AutoCanada Inc
TSX:ACQ
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
13.9
26.88
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
AutoCanada Inc
You don't have any saved screeners yet
Good morning. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoCanada Inc. Second Quarter Results Conference Call. [Operator Instructions] Thank you.Erin Oor, Vice President of Corporate Development and Administration, you may begin your conference.
Thank you, Cheryl. Good morning, and thank you for joining us on today's call. Today, I'm joined by Paul Antony, our newly appointed Executive Chairman; Michael Rawluk, who was appointed President of AutoCanada just over a month ago; Chris Burrows, our Chief Financial Officer; and Bill Berman, our newly appointed Vice President (sic) [ President ], United States.Before we discuss the quarter and other changes at the company, let me remind everyone that certain statements in this presentation may be forward-looking in nature. I would refer you to our more complete related disclosures contained in AutoCanada's most recent annual information form. These statements include involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ materially 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 see the AIF dated March 15, 2018, which is available on SEDAR website as well as on AutoCanada's website within the Investor Documents & Filings section.With that, let me turn the call over to Mr. Paul Antony.
Thanks, Erin, and good morning, everyone. Thanks for joining the call.As all of you know, this is my first AutoCanada quarterly call, just been elected to the Board, the most recent AGM and then being appointed as Executive Chairman yesterday.I do welcome the opportunity to lead AutoCanada and contribute to building out what at its core is a very good business, and we have some challenges to address though, and I look forward to reporting on our progress in the quarter to come. With that said, I'm going to go a little bit off script here. I just want to set the tone for things going forward. We intend to be fully transparent with you, all of our stakeholders. Going forward, we intend to use these conference calls as our main method of communicating with you and then between quarters, having our head down and working really hard. So if you have any questions today, we're going to answer them to the best of our ability, be fully transparent, and we'll kind of see at the next quarter.So with that, AutoCanada has issued 2 releases following the close of market yesterday; one, announcing the changes to our Board and management and the other is with our results for the second quarter. There's a lot I want to cover today and spend a little time for us reviewing what's taken place, both within the company, and then reviewing our results and then focus on where we're going in the changes that will start having an impact this quarter and into the future. We'll then open up the call to your questions.As you all know, it was a very challenging quarter for AutoCanada and that led to comprehensive review, with every aspect of our business. We recently established a special committee of Independent Directors to review alternatives to maximize shareholder value. And the result from this work is renewed board and a renewed leadership team that are both focused on making fundamental changes to our operations, so we can deliver the kind of top line revenue numbers and bottom line profitability that we believe this company is capable of delivering.I'm going to spend some time highlighting these changes. At the Board level, we welcome 3 new directors yesterday; Michael Rawluk, Stephen Green and Elias Olmeta. Michael was appointed President of AutoCanada in early July. Most recently, Chief Operating Officer of a large multi-brand chain of 22 store dealerships. He began his automotive career more than 15 years ago. Stephen Green previously served as Executive Vice President, Legal and Corporate Secretary of what is now IHS Markit, a global information provider. Elias Olmeta is the Executive Vice President and Chief Financial Officer of Mitchell International, a provider of software to the automotive industry.They also do health care as well.As was previously announced, Gordon Barefoot stepped down from the Board following yesterday's meeting. Gordon was Chairman of the Board and part of AutoCanada for the last 11 years. His contributions were extensive, and we do thank him for his efforts over these many years.Two other directors stepped down from the Board as well over the summer. We thank Michael Rawluk and Arlene Dickinson for their contributions to the company. With these 3 new additions, we have a good balance between incumbents and those new to the company.There have also been a number of changes within the management team. As you will have seen, Steven Landry has taken a new responsibility and will serve AutoCanada as Special Adviser on OEM relationships and dealership acquisition. Steven is particularly well suited to this role given his background.I moved into the role of Exec Chair and will take on the role of providing overall leadership for the business while continuing to serve as Chairman of the Board.Chris Burrows will be leaving the company at the end of the day to pursue new opportunities. We have commenced the search process for Chris' replacement. I'll remind you that Chris and Steven both played key roles in the rapid evolution of AutoCanada from that of a founder-led Western Canadian-focused business with a limited number of brands to a national automotive retailing group, selling most major brands in the industry. I'm also pleased to welcome William Berman to AutoCanada. As many of you will know, Bill was most recently the President and Chief Operating Officer of AutoNation, North America's largest automotive retailer, and he brings 20 years experience to his role, which is President, United States. With that high-level recap of the teams, the board and management, let me turn the call over to Chris Burrows for a recap of our financial results for the second quarter. Following Chris' presentation, I'll walk through some of the changes that have begun to better position AutoCanada for success starting in the third quarter. Chris?
Thanks, Paul. Before I get into some of the key metrics, I will remind everyone that our complete second quarter report, including our MD&A was released yesterday and can be found on AutoCanada's Investor Relations website and under our profile on SEDAR.Let me recap our performance from the quarter.Revenue was down 1.6% in the second quarter to $880.6 million with same-store revenue down 5.1%. We had 2 major contributors to the decline in same-store revenue. The first was a divestiture of GM dealerships as part of our 3-way agreement with CanadaOne Auto Group and General Motors of Canada, which ultimately allowed AutoCanada to own and operate GM dealerships. This accounted for $100 million decline in revenue, all of which was also part of same-store revenues in 2017. The second contributor was the relatively poor-performing FCA brand platform, which nationally saw an 11% decline in sales. We saw a decline in our FCA revenue of close to $46 million. Taken together, these 2 factors contributed approximately 15% to a decline in revenues. We do see the FCA numbers potentially improving as the new Ram truck becomes available at more of our dealerships. Operating expenses were $128.7 million and included $4.5 million of management transition costs. This was up 14% from the same period last year. Operating expenses as a percentage of gross profit were 91.6%, up from 78.5% over the same period in 2017. Gross profit was $140.6 million, down 2.3% compared with the same quarter in 2017.Gross profit as a percentage of revenue decreased slightly to 16% from 16.1%. Same-store gross profit declined 4.3%. AutoCanada sold 12,506 new vehicles in the second quarter, down 6.9% in the same period last year. Revenues from the sale of new vehicles was $522.1 million, down 6.5%. The sale of new vehicles accounted for 59.3% of the company's total revenue and 21.8% of gross profit compared with 62.4% of revenue and 26.8% of gross profit in the second quarter of 2017.On a same-store basis, unit sales and revenue from new vehicle sales were down 13% and 8.7%, respectively. Offsetting the decline in number of vehicles sold was a increase in the average revenue per vehicle sold of $2,028 or 5%.Used vehicle sales were 6,013 units, up 18.8% compared to last year. Revenue from the sale of use vehicles was $198.6 million, up 8.6% year-over-year. The sale of used vehicles accounted for 22.6% of our total revenue and 9.4% of gross profit versus 20.4% of revenue and 9.1% of gross profit in the second quarter of 2017. On a same-store basis, unit sales and revenue from used vehicle sales were up 6.2% and 2.5%, respectively.The average revenue per used vehicle sold in our same-store has declined by 2.2%.Revenue from parts, service and collision repair was $121.5 million, up 6.6% from 2017. This accounted for 13.8% of the company's total revenue and 43.3% of our gross profit, up from 12.7% of revenue and 39.1% of gross profit for the same quarter of 2017.On a same-store basis, revenue from this line of business decreased 1.1% year-over-year, primarily due to a 0.8% decrease in the average revenue per repair order completed and a decrease in overall repair orders of 397. Finance and Insurance generated $38.4 million of revenue, a decrease of 2.4% in the same period of 2017. This accounted for 4.4% of the company's total revenue and 25.5% of its gross profit, in line with 4.4% of revenue and up from 24.9% of gross profit in the second quarter last year.On a same-store basis, revenue from Finance and Insurance declined 11.4%, primarily owing to a decrease in the number of vehicles sold.EBITDA attributable to AutoCanada's shareholders decreased to $10.8 million from $43.7 million last year. Including the impairment of nonfinancial assets, the company generated a net loss attributable to AutoCanada's shareholders of $41.3 million or $1.51 per share. On an adjusted basis, the company generated net earnings attributable to AutoCanada's shareholders of $15 million or $0.55 per share. This compares to net income of $25 million in 2017 or $0.91 per share and $15.5 million on an adjusted basis or $0.57 per share.Total impairment charges were $58.1 million in the second quarter or $1.99 per share of net of tax. Included in this total is a $44 million impairment charge related to the Grossinger Auto Group.With that, I'll turn the call back over to Paul.
Thanks, Chris. As I mentioned at the start of the call, our performance in the second quarter was not acceptable. While we have a portfolio of excellent dealerships and improving geographic and brand diversity, we fell short in integrating newly acquired stores and enforcing consistent practices and standards across the company. We're now addressing these deficiencies and expect to realize margin improvement in the coming quarters.Michael Rawluk has been conducting a comprehensive review of our operations and has developed a go-forward plan for the company.As disclosed, we anticipate the plan to yield an additional $30 million or more in EBITDA within the next 18 months.This is separate and apart from intended operational improvement.It's an ambitious goal that will involve managing costs while increasing sales and employee productivity. It will involve much more structured process and an operating discipline that will help our stores outperform their peers. While Michael has been introducing changes to our Canadian stores, Bill Berman will be following a similar course of action with our U.S. stores. As you all seen in our second quarter reports, recorded a $44 million impairment charge related to Grossinger Auto Group. This was a result of revised expectations for the time line of U.S. operational profitability and a downward revision to our future profitability projection for this acquisition, primarily because store quality was lower than expected and will require more time to realize needed improvements.The first step in that process was putting the right person in charge, and we have that with Bill.Strategic review that was started in June has been completed and the special committee and the board have endorsed the go-forward plan for the company developed by the President. Let me underscore my complete confidence in Michael's go-forward plan.I've known Michael for a number of years and I've seen how he works and what he can accomplish. Of course, the Board will continue to consider any alternatives that may be available to enhance shareholder value.The automotive industry is definitely in a state of uncertainty right now, owing largely to trade-related issues. While we can't predict what will happen, our best way of managing through this uncertainty is to do what we're doing and that is make AutoCanada a better, stronger company. Over the last quarter, we've taken a lot of steps and made a number of changes so we can achieve our goals.We're going to continue to look at acquisitions, which is why Stephen's new role will be of considerable benefit. And the market remains very attractive for further consolidation. We know we have to do better. We also know that we are beyond the point of talk. We must deliver improved results, starting this quarter. We're confident we'll do that. We thank our shareholders for their patience as we make the necessary changes to our business. The patience will be rewarded. We also thank our employees for the enthusiasm they've demonstrated implementing many of these changes. And with that, I'd like to open the call to your questions. Operator, could you please come back and start this off.
[Operator Instructions] Your first question comes from the line of Chris Murray of AltaCorp Capital.
I guess, the first question I have is just the results in the quarter were weaker than we had been expecting. Trying to understand what's going on structurally and is there any, sort of, commentary you can give us from what you've been seeing in July? And also, if you can talk about FCA performance and how you're seeing that evolve through the balance of the year?
Chris, it's Chris. I think structurally nothing specific that I'll highlight on. Obviously, we did highlight the underperformance or the soft performance with respect to FCA. We've seen that in the industry wide across Canada throughout this year. Obviously, with our concentration of 17 FCA stores in our portfolio, many of which are high-volume stores, we as a company have felt the impact of a soft result, or the soft sales market for FCA in the country this year.
Okay. Michael or Paul, I don't know if you -- one of you want to take this, but you talked about kind of a revised operating plan to generate, as you said, $30 million or more in EBITDA. Over the last couple of quarters, we've been hearing some different things from the management team about wanting to do something similar. Can you give us more color on exactly what you're looking to do that would be either an extension or different in that plan that we should maybe looking for in the coming quarters?
Michael, I'm going to pass the phone over to you.
Yes. So I think the different flavor of the go-forward plan is that it's not focused on cost cutting, but it's really focused on the synergies that are created from coordinating operations within the dealer network, which can produce significantly more upside than trying to cut costs.
Okay. And any additional color you can offer on terms of what kind of synergies you'd be looking at?
I think that's -- as far as we're concerned, we're deep in the process exploring all of our opportunities within the organization to do that.
Okay. And then just one last piece is just on the acquisition strategy. I appreciate Steven's probably still part of this discussion at least at this juncture. Originally, the theory was to move more national platform balance. We've also called out the fact that you're looking to divest of a couple of dealerships. Can you give us your thoughts around how the acquisition strategy looks going forward, either by brand, platform and geography?
Well, I'll just maybe answer that generally. I would say that we're going to be very strategic about how we think about acquiring stores right now. Our focus needs to be building out our platform to be able to accept these stores in the best possible way. And so while we're not going to turn down any great opportunities, high-quality stores are very difficult to come by. And so we'll be -- we'll definitely be looking at those. Our main focus right now more than anything is building up the operational excellence and muscle within our organization. And so our goal is to ultimately have a balanced platform across the country and that means balanced brands and balanced geography. And so when we look at our portfolio, if it doesn't fit at this point in time, then we'll look to exit and enter where it does. Does that makes sense?
Yes. It does. And any color around the divestitures around what you might be shedding?
I think at this time we'll just leave it at that.
Your next question comes from the line of Steve Arthur of RBC Capital Markets.
First off, just a follow-up on Chris' question on the plan ahead, fully recognized, it's pretty early days and lots, it's being cooked now. But is there any examples of the kind of synergies that you're looking at across the dealerships and that kind of stuff? It would be interesting to hear that color or perhaps more importantly just the target of all this. If we roll the clock ahead a year or 2, what the target business model might look like? Any kind of key metrics that you'll be tracking and reporting on, and we can watch for in future quarters?
So we'll give you a little teaser maybe just to give you an idea. We've never really had a subprime portfolio of business, and we think that building out that capability within our organization opens us up to a lot more auto sales and a lot more service contracts. They're just -- it's another world that we intend to open up for our organization. That's just one of many things that we have in our go-forward plan.
Will there be a like target metrics, target business model things like that, that you'd be talking about that are different in future quarters or things that we can use to track the progress?
Yes. I think Steve, as the company rolls forward definitely, you'll start to see information come from AutoCanada in the third, fourth quarter, the first quarter, early quarters of next year. I mean, obviously, as we've discussed, it's a $30 million EBITDA improvement over the next 18 months. And I think a reasonable expectation will be to understand how that's flowing in and where that is coming. So they'll kind of come in 2 different ways. Honestly, Steve, it will come through enhanced disclosure in terms of financial operating performance inside the MD&As and the news releases, the continued disclosure docs. In terms of specific indices, metrics, KPIs, at this time, I would suggest that there's more development coming in this regard for the future.
Okay. Fair enough. Just on Grossinger Group, few surprise there, obviously. Just wondering if you can dig in a little bit in terms of whether the main issues there are sales related or cost related and what that road map looks like for that part of the business?
Obviously, Steve, as we started to really get our hands in that business and wrap our arms around the operations of it what we've uncovered is that the pathway to profitability on those stores is going to -- is a, going to be lower and b, going to take longer. And as we revise and recast those forecasts on that profitability, I think that that's how we arose to where we're at on the Grossinger Group. In terms of specifics on those stores, it's not a singular type of an issue in any given store. As we've disclosed there's 9 different locations, 9 rooftops in that area and each of those stores have their own unique challenges among them.
Okay. Final one for me just on the balance sheet. Just your thoughts on where you stand versus the covenants. I think the one, Q1, we were looking at 3.7 right now versus the 4.0 covenant. Probably not too much debt repayment in the near future, I'm guessing so, and you're coming off a couple of weaker EBITDA quarters. So I guess, is your confidence if there's a question here, your confidence levels in the Q3, Q4 EBITDA numbers versus a year ago just to keep yourselves on side with those covenants.
Yes. So I think that there's kind of 2 things to say on this regard is, first and foremost as you heard in Paul's earlier comments that the time for change is now. The time for improvement is now. So very, very confident in where we're going for the third quarter. The other thing that I will say is all of the partners with -- inside the credit facility syndicate remain committed and very supportive to AutoCanada and its future direction. So I would not anticipate any stress or pressure unnecessarily from any of the syndicate partners.
Your next question comes from the line of Michael Doumet of Scotiabank.
Just want to follow-up on the $30 million of EBITDA improvement. A lots of questions there obviously, but can you give us an example of maybe where some of that growth can come from? Maybe just another way to tackle the question. Is there an area where you feel like the business has underperformed significantly when you compare it to the peers?
Well, let me talk a bit, Michael. And I think that as I look and I evaluate the plan that this company has put together. I think there's a number of areas that, in aggregate, are going to get to that $30 million. As Paul and Michael earlier said, around special finance, around subprime finance to move more units, I mean, obviously that has ancillary benefits also attached to it in terms of other things that you're selling in the business office. It's other parts and service opportunities that you're selling related to the sale of a car. I think that there is opportunities throughout the business and I wouldn't want to single out anything, in particular, and specific, but there's areas of opportunity and efficiency and productivity that have been highlighted and targeted across the entire scope of the business. So from a marketing contact, there's opportunities within how we go-to-market, how we do retail activation, there's opportunities in special and subprime finance, there's opportunities in what we sell within the business office and how the underwriting on those products is done. So in aggregate, they're totaling up and forming the go-forward plan. But specifically, I think that that's really as specific as we're -- as we get to this morning.
Okay. Fair enough. And maybe just, sort of, wrap up the whole, sort of, margin target. I mean, you commented in the release that you're planning to achieve operating profits comparable to the best U.S. dealers. So I'm thinking you're looking for $30 million of EBITDA improvement in 18 months. You're also looking for improvements on top of that. I mean, with those 2, do we, sort of, get there or is there more to do? I'm just trying to think about what's the right starting point really when you're adding $30 million and sort of where do we get to in 18 months?
Yes. And I think that really those statements are directive and guiding, but they're also somewhat aspirational, right. I mean, definitely as the company kind of realigns and reforms, it is -- it's intent is to move more towards margin profiles and profitability and efficiencies that you would typically see in some of the U.S. publics that we're so often compared to. I think that as we start to add the $30 million in net add EBITDA over the next 18 months, obviously, with the filing of Q2 today, you see the estimated EBITDA for 2018, the targets will obviously drop and reset and reform the baseline upon which the $30 million will be added.
Okay. That's helpful. And maybe I just want to dig in a little bit more on the Fiat Chrysler sales in Canada in July. Big decline there versus what we saw in the U.S. So maybe just a first question on why the difference or the discrepancy? And then second, just in terms of when you expect the Ram to come in, sort of, reverse that trend in Q3, Q4?
Yes. I think that still the -- that the Ram is on ground now. So the 19 trucks are already here. Obviously, they're starting to sell-through and good inventory and good supply is there, I think, more importantly, our focus for the future is going to be less on any particular model or any particular brand and being able to effectively pivot in terms of what is being sold at what location. So what I mean by that is, if there's short supply of a Ram or for Ram or any other model for that matter isn't selling tremendously well, then pivoting to something else that is selling. So irrespective of what you're selling to sell more of it, whether that's new or used a different model or what have you. Structurally, you asked the question about is there something fundamentally different between the performance of FCA in Canada versus the performance of FCA in the U.S. Structurally, it will be hard for us to comment. We don't own and don't retail for Chrysler in the U.S. So hard for us to really comment. We're speaking from position of retailing FCA in Canada but can't comment on the U.S.
Okay. No. Helpful. Anyways. Maybe just one last question. Aside from the divestitures of the 2 dealerships there, any assets that you would contemplate divesting, which would accelerate the repayment of debt that would have a limited impact to your profitability?
Obviously, Michael, as part of the full-on strategic review, the company and the Board and its management team have evaluated a myriad of possibilities. We've spoken today about the divestiture of 2 dealerships. The company and its management team and its Board will continue to evaluate opportunities. As of this point, there's no specific additional divestitures of nonperforming assets or unproductive assets other than what we've already disclosed.
Your next question comes from the line of Matt Bank of CIBC.
So I just want to dig a bit more into how we should read into the results in the first half of 2018 and just get a sense of when these numbers are run rate versus onetime. So first, on the OpEx, in the MD&A, there is -- it's mentioned there's an $11 million increase in variable admin and the list you have in there looks like it's almost entirely onetime expenses. Is that the right way to read it?
That's correct, Matt.
Okay. And then within new vehicle, I mean, I understand the FCA headwinds, but the gross margin percentage was 5.87%, which is quite a bit lower than it’s been as I look back in my model. Is there anything onetime there? Is that just kind of the way your business is tracking from here and how should we think about that number?
I think, obviously, in Q2, the PVR on new unit sales was lower than a historical trend. I think that it's definitely been identified by management as an area to focus on to perform better in those areas. There has been pressure on new car margins in our business over the last 3 to 4 quarters and definitely, an area of focus moving forward. So an opportunity for the company and for the stores to pick up some margin.
Okay. And I just want to turn to the balance sheet if I could. So you mentioned that you would continue to look at acquisitions. Just wondering what kind of capacity to make deals do you view you have, given where your balance sheet is right now.
Great question, Matt. And as we look at it and my comments earlier, we have kind of committed lenders, and we've don't anticipate any kind of pushback there. I would also say that as we evaluate the performance -- we talked this morning about disposal divestiture of 2 stores that obviously we'll redeploy that capital into better-performing assets. I think that we've talked previously, are there some lands, are there unproductive -- other unproductive assets potentially. There is -- this is still a strong cash flowing business, down in the second quarter. But the ability to make acquisitions remains the intent to the Board and the ability, I believe, is still there.
Okay. And I know you've addressed this and I understand that you have the support your lenders, but just trying to understand like, let's say, that profitability in the second half looked something like the first half. What would your options be, if you did shift your covenants?
Yes. Definitely, that's not what our internal forecast would assume at this point. Definitely, I think that that's why there have been drastic actions kind of put in play within AutoCanada, the addition of some very talented and very capable management teams to right the proverbial ship back to a better operating financial performance. As I said, committed lenders that are there, but right now, we're not forecasting kind of any covenant breach or covenant pressure.
Okay. And I just want to squeeze in one more actually. So finance costs just to head back to the quarter, they're -- they ran at $30 million in the quarter and the net carrying cost of vehicle inventory is up $5 million year-to-date. I understand that there's higher interest rates. Just wondering if we should start viewing this as a new run rate for finance costs. And if there's anything in the plan to address the increase to floor plan costs?
Yes. For the time being, for the purposes of modeling out inventory carrying costs, this would be a more appropriate measure from a run rate perspective. Definitely, within the context of the go-forward plan, there are discrete activities aimed at evaluating the overall amount of inventory on ground, both from a new and a used perspective. And definitely, the intent there is to rationalize the amount of inventory in order to manage the carrying cost of such.
Your next question comes from the line of Derek Dley of Canaccord Genuity.
Yes. Sorry, can you hear me all right? There's some feedback on the line there.
Yes.
Yes.
You sound fine.
Okay. And again not to harp on the balance sheet, but clearly, looks right now like we are a little -- you guys are a little bit close to your covenant. How comfortable are you guys with the current dividend? Will that be an option that reducing the dividend might be on the table should you not be able to turn around the profitability as quick as you think?
Yes, Derek, I think as you'd reasonably expect, the board and company continually reevaluate their dividend policy. Each quarter when it comes time to declare such, I think that there is -- if profitability were to continue to decline, there's a number of levers that can be evaluated for which lever to pull and which lever to push. And I don't think that it's a foregone conclusion that you would look at the dividend. I think there's other options and other opportunities in the absence of that.
So would you prioritize selling nonproductive assets like these 2 dealerships that you're discussing versus reducing your dividend policy or changing your dividend policy?
Yes. I mean, the easy answer is yes, but it's not that simple. Obviously, it's part of a larger analysis about if you were to divest of noncore assets or underperforming assets, how and where to deploy that capital and is it better to acquire an operating asset with a higher rate of return or to return that capital to shareholders if those opportunities don't exist. So it's part of a broader analysis.
Okay. In terms of the SG&A expense as a percentage of operating profit, I mean, it's still materially higher than what we're used to hear in the front half of the year. And you mentioned that you haven't seen anything structurally different, I think at the beginning of the call, at the beginning of the question period. So I'm just trying to get a sense of like what exactly happened here? How did these costs get so elevated in the front half of the year from what we're used to on a historical perspective?
Well, there is -- both quarters are quite different, Derek. So in terms of the second quarter what you have is a couple of things that we've disclosed in our documents around, incremental onetime variable admin costs related to strategic review and all things associated with that legal and consulting type of fees. We've also, in the first quarter -- or sorry, excuse me, in the second quarter, you've got a significant management transition costs to the tune of $4.5 million. So there's a meaningful and a material amount of onetime type of expenses. With the exclusion of the onetime costs from the operating leverage ratio, you'll see a decline from 91.6% down into the 86% -- 85%, 86% range.
I see that. I can do that, but it's still 10 percentage points above where we were at last year. So I mean -- I do want to help or we can take that off-line. That's fine.
No. Derek, I think I understand we're driving out. I mean, I think the other piece of that is to not lose sight of this. This is actually a ratio, right. So you've -- there's a cost element and a gross profit element to it and as we've seen this morning and talked about this morning. I mean, definitely, there's a lower profitability, a softer quarter where operating expense hasn't matched the rate of decline in the operating performance. So there is -- let's not lose sight of this -- both sides to this ratio.
Okay. And then just last one for me. With the appointment here of Bill as the Head of U.S. or President of the U.S. Operations. Is Bill's role predominantly in the near term be more focused on just sorting out the Grossinger acquisition and increasing the profitability levels at Grossinger? Or should we expect any sort of expansion or acquisition activity in the U.S.? Or is that predominantly going to remain in Canada if and when you do see opportunities arise?
So this is Paul Antony. I would say that we came to the conclusion that regardless of anything we need to rightsize the platform in the United States. And we also recognize that we, in Canada, here didn't have the expertise and experience to do that. And so what we love about the opportunity to partner with Bill to actually go do that is that he brings the U.S. capability to actually organize and operationalize the platform. And then from there, we get to have the optionality of deciding what we want to do go forward. And so we could definitely brought on somebody to just fix the platform, but not necessarily, go and scale it. But with Bill, we think that we have the ability to not only fix the platform, but grow it if we choose to, stay put if we choose to, but we have all those options. With that said, our goal is to maximize the returns from that organization, build a strong platform that we can grow much like in Canada.
Your next question comes from the line of Maggie MacDougall of Cormark.
Just wanted to ask, for clarification purposes, you are targeting $30 million in EBITDA improvement over 18 months, over what LTM or it's -- like is it 2017, what is the base?
Maggie, it's actually derived as an incremental $30 million over whatever the baseline actually is. So this is separate and distinct from kind of improving the business and discrete objectives and projects are going to incrementally add $30 million as opposed to its -- it's an improvement specifically in the performance of the business.
So basically, you've got your model for 2018 or your forecast for 2018 and you are hoping to add an additional $30 million over your already budgeted 2018 EBITDA figure?
Correct.
Okay. And your 2018 EBITDA expectations, do they take into account a declining light vehicle sales market in Canada and the U.S.?
I would say the current estimates on The Street for the 2018 EBITDA would not take into account or may not take those into account and certainly, would not take into account the results of the second quarter either. I would expect the baseline to decline.
But you're using a consensus EBITDA estimates for 2018 as your baseline model?
No. No. We're not. So, obviously, we've got -- we as a company have an internal model and the consensus estimate is just that it's a consensus estimate. I do believe that most of the research community yourself included will likely adjust most of the models and forecast that are out there after the filing of [ TASE ] and Q2's results.
Right. But I'm not talking about Street estimates. I'm just wondering your internal projection for improvement in the business over the next 12 to 18 months. Do they take into account a decline in new light vehicle sales market in the U.S. and Canada?
Oh, ours? Yes. Yes. It is incorporated. Yes.
Okay. That's good to know. And then I suppose I'm wondering and this might be a difficult question to answer, but in light of the fact that the Grossinger acquisition was done by Mr. Landry. How is it that you're comfortable keeping him on as an adviser on M&A, considering that shortly, after that acquisition closed, you had to write it down?
I would say that, that -- we think that Steve brings a lot of relationships to this organization. He's done a lot of wonderful things. And I would say that his skills with the OEMs and relationships with the OEMs, we believe will bear fruit over the next 2, 3 quarters. We're very close, as you know, dealing with other OEMs that we might want to engage going further. So I would say at this point, holding aside the Grossinger acquisition, Steve's done a tremendous job of getting this company to a different level than where it was when he took over and now the company needs to take a different path, and we think that Steve's skill set is still very valuable in another area.
Okay. Great. And then on the divestitures that you have planned, will they occur during Q3 or Q4 of this year?
We're going to be very opportunistic with the divestitures just like we -- as I said we are with the acquisitions
Oh. So you don't already have a buyer of those dealerships lined up?
Yes. I mean, Maggie, is -- as you'd appreciate the transaction and divestiture of a store and assets such as a dealership can take time. There are presently definitive agreements with respect to those stores. Can't speak specifically to the whats and the where at this point, but it can take some time to sell those through and close those transactions.
Okay. And what is the present management team's equity ownership of AutoCanada?
I personally can't comment. At this point in time, I would say that currently, a lot of these people have been brought in while we're in blackout. And so I would say, at this point in time that remains to be seen.
Yes. I would add one follow-up to that, Maggie. I think I understand the rational and the logic behind it. As Paul said, a lot of the recent management team was hired during the blackout period. So limited opportunities, but it is entirely the intention of the company to vest all of the new executives' interests and align that with the performance of AutoCanada.
Do you think that any board members or members of the management team would be willing to inject their personal equity into the business if it becomes clear that, that's something that could be required?
I don't think we can comment at this point in time.
Okay. Okay. Looking forward to see how the plan unfolds for you guys.
Yes. Should be good.
Your next question comes from the line of Stephen Harris of GMP Securities.
Just a couple of questions to follow-up. When you come back to the FCA situation, the ROCE numbers you wrote for July, showed a 33% decline in FCA unit sales. That's sort of a worst pace than what we had seen in the first half of the year and is really quite an alarming number. Are you seeing that in your business today? And could you give us some thoughts about what might cause that kind of a drop in sales? There's a transition going on on the pickup trucks. I know that's important, but you seem to be suggesting that there is availability on the pickup trucks in the markets? So if it's not that, what's causing the issues with FCA to cause such a significant decline?
Steve, it's a challenging question to answer. Obviously, with our 17 Chrysler stores, we're big retailers for FCA. We're very supportive of the brand. We remain committed and behind it. Obviously, it's been a challenging period for them. It would be speculation to try and provide you an answer with on their results with an OEM nationally or even provincially for that matter.
But you must have an idea whether the results from your stores are mirroring the national or are they different than that?
Yes. No. We would be mirroring national. That's a safe assumption.
Okay. And on the OpEx side, we talked about some of the expenses being onetime in nature in Q2. There have been ongoing, I guess, a strategic review is gone on into the third quarter. We've also seen additional management transition expenses. Can you just give us a sense they will be more of that in this quarter? Or did you essentially, put all those expenses into Q2?
Yes. Definitely, the strategic review is concluded. So we'd not expect lingering fees associated with that scope of work. There will be, obviously, some management transition costs that bleed into Q3 related to the departure of certain executives for decisions and actions taken in the third quarter.
Okay. Great. And I just want to circle back. On this $30 million of EBITDA, we've been -- I think what -- the message you've been hearing from everybody is -- is one of, if you were in our position, how would you measure success given that there isn't really a starting point that you provided us with as a baseline? So how do you think we should measure success, or will you be reporting progress towards that goal as you go forward?
Yes. As I said earlier, Steve, I think that there's continuing development with respect to the go-forward plan. I would, obviously, on behalf of the company ask for a little bit of patience as Michael has been in the chair for slightly over a month and it will take some time, as you would expect, for the Head of Operations to really wrap their arms around it. Michael Rawluk is about to embark on a plan to rightsize and reform the company towards future profitability. In the next month, he's going to be on the road and working directly in the stores with each of our stores. And as part of that, then we'll start to see the impacts of the $30 million EBITDA improvement in a myriad of ways. You'll see that in lower operating leverage. You'll see that in improved kind of top line and gross profit. You'll see that come through in a number of ways. And I would expect that all those are -- all of the research community in the markets should be questioning of the progress against that plan.
And to add that. Like this is not a cost-cutting plan. This is a growth plan.
Okay. All right, well listen, -- we look forward to seeing the progress on that and hearing how it goes. I think that concludes it for me.
Your next question comes from the line of Steve Kammermayer of Clarus Securities.
Did the U.S. -- did the Grossinger Group contribute any positive EBITDA cash flow in the quarter?
Steve, we don't split out what the profitability by business unit or business segment actually is anywhere whether that's Illinois or anywhere in Canada.
Okay. Maybe you could help us out then on presumably you could -- you have the what same-store sales would have been in the U.S. had you owned it for the full year?
No, because our same-store sales policies are -- we don't pull in stores until the first quarter after we've owned them for 2 years. So those -- that data is not readily available.
Okay. Okay. Sticking with U.S. then, so you guys mentioned profitability would take a little longer than previously estimated. So from your prior estimate, how much longer do you expect it will take to hit the goal?
So why don't we actually turn this over to Bill Berman.
Well, I have to get in-depth into the stores to really see what that is, but I think we'll definitely see consumer model progress as this year plays out and as we go into 2019, I think the stores will be fully online and producing at a very high level.
Your last question comes from the line of Patrick Wilson of Deans Knight Capital.
Just one last question about sort of the management transition. Obviously, Michael is taking on a more prominent role here and Paul, you've obviously stepped into the executive chairman role, but there's been a notable lack of announcement as far as the plan on the CEO role itself. Is -- Michael is it the plan for him to step into that role at some point, or are you initiating a search more broadly? What's the plan for that role going forward?
So I would say at this point in time I'll be assuming the role of Exec Chair and I don't want to say CEO at this point in time. I'll be assuming the role of Exec Chair and assuming a lot of those roles of CEO at this point in time. And helping steer the company.
Okay. And is there a longer -- is there a plan, longer term to look at filling that role that the board will look at? Obviously, Paul, maybe you'd be included in that or -- and/or Michael. Is there a plan going forward there? Or is that just going to sort of fall into place?
I think it will fall into place. I think we have a talented management team that's just taken the seat over the course of last month and a week. We have got a lot of moving parts in this organization. This is -- to be frank with you, this is open-heart surgery, and we're going to do what we need to do to get this company operating as a highly efficient dealer group. And we intend to do that as quickly as possible. And so while we're lacking the title of CEO, it certainly won't be -- we won't be lacking a CEO. I can promise you that.
There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Thank you very much. That's all we have for today. Appreciate everyone attending. And if you have any questions, Chris is available for calls in the coming weeks.
Thanks, everyone.
Really appreciate everybody's time. Thanks so much.
This concludes today's conference call. You may now disconnect.