B. The S&P upgrade, add on offering and revolver upsizing of $50 million, all contributed to activating our dry powder of just over $250 million and allowing us to move forward on our acquisition pipeline of well in excess of $150 million. Given the deals we currently have in the pipeline, we do not foresee our debt leverage extending outside of our target debt leverage over the next 18 months. At the end of this first quarter of 2021, our debt leverage improved to 0.7x as compared to 3.2x in the prior year and as compared to 6.6x at the end of the first quarter in 2019. Our lease-adjusted net debt leverage was 3.0x at the end of the first quarter as compared to 6.1x at the end of the first quarter in 2020. Trailing 12-month free cash flow of $145 million compares to $105 million in the prior year. We enjoyed our seventh straight quarter of positive free cash flow with Q1 2021. One highlight I will speak to here before turning this over to Casey. With the ongoing success of our completeness model driving stability and resiliency of our profitability and cash flows, we have, now with our strong Q1 results, moved our pre-IFRS 16 adjusted EBITDA on a TTM basis to $111.5 million. Our pre-IFRS 16 adjusted EBITDA margin improves to 3.1% from 1.5% in the prior year on a TTM basis. I have to end my piece here as I have since the end of the first quarter of 2020. We cannot know what the future holds for us with COVID-19. And now this third wave seemingly in a race against time with vaccinations. But with the actions we've taken to strengthen the business and the balance sheet, we are well positioned to weather any outcomes. With that, I'll turn it over to Casey to discuss our results. Casey Charleson joined us in mid-March as VP Finance to further strengthen and add depth to the broader finance organization as we enter a period of growth. Casey knows AutoCanada well, previously having worked with PwC as a Director in the Assurance Group and on our file for a number of years before moving on into private industry. Casey, over to you.
Thanks, Mike. At the consolidated level, revenue came in at $969.8 million, an increase of $261 million or 36.8%. Gross profit came at $167.6 million, an increase of $50.3 million or 42.9%. Adjusted EBITDA came in at $47.2 million, which was an increase of $41.5 million or 723% over Q1 2020. In our Canadian operations, total retail vehicles sold came in at 15,685, an increase of 4,730 units or 43.2%. The Canadian operations generated revenue of $863.8 million, an increase of 37.9% versus the prior year. Gross profit was $152.2 million an increase of 43.4%. Adjusted EBITDA was $43.2 million, an increase of $34.5 million. Normalizing for COVID-related items, including Q's income of $2.9 million and a rent subsidy of $0.2 million, normalized adjusted EBITDA was $40.1 million, an increase of $31.4 million. On a pre-IFRS 16 basis, Canada's normalized adjusted EBITDA was $30.1 million or 3.5% of revenue. Other key highlights include the following: same-store gross profit increased by $37.8 million or 35%, and our gross profit percentage increased to 18.4% from 17.5%. Same-store used to new retail units ratio increased to 1.19 in the quarter from 1.08. Same-store F&I gross profit per retail unit increased to 3,085, up 15.5% or $413 per unit. Same-store F&I gross profit dollars increased $17 million or 58.2%. In our U.S. operations, revenue was $106 million, an increase from Q1 2020 of 29%. Gross profit was $15.5 million, an increase of 38.5%. Adjusted EBITDA was $4 million, an increase of $7 million from 2020. Normalizing for the forgiveness of $5.4 million of Paycheck Protection Program loans received, normalized adjusted EBITDA was negative $1.4 million, an increase of $1.6 million. New vehicle gross profit increased by $2.2 million and new vehicle gross profit percentage increased by 4 percentage points to 4.3%. Used vehicle revenue increased by 33.7% and used vehicle gross profit increased by 88.9%. Used vehicle gross profit percentage increased by 1.7 percentage points. The number of used retail vehicles sold increased by 23.2% to 897 units. I'll now turn the call over to Michael Rawluk to discuss our Canadian operations.
Thank you to everyone for taking the time to join us today. We had a fantastic first quarter. There's no other way to put it. Every aspect of the business performed. And while we are tremendously proud of these results, we are more proud of how we got here. Thank you to our entire team across Canada for outperforming the Canadian market for the ninth consecutive quarter. We also want to extend a special thanks to our OEMs and strategic partners who continue to work alongside of us. Our performance in Q1 was not an accident and it was not an anomaly. It was strategically mapped in the Go Forward Plan, assembled in the AutoCanada playbook, and executed by our team leaders and realized through an intense focus on excellence in running our 10-day operational sprints. An important milestone in the Go Forward Plan was achieving a normalized pre-IFRS 16 adjusted EBITDA margin of 3.5%, and we are pleased to report that we have attained this number in the most difficult quarter of the year. Expense ratios are under control and margins are strong across the business. For the ninth consecutive quarter, we outperformed the Canadian market with our same-store new retail unit sales increasing by almost 30% compared to the market increase of 15.2%. This performance was due in part to our dedicated online sales departments that were created in every dealership to serve the consumers shift to digital and remote purchasing. These teams are supported by our centralized digital marketing department, Internet lead specialists and trainers from head office. In Q1, we exceeded our project safety goal by selling an average of 56 used vehicles a month per dealership. In addition, we're excited to report that Project 50 was achieved on an annual basis by selling an average of 50 used vehicles a month per dealership over the last 12 months. In our finance and insurance business, we are proud to report that our same-store gross profit per retail unit increased to $3,085, up 15.5% or $413 per unit. This level of performance solidifies our global leadership in this area and sets a new benchmark for the industry. Each of the ancillary businesses, including RightRide, our special finance division, wholesale export and collision are all making strong contributions to the bottom line and growing exponentially. We are not even close to being done here and are excited by the belief that there's so much capacity for more. While our fast-paced industry does not allow us much time for reflection, it is clear that this exceptional performance is a result of rebuilding our business on the foundation of our 4 pillars: process, data, training and culture. These 4 pillars are the framework of the AutoCanada playbook, which were created to align our activities to our vision and to our strategy. The foundation is our 10-day sprints, which is a program focused on achieving short-term targets while recalibrating resources and direction with speed and agility. This playbook of our best practices provides a competitive advantage to our dealerships. A long-standing truism is that culture is everything, and the foundation of our culture is transparency in data. A meaningful portion of AutoCanada's progress results directly from operational analytics and, subsequently, each process in the playbook is supported by our world-class enterprise data warehouse, our business analysts and by our trainers. Transparency is promoted by equipping our managers and team members with real-time dashboards that promote optimal decisions. Human wisdom meticulously process mapped through cutting-edge methods, paired with machine learning and artificial intelligence, has taken us from knowing what is to predicting what will be to prescribing what should be. This intersection between data and operational execution provided AutoCanada with early insights into the current inventory supply issues faced by the industry.Early indicators from our system prompted us to increase our inventory levels in anticipation of this event. This is just one example of how our approach to data and analytics provides out AutoCanada with a competitive advantage. We're in the middle of peak selling season and remain steadfast in our processes, our culture and our team. Although we are operating with a high level of confidence, we are also aware of the risks on the horizon and are actively managing them. Inventory management has been a priority for us since October last year, and we continue to be laser-focused. It's important to highlight that the current supply/demand imbalance is not driven by the full recovery in the demand side, but rather a disruption in supply. According to the DesRosiers Automotive Consultants, new vehicle sales are down 8% compared to 2019, demonstrating that the market has not yet recovered to pre-pandemic levels. This is a good data point as it demonstrates that there is still potential for increased demand in the market. AutoCanada was up 3.2% in new vehicle sales compared to Q1 2019, which evidences that we are taking market share. At the end of April, we had 109 days' supply of new vehicles, not including our production pipeline. Although the supply chain issues have received a lot of headlines lately, we have been actively managing for this event since October of 2020. Throughout the winter, we stockpiled new vehicles by requesting additional production when it was available and purchasing declined allocation from our competitors when the market was uncertain and the supply chain issues were not fully apparent.Although we expect additional challenges in the months ahead, we are certainly in pull position when it comes to inventory. We entered May with 89 days' supply of used vehicles based on selling a minimum of 60 used vehicles per month per dealership. It's true that used vehicles are difficult to source right now, but we stockpiled massive amounts of used vehicles during the winter through a dedicated, centralized used vehicle buying strategy. This strategy has paid huge dividends, allowing us to enter the spring market with ample inventory, which also drives a high replenishment rate through vehicle trade-ins. We're already 5 weeks past these Q1 results, and we can confirm that our momentum continues. Since the launch of the Go Forward Plan in 2018, we have been disciplined in practicing our 10-day sprints with one goal, compete and win. Having recently completed our 100th operational sprint, we can say with confidence that we are a force. We are in-game shape, battle hard into the pandemic and focused on winning one 10-day sprint at a time.Over to you, Paul.
Thanks, Michael. When you think about the growth opportunities, we often reference 3 distinct phases: crawl, walk and run. Our Canadian operations have clearly entered the run phase and are primed to continue the momentum while aggressively pursuing growth opportunities. Our U.S. operations continue to make strides as well, having gone through a long crawl. We're now hitting our stride to enter the walk phase. On that note, during the first quarter, we're pleased to welcome Jim Douvas as Vice President of U.S. operations. Jim brings over 20 years' experience in retail automotive in the Chicago area. With a strong record of helping dealerships take their next step forward. Jim takes the reins from Tammy and brings a growth-oriented mindset, which will help carry us through the walk phase and into the run phase. Although Jim only joined the team 6 weeks ago, his efforts have already delivered tangible improvements within our dealerships and have resulted in an evolutionary shift in operational culture from cost management to accelerated growth.With an increased focus on used vehicles in F&I, Jim is following many of the same plays that have made us successful in Canada. Overall, I look forward to the group's performance in the coming months under Jim's leadership. While we're incredibly proud of the quarter and our achievements to date, as I mentioned earlier, we're not here to spike the football. We have a battle tested team that continues to keep its head down executing as we head into the summer months.Our performance reflects the fundamental strength of our business model and our operational playbook allows us to be ready to execute on our next leg of growth and acquisition strategies. We remain extremely active in the buy/sell market, turning over every rock and exploring every opportunity while maintaining discipline in our valuation methodologies and approach to transactions as valuations have not yet fully reconciled with the realities of the industry. That said, our playbook allows us to overlay several growth vectors on to acquire dealerships, most not available to other dealers or dealer groups, of which successful execution on just a couple of those growth vectors can ensure we meet our internal hurdle requirements. Despite the challenging backdrop, we continue to look aggressively at acquisition targets that are -- and are currently engaged with multiple targets in connection with potential acquisitions well in excess of $150 million in transaction value. We're assessing this extensive pipeline of acquisition opportunities, qualitatively and quantitatively, with the goal of diversifying by geography and brand in addition to expanding our network of used dealerships and collision centers. The majority of the pipeline is represented by franchise dealerships located in Ontario, Canada. And includes a mix of OEM brands that we currently operate, and importantly, brands that we do not currently operate. We anticipate being beginning to close on deals in Q2 of '21, extending into Q3, while also continuing to develop our acquisition pipeline as we move forward beyond these initial acquisition opportunities. With a significantly strengthened financial position, we are well positioned to take advantage of the acquisition opportunities while maintaining our strong balance sheet and financial flexibility. As I mentioned last quarter, I also believe the strong reputation AutoCanada has now built over the last 2 years has made us an acquirer of choice in looking at acquisitions. As long as we remain within our target internal operating and capital allocation metrics, we're willing to work with vendors to achieve a deal that makes sense. As we've said before, we continue to be proactive and vigilant as to what the future holds with any ongoing impact from COVID-19. That said, we believe we have stabilized the fundamentals of our business while identifying and developing several growth vectors, new cars aside, including F&I, parts and service, collision repair, near prime, subprime and used only retail. Our team has been mobilized to approach each one of these growth opportunities with the same intensity and vigor with which we rebuilt this company. These are truly exciting times for AutoCanada, and we're poised to take advantage of the disruption and consolidation in the industry and blaze a new path forward in the evolution of the company. Now I'm going to turn it over to the operator for any questions.
[Operator Instructions] Our first question comes from the line of Chris Murray with ATB Capital Markets.
Just going back to the operating performance in the quarter. I'll say this, the gross profit percentages and even the operating costs were pretty high for Q1. Just can you talk a little bit about your expectations on sustainability. Is there anything I know in that mix that would be skewing those upwards? Or is that really where the new baseline should be going forward? There's been a couple of quarters now in a row where certainly, the numbers have moved up, but it's just -- I want to be careful about saying, too good to be true, but just worried about if there's any normalization coming?
Mike, do you want to take that? Or Michael?
Yes, I can handle that. So if you look at the Go Forward Plan originally, we set targets for each of the main margin and operating expense. And we're at our target sort of but it's not too good to be true, it's actually we're not quite there where we originally set out to be. So if you compare -- I'll break it down just a little bit, too. If you look at parts service and collision margin improvements, that's not the result of any pandemic or pent-up demand or anything. In fact, everybody will tell you, mobility is down 15% to 20% across the country. The demand side of it is actually a challenge. Those margin improvements were originally targeted in the Go Forward Plan. They were built into all of our KPIs. And COVID provided us an opportunity to really land the plane and work on everything and tear everything down to get to our goal at probably a little bit of a faster pace than we thought. If you go to F&I, those margins, again, they're not subject to supply and demand issues at all. That's selling finance and insurance business to people who have already bought cars. That's a function of data, performance, training, execution, organization, that type of thing, again, not subject to external demand and supplier environmental issues. Moving up a little bit. If you go to a retail GPU for used cars. Like it's where we target it to be. We're happy with those margins. If you look at our peer group, they're not out of line. The company is where it should be. And if you look at new, they're strong, but again, not out of line. And historically, kind of where we've been with continued improvement. So we're quite pleased with our margins. But again, we feel like we have more runway there. I don't know if that provides you enough. Well, and I do want to say one more thing, too, is that on our adjusted EBITDA margin, we've hit a milestone. Not to be confused with the destination. We have lots more to go with our EBITDA margin, and we're confident that we can get there.
No, that's helpful. And then my next question is -- and Paul, I don't know if you want to take this one, but not a lot of commentary around the used digital program or initiative right now. Any sort of update on kind of progress made in the quarter? And any sort of milestones we should be looking for as we move through the year?
Yes. Look, I think for the used digital and our used program in general, it's going to be a bit of a slow roll. This is something that we promised the Board and our shareholders that we were going to do -- I think I mentioned on the last call without blowing a hole in the side of the ship. So we don't have the luxury of -- well, we have the luxury, we don't want to waste it on that of just expensing this company to death. And so we're doing it in a slow and methodical way and building a proper foundation. And so with that in mind, I would say it's on track. We've got other deals in the pipeline. And we're continuing to move the ball forward. I can't really say much more than that other than our initial acquisition, which was held in the motors on its own did very well last quarter.
Okay. And maybe if I can just squeeze in one more. When you guys did the debt deal, you talked about $100 million in transaction value. Potentially available to you today, you're talking about $150 million. And it's not that long ago. I mean, that's a pretty sizable increase. Is there something that's changed in the marketplace that all of a sudden you're seeing more deals in the pipeline. And I guess as part of that, how are you feeling about your ability to transact at that volume?
We're very confident in our ability to transact to that volume. And frankly, we're seeing a ton of action. That said, prices aren't necessarily in line with what our expectations of the way pricing needs to be. And so we're turning down as many as we look at. We're looking at everything. I would say, with that, we're also really disciplined and thinking strategically about the business and building out a fulsome market for ourselves in geographies that we don't exist. And so when the opportunity arises and we feel it's core to our business vision, then we -- we're moving forward.
Our next question comes from the line of David Ocampo with Cormark Securities.
I just wanted to circle back on the M&A comments there that pricing isn't quite where you want it to be. Is that more of a function of irrational prices from the seller? Or is it because things are getting bid up by more competition for the acquisitions that you're looking at?
I don't think it's -- I don't think that it's competition. I think that people have -- either we have unrealistic expectations about what we ought to be paying for the business or people have unrealistic expectations with regard to asking price. And I think I've mentioned this before, but the reason the team is here today is because acquisitions weren't done in a diligent matter previous to us. And so we have no intention of making the same mistake. So we're being very, very cautious and strategic and willing to work with vendors. But I think the reality of -- we're in the middle of a pandemic. There's a shortage of vehicles. There's a bunch of knock-on effects as a result of the environment that we're in right now. And so being very cautious and prudent is, especially with so many opportunities out there. I think it's in the best interest of the company and our shareholders.
Great. And maybe just zeroing in here on RightRide. I think you're up to 7 stand-alone locations now, and that's from, I think, only one from the start of 2020. How should we think about growth in that part of the segment, capital requirements and the economics of the subprime market versus your traditional F&I business?
Michael?
Yes. So the way to think of RightRide as far as growth is the term exponential. We have 7 stand-alone. We have been building a platform since 2018, completely greenfielding that business, and spending a lot actually. It's kind of -- that's the dark horse in our business. Right now, that's going to drive a lot of future growth going forward. When you think about subprime, you have to think of it in terms of its everything except prime or super prime. So it's not just deep subprime as far as like 30% interest rates or different things like that. But the market is really focused on the subprime and the near prime, which is at 7%, 8% or just south of the prime business. And there's a lot of people in that category. It takes any consumers everywhere from new to Canada to people, millennials that are trying to buy a car with no credit, all the way to people that have poor credit. So it's a large and growing market. Estimates are, it's approximately 30% of all car buyers. And we have dedicated specialized teams and locations that are focused on serving that segment. And again, they're making strong contributions this year and just really starting to gain traction and growth. That's going to be a future story for sure now that it's become more visible. As far as the capital requirements go, it's nothing. These are all greenfield. We rent locations. We have teams. We floor plan inventory and then we go next to no working capital requirements.
Our next question comes from the line of Michael Doumet with Scotiabank.
So I'll start off with the U.S. business. Now that business showed an improvement versus last year, but it was still EBITDA negative on a normalized basis. I guess the question is, is this something we should expect going forward for Q1 given the size and the seasonality in the business? Or whether there's improvement there? And what we saw in the quarter were increased platform cost to initiate some of the successes in the -- seen in Canada?
So I would say in the U.S., we are where we are as a result of expense control, and that might have had a negative impact on our inventory in the United States as well. And when we look at our U.S. business, we see the same opportunity in the U.S., similar to what we're kind of gravitating towards Canada. And so I think I mentioned it in my call script, but it's now time to enter the walk phase. And so we've got a handle on expenses. We stopped the bleeding in that organization. And now for us, it's about growing the business. And so stocking the right amount of inventory, selling more vehicles, going after F&I, putting the right people in place with the right processes. And frankly, we're very bullish on the U.S.
Got it. And just, I guess, based on the comments. Paul, I mean, in terms of timing and when we should expect an improvement, I mean should we see 2021 in the U.S. is still somewhat of a transition period before kind of larger expectations into 2022?
So I would say that we have -- so pandemic aside, we have high expectations in the U.S. And since Jim's been there just over 6 weeks, our volumes are starting to go through the roof. We're becoming used car factory and really, really pushing volume as well as increasing margin, just F&I. There's a lot of things -- there's a lot of things leveling up in the U.S. And so I would have an expectation that the U.S. starts contributing in a meaningful way go-forward.
Okay. Great. And then on the Canadian operating leverage. Now the Q1 OpEx was higher than that of Q3 of last year despite the lower sales level. So I guess the higher-level question, I mean, are the costs catching up to activity levels? Or are you adding additional costs to support further growth? And again, it could be having to do with M&A platform cost, things of that. So just to sort of put it into context, please.
Yes. So if I heard the question right, and correct me if I'm wrong, but if you're comparing the Q1 OpEx ratio to Q3, that's an apples-to-oranges comparison because Q1 is historically always the highest OpEx ratio of the year because it's the lowest volume from a service and sales standpoint. And so we have -- we -- each unit of sales bears the higher burden of overhead cost per unit. But if you were to extrapolate our OpEx ratio for Q1, and you were to look at it seasonally and seasonally-adjusted, you're going to see that Q3 will be significantly lower.
Okay. No, that's helpful. And then I guess one last one. On the outperformance for the new vehicle sales versus the industry, and obviously quite massive. And you pointed out to the drivers there. And on previous calls, I think you've talked about how outperformance begets outperformance. But just to get your thoughts on whether or not you can secure enough inventory to continue to drive that outperformance? Again, maybe not similar to Q1 but sizably still.
Yes. We are -- yes, go ahead.
Michael, go ahead.
Yes. We're absolutely in full position when it comes to inventory. And we've been on the inventory issue since October of last year. And we have 109 day supply, not including our production pipeline. So we have complete visibility until August of this year without disruption. Yes, the waters will get a little bit choppy, but we're out front.
And I'll just add one thing, Michael. It's important for us, this is the metric that we use to measure ourselves with, like the absolute yardstick. And our view is as long as we're outperforming the market, regardless of inventory shortages or semiconductor issues or the foam for the seats, you name it. As long as we are outperforming the market, we can't do it, we can't do anymore. And so that is absolutely the metric that we use internally. And hopefully, that's The Street and investors use to measure us.
Our next question comes from the line of Luke Hannan with Canaccord Genuity.
You've touched on it a couple of times already on the call. I do want to come back to inventory for a second, specifically used inventory. You guys did a really good job of building that up over the past couple of quarters. I'm just curious -- and I imagine that stockpile leaves you pretty well positioned for the near-term here. But I'm just curious, what are you seeing now within the used car market? I would imagine prices for used cars are coming in higher and yet as was reflected this quarter, you guys also saw some sizable margin improvement when it came to you retailing those used cars. So just curious if those dynamics are still sort of holding true now?
So used car prices are still increasing on a week-over-week basis, and our volumes are still strong. And so as long as we -- and this is, to Michael's point, our team, using data to analyze and understand valuations on vehicles from trade-ins to purchasing from dealers that might be sitting with stale inventory. I mean, we are using data daily to really drive decisioning around our valuations and what to stock, where to stock it and so on. And so from our perspective, we're well positioned against the backdrop of the market.
Got it. Another one on -- just on the -- I guess, the -- I'll call it, the long-term margin potential, not necessarily including the online business. So just with your current footprint and assuming there's no sort of, I guess, further initiatives that you guys have in place. Michael called out that you hit the 3.5% adjusted EBITDA margins on a pre-IFRS 16 basis. I guess I'm just curious, and there's a lot of puts and takes, what's going on in the market. But if the business, as is to date, with the current platform that you have in place, what would be sort of your long-term adjusted EBITDA margin guidance on a post-IFRS 16 basis? I think in the past, you may have quoted 4%, is that still reasonable? Is there upside to that? Any thoughts there would be helpful.
I mean, first off, we're not providing guidance. Our Q1 performance was -- it was strong across the board, and it was our strongest Q1 in the company's history. I think that what's happening is that all elements of our complete business model is contributing to the outperformance. And we -- as I've said before, we expect to continue to outperform the market. And we're focused on continuing to improve our margins across all of our segments relative to the historical performance. We've been doing that. We still don't know when normalcy is going to return. And so we don't view the margin performance in Q1 as outside of what we think we're capable of delivering.
Okay. That's helpful. One last quick one for me. This one's for Mike. I saw you guys spend about $3 million in CapEx for the quarter. Historically, you've spent about $29 million per year. Is it fair to say that throughout the year, the balance of the year, maybe you'll catch up on some of your capital projects? Or how should we be thinking about that?
Yes, we shouldn't expect to move the number materially over the year. So it's very early into the year. So there's no real direction in terms of catching it up, we could come in below what the average has been over the last 2 to 3 years, so we can come in a little bit closer. We'll have better visibility to it as we move through the year.
Our next question comes from the line of Maggie MacDougall with Stifel.
So first question, not to beat a dead horse here, but I'm just interested in touching back on this whole margin discussion. So if I look back historically, Q1 is always the lowest margin quarter of the year. And from sort of 2015 to 2017, that would have been in and around sort of 2% to 2.5% pre-IFRS calculation and excluding onetime items. So considering what you've done in Q1 of this year and all the moving parts of the pandemic and the chip shortage and your inventory position and your own internal operational improvement, I believe what you said is that we should expect normal seasonality this year. But can you perhaps just confirm that and maybe discuss if we should be thinking about the cadence of margin sequentially from Q1, Q2, Q3, which are that middle part of the year is your strongest margin season? If that historical pattern should be expected to persist this year?
Michael?
Yes. So absolutely, the historical pattern will continue. Again, I just -- because we're cycling on margins, I'll join you in the cycle and say that we're -- we look at our margins every day, and we have targets that we set originally with the Go Forward Plan. And although the margins have improved dramatically, they are in line. And in a lot of cases, not even at where we think they should be and where original targets are. So we're on track for our targets. So we're not surprised by any of these margins. And I think if you look at high performers in the industry, that would confirm that these margins are not out of line of what a high-performing auto group is capable of doing.
The other question I had was just on, I guess, the state of the marketing competition. So there's been bunch of developments. We've seen the U.S. large peers being fairly acquisitive. There's always rumors that some -- so and so maybe coming into Canada and buying a dealer group here. There's also been prospective IPOs as ideas floated in the market. And then we've also seen Clutch raise some money for its online platform and continued growth. So I guess my question here is, a, what do you think about the prospect of a U.S. guy coming into Canada? B, do you think there's room in the Canadian capital markets for a second public dealer group? And then, C, how do you feel about, I guess, cost of capital and the ability to grow your digital footprint versus these e-commerce plays that are getting really high valuations?
Got it. So let me try and unpack that. With regards to the U.S. peers, I'd say if there's any U.S. peers approaching the market, we would welcome the competition. I'll say the market in Canada is far more nuanced than many of the states in the United States. For example, there's no significant franchise laws protecting the dealers with lobby groups like they do in the U.S. But I think it will also be a huge vote of confidence in our thesis that dealership consolidation in Canada provides a lot of opportunity when you perform at the level that we're performing at now and better. And so I see that as being a positive. I'd say that given the new budget that just came out, which has an attack on premium luxury. You have the government potentially putting a surcharge of 20% on vehicles in excess of $100,000. And I think it's probably -- if I were to look into a crystal ball, I've got to imagine that, that would slow down the interest in premium luxury, but maybe accelerate the desire for the Toyotas and Hondas and General Motors and Ford. With regards to private companies, if there's another private group going public in Canada or IPO-ing or whatever, I'd say we also welcome the direct competition, and we're very confident in our abilities and capabilities. There's a ton of benefits to being a public auto dealer consolidator, but there's also a lot of pressures on a newly public organization, and from quarterly evaluations with The Street to absorbing the cost structure associated with being public. As it did with us, it'd probably take any organization that's deciding to go public a couple of years to prove out their performance and gain confidence with the investors and then have a valuation that's commensurate with their earnings. So I don't think it's just -- like I don't think it's a cake walk, but I think we -- again, we'd welcome that. And thirdly, I heard you asking questions, the question kind of around digital retail. And look, I can point to one, which would be Clutch. And I know that Clutch for anybody on the call that doesn't know is a digital retail company that I think just got a valuation of $100 million, which is a huge vote of confidence into our thesis. But that $100 million valuation, despite all the challenges they face with inventory and so on kind of validates the huge opportunity kind of that AutoCanada has to kind of create a very significant value for our shareholders. And I think you'd have to take into consideration our structural advantages that we already have in place, like our national physical footprint, access to used vehicles unlike most other entrants in the space. So I think we have this ability, we have this ability to take advantage where others might not. But also, as I mentioned in my prepared remarks, we've already begun building out our omnichannel and digital experience. And in Q1 alone, I think you'll recall, I mentioned 1 out of every 3 cars that we retailed was sold through our online sales departments. And these are online customers who maintain contact solely with our online sales department. And so whether they transact fully online or come into the store, we're already doing the digital transaction today, and we're just going to keep on iterating on that and expanding our capabilities. So does that answer the question?
Yes, it does. Thanks. I actually just have one more question, and then I'll jump off here. It does relate to sort of the costs that might be flowing through the operating expense line or perhaps don't think it's hitting the gross profit line. But if any, can somebody perhaps help me out just to understand what we should be thinking of in terms of expenses related to building our digital and how they flow through the P&L?
Sorry, the expenses of building the digital?
Yes. Like is there cost varied in employee cost or admin cost, just as an example, related to growing that and building that digital retail platform?
Well, the digital retail platform that we currently have that we're operating right now today has been built, and we're continuing to iterate on that. And I think the cost -- at the costs, and we have our team, and we continue to push forward with that. Separate and aside from that, we also have the used digital, which I think we've mentioned a few times, it's going to probably take us -- probably about a year to put the scaffolding in place. So we have representation across the country. And then we intend to tie it all together with a digital platform. Those costs have not been realized yet and probably will over the course of the next 1.5 years.
Will they be capitalized, Paul? And will they hit the EBITDA margin?
So they will be capitalized. They're not going to be a tremendous costs, the way we see it. This is the -- a large portion of digital retail, the way we see it is we're going to expand on what we're doing currently and overlay that on our used vehicle footprint. And so I would have expectations. The expense -- the major expense will come when the time comes with advertising and marketing in building the brand.
Our next question comes from Krista Friesen with CIBC.
I just have a few questions on the Go Forward initiative. So I think you mentioned that your used inventory now sits at 89 days, assuming 60 sales per month per dealership. Is that a new kind of goal for you, like a Project 60 almost as opposed to a Project 50?
So Michael talked about this with data and analytics, and I'll let Michael expand on it. But using the data and the system that Michael and his team have built, we had an essential need for inventory, given that we saw shortages in the supply chain. And so we spooled up and we decided that it was time for us to actually expand inventory. I would not say that's a new normal unless we start selling more vehicles. But it certainly is the normal right now while inventory is -- it has and is -- Michael, can you expand on that? Or would you like to or?
Yes. Yes. I think the short answer is Project 50 will turn into Project 60 will turn into Project 90 will turn into a Project 100. And we're just going to keep going. And we -- like long term, the dream is we have 100 used vehicles per dealership per month. We're not stopping. And that market is so big that -- and we have a national footprint that, that's going to be a growth vector for us for years.
Perfect. And just on your service bay occupancy, I noticed that it improved during the quarter. Are you continuing to see -- do you see sequential improvement throughout the quarter? And are you seeing that in April and May, kind of as these miles driven start to rebound off the lows?
Yes. Great question. And that's one area of our business that's really struggled since the pandemic hit. And in March, we saw a nice comeback in that business. And in April, we were up 13% over 2019 numbers. So again, we're not comparing to 2020 because that's not fair. And so like to have 13% growth over 2019, that really -- our internal messaging was like service is back. And so we're pretty excited about that. And we're excited about that high financial throughput business, good gross margins goes right to the bottom line. And so with that business starting to come back in a meaningful way, we're looking forward to even improved margins.
Perfect. That's great. And maybe just one last question, a higher-level question. The other week, Ford on its earnings call said that it was looking at maybe making some changes to its order process after what they've kind of experienced through the pandemic here and through this chip issue and is looking at potentially lower dealer inventories, which would lessen their finance lease -- finance cost to the dealers. Are you hearing this from any other OEMS? Or is this maybe just a discussion that Ford's having initially?
It's very OEM-specific. That's what we're hearing. And so some OEMs, for example, were historically carrying large stay supply in Canada. And they're looking at COVID as everybody's ability to rightsize their business. But it's not -- like we're not hearing -- and I'll let Paul speak to what he's hearing. But from an operational perspective, we talk to the OEMs all the time, and we're not really hearing and seeing any evidence that there's going to be a material shift in how OEMs are managing their inventory.
I don't think so. I think this is a temporary issue and things will revert to normal, when things revert to normal. This industry has been going for years. And this is -- when you zoom out, you'll see this as being a blip for a couple of years on the graph.
And our next question comes from the line of Maxim Sytchev with National Bank.
Paul, you made an interesting comment around the data analytics and so forth. I'm just curious to see whether this, I guess, new capability would allow you to better manage a flattening or, I presume, an eventual decline in used pricing. So how do you guys think about that potential eventuality?
Sorry, can you repeat the question?
Just in terms of you having right now deeper data analytics, and if you look at the used pricing, which is quite high right now, when we sort of project forward and if there was a flattening or a decline on used pricing, just the ability to manage inventory accretively for AutoCanada. How much more of a leg up you get in this cycle because you have these more sophisticated tools versus sort of the past history? Just curious how you think about this.
Well, the way I would think about it is we're going to manage the decline in price similar to the way we manage the increase in price and the restrictive flow of inventory. And so using that data to help us give us signals as to when to buy or when to get off of inventory, I think, gives us a leg up vis-à-vis our competitors. And so we intend to do exactly the opposite of what we did when we were stocking up.
Yes. I would like to add, too, to that, that our job is to not manage the price of inventory, our job is to manage the spread with the margin of inventory. And we put a lot of work and practice into getting what we think is a very normal and sustainable margin for used vehicles. And I want to emphasize that because it's not even at what our target was. So our margin is at the very least sustainable. And as prices go down, it doesn't necessarily mean our margin goes down. It's just you turn fast and you sell fast. And in fact, when prices go down, the used cars become more affordable to the consumer and the demand will return because you have to understand that there's a bit of confusion with the used car market because people think -- I've heard lots, I'm not saying that anybody in this call, but I've heard lots of people say it's pent-up demand. It's not pent-up demand. It's a disruption in supply and demand for used cars is below last year, which was below the year before. And so when prices come down and our margins are sustained, we expect volumes to return to pre-pandemic levels and then our profitability will only improve from there.
All right. That's very helpful. And then maybe one follow-up in terms of M&A and being able to convert pretty significant pipeline. Paul, do you mind maybe talking about -- I don't know if you want to discuss kind of high level, how you think about accretion and timing around that accretion and what metrics you guys are looking at internally? So yes, maybe sort of any thoughts there, please.
I would just tell you that we believe that our business model is extremely strong and that overlaying our synergies on to already good businesses just provides or turbocharges these businesses. And so from the way we're thinking about it, we intend to use our existing platform that Michael and the team have done an unbelievable job of building and overlaying our growth vectors over top of high-quality brands in high-quality geographies, we believe will give us a symmetric upside. I don't know what more to say than that other than we're being very disciplined. We have internal IRR and a target to hit. Our Board is being very, very disciplined as well. And when we see the ability to overlay our capabilities on existing good assets, we are poised to take advantage of it.
At this time, we have no additional audio questions.
Well, great. Thank you very much, everybody. We appreciate everybody's time, and again, I know this is off script, but I would say, I really want to shout out to our management team and our employees and associates that have actually made this quarter come true. I mean we are very, very excited about the opportunity for the future and frankly, couldn't be more proud of this platform and our team. So thank you very much, and we'll look forward to talking to everybody on the next call. Thanks.
And this concludes today's conference call. You may now disconnect.