AutoCanada Inc
TSX:ACQ
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AutoCanada Inc
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Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoCanada Second Quarter 2021 Earnings Call. [Operator Instructions] I would like to remind everyone that certain statements in this presentation and on our call are forward-looking in nature, including, among other things, future performance and the implementation in 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 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 obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information about possible risks, please refer to our IF, which is available on SEDAR and our website within the Investor Documentation and filings section. I will now turn the call over to Mike Borys, Chief Financial Officer. Please go ahead.
Thank you, Anna. Good morning, everyone, and thank you for joining us on today's second quarter results conference call. For today's call, I'm joined by Paul Antony, our Executive Chair; Michael Rawluk, President of our Canadian Operations; Peter Hong, our Chief Strategy Officer; and Casey Charleson, our Vice President of Finance. We released our Q2 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.
Thank you, Mike, and good morning, everyone. We're thrilled to report yet another record-setting quarter. Powered by the team's continued unrelenting drive and focus on execution, our operations delivered strong second quarter results across almost every key metric. Starting with revenue, where we recorded our highest second quarter figure of $1.3 billion through adjusted EBITDA of $70.5 million, or $59.6 million on a pre-IFRS 16 basis, which was 1,360% better than Q2 last year. This is a tremendous performance from top to bottom. Obviously, comparing against the quarter that was impacted by the onset of COVID was a factor in the increase. However, this performance continues the trend of sustainable improvement in the execution of our complete business model and strategic initiatives. If we go back to Q2 2019, our adjusted EBITDA on a pre-IFRS 16 basis was $23 million. Our current Q2 performance is ahead of that metric by 159%. Mike is going to get into this with his piece. But when you look back over the progress we've made over these last 3 years since this management team took over, you can look at a trailing 12 months adjusted EBITDA on a pre-IFRS 16 basis to the end of Q2 2021 of $176 million that compares with the trailing 12 months results of $48 million to the end of Q2 2019. Those results reinforce the strength and resiliency of our business model. Particularly impressive was the strong performance of our U.S. operations. This was a breakout quarter as our newly appointed management team led by Jim Douvas drove a fundamental shift in the operating and sales culture while capitalizing on favorable market conditions. Significant strategic operational changes, including establishing a dedicated used vehicle team and actively top-grading talent across all functional areas at the dealership level and our U.S. head office position the U.S. well for selling season and led to improved metrics on multiple fronts. Specifically, the U.S. increased used retail unit sales to 1,797 units from 693 in the prior year, an improvement of 159% and supported the improvement in their used to new ratio to 0.77 from 0.69 in the prior year. They also reported normalized adjusted EBITDA of $7.7 million in Q2 2021 against $0.9 million reported in Q2 2020. While one strong quarter doesn't make a trend, we remain nonetheless impressed with the progress we're seeing from Jim and his team and believe we are on the right path to margins more typical of our U.S. peers. Over the last few quarters, we discussed several key structural advantage that we expect to benefit from in the quarter to head, and I'll highlight how these advantages continue to play a significant role in our performance this quarter. With digital, we continue to be pleased with the uptake in our online departments at our dealerships, which are responsible for taking online customers through the entire sales transaction, providing continuity regardless of the customer transaction completely online or comes into the dealership. We continue to see the consistency of our service across dealerships remain matched in the marketplace and provide a significant competitive advantage. Our dealerships online sales departments are supported by a dedicated home office team specializing in digital sales. This centralized support team provides training, promotes best practices, analyzes key performance indicators and provides regular monitoring of the data and coaching. And it's all wrapped under our Buy From Home banner. We also continue to see good momentum initially in our digital use strategy, including our second platform acquisition in the segment announced earlier this week. In terms of our scale, not only were able to hire and attract top-tier talent and support -- supporting and training our dealers with best practices. The operating cost structure that we have in place suggests we'll be able to continue to profitably grow the business. Canada OpEx as a percentage of gross margin was just 72%, excluding any government assistance. This beat our record performance in Q3 2020, all the while building our infrastructure to support future dealership growth. Our balance sheet strength is another part of our advantage, and we're well positioned with dry powder to take advantage of our acquisition opportunities while maintaining our financial flexibility. We've moved net debt leverage from a high of 6.6x at the end of Q1 2019 to 0.1x at the end of Q2 2021. The benefits of our commitment to diversification efforts also continue to be highlighted in this quarter. Each component of the AutoCanada engine was in motion and played a significant role from used vehicle sales to right ride, F&I, parts, service, collision and the strength of our U.S. operations. All of our initiatives are showing traction and are on track for continued growth. Building on what we said last quarter about our data advantage, our focus on leveraging our in-house data science team to make decisions about inventory was a key driver of our performance this quarter. 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 long term. I'll speak to our pipeline at the conclusion of this webcast and provide a little more color on where we're headed. Speaking to the market environment and the industry as a whole, clearly, we're living in unprecedented times. And we expect the market environment to remain constructive over the next 18 to 24 months as vehicle production begins to come back and margins eventually normalize for both new and used vehicles on a sustainable basis. During this time, we expect to continue to show strong results, and we'll continue to be disciplined with our approach as we have been over the last 3 years. We've been building muscle into our business model, and we're now beginning to focus more resources on the integration of our pipeline of acquisitions. Our employees in Canada and the United States continue to work tirelessly, and they've delivered excellent performance. Thank you to all of you so much. We've -- we're encouraged by the very strong momentum across our business and we remain well prepared to face any challenges in our current environment. I'll come back to speaking more about our 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. As opposed to speaking to some of our performance metrics as compared to the prior year, which would clearly paint a favorable picture, I'll skip back to 2019 to better demonstrate some of the progress that this company and the management team has made over the last 3 years. In essence, this speaks to many analysts' questions on the sustainability of our performance. Reference this year will be based on pre-IFRS 16 accounting. Bear in mind that this TTM review excludes Q2 2020 and the various material provisions and subsidies we took into our P&L in that quarter. For the most part, this is a clean review of the last 12 months as compared to the first full year of operations for the new management team at that time. Trailing 12-month adjusted EBITDA at the end of Q2 2021 is $176.4 million. This compares to a TTM adjusted EBITDA at Q2 2019 of $48.4 million. It's worth noting that our U.S. operations has lost $13 million in adjusted EBITDA to the end of Q2 2019 as compared to generating a positive $14.8 million to the end of Q2 2021, a positive swing of $27.8 million. Over that same period, our consolidated EBITDA margin improved from 1.5% to 4.3%. Operating expenses as a percentage of gross margin improved by approximately 33 percentage points, moving from 105.9% to 73.2%. Used to new on a consolidated trailing 12-month basis improved from 0.69 to 1.04, a call out here to Canada specifically taking use to new from 0.73 to 1.13. Trailing 12-month free cash flow improved to negative $19.5 million to a positive $160 million, a swing of just over $179 million. And net debt improved from $272 million at the end of Q2 2019 to $21.6 million at the end of this most recent quarter, bringing our net debt leverage from 5.6x to 0.1x. The Canadian team has led the way in actioning and proving out the Go Forward Plan. Our results show it. Jim Douvas and his U.S. team are now moving in the same direction. We have cleaned up our balance sheet, strengthened our relationships with our lenders and have dry powder well in excess of $300 million to complete deals without having to raise equity, while staying within our target range of debt leverage. Beyond these gains in our core business segments, we continue to see real opportunity across our strategic initiatives, including OEM dealership acquisitions, the build-out of our used digital footprint the build-out of our collision platform and the ongoing expansion of our near prime RightRide business. So we come back to the question of sustainability. We can't speak to the next quarter or the quarter after that. But based on our track record, we have clearly grown the potential of this business while also working to strengthen the core foundation of our model across all segments of the business. We'll let the quarters take care of results. And with that, I'll turn it over to Casey.
Thanks, Mike. At the consolidated level, revenue came in at $1.3 billion, an increase of $553.6 million or 76%. Gross profit came in at $217.8 million, an increase of $120 million or 123%. Net income was $37.7 million, an increase of 288%. Adjusted EBITDA came in at $70.5 million, which was an increase of $65.7 million or 1,360% over Q2 2020. In our Canadian operations, total retail vehicles sold came in at 19,237, an increase of 6,184 units or 47.4%. The Canadian operations generated revenue of $1.1 billion, an increase of 66% versus the prior year. Gross profit was $187.9 million, an increase of 109%. Net income was $33 million, an increase of $46.7 million. Adjusted EBITDA was $61.5 million, an increase of $53.2 million. Other key highlights include the following: same-store gross profit increased by $89.8 million or 103%, and our gross profit percentage increased to 18.3% from 13.9%. Same-store used to new retail units ratio increased to 1.37 in the quarter from 1.01. Same-store F&I gross profit per retail unit increased to 2,942, up 12% or $305 per unit. Same-store F&I gross profit dollars increased $19.6 million or 57%. In our U.S. operations, revenue was $192 million, an increase from Q2 2020 of 170%. Gross profit was $29.9 million, an increase of 273.1%. Net income was $4.7 million, an increase of $11.1 million. Adjusted EBITDA was $9 million, an increase of $12.5 million from Q2 2020. New vehicle gross profit increased by $6.7 million, and new vehicle gross profit percentage increased by 9.7 percentage points to 5.4%. Used vehicle revenue increased by 413%, and used vehicle gross profit increased by 469%. The number of used retail vehicles sold increased by 159% to 1,797 units. I'll now turn the call over to Michael Rawluk to discuss our Canadian operations.
Thanks, Casey, and good morning, everyone. Thank you for taking the time to join us today. We had a fantastic second quarter. There's no other way to put it. Every aspect of the business performed, and we continue to drive operational excellence based on data-driven decisions and executing on our AutoCanada playbook. These results do not happen by accident. We want to extend a tremendous thank you to each of our dealership teams across Canada for delivering record results in Q2. We also want to extend the special thanks to our OEMs, strategic partners and vendors who have shared the same vision of operational excellence and advancing the business forward. I'll take a moment to highlight a few aspects of the business that have shown great progress within the quarter. First, our new vehicle business continued to perform well. Stepping back to Q2 2020 when we outperformed the market by 20.4 percentage points because we remained open, we had a much stronger starting point last year. For instance, if we looked at the business as our OEM partners do and compare Q2 2021 performance to Q2 2019, for brands owned by AutoCanada, we remained ahead of the market by 8.5 percentage points. If we look at the used business, Project 50 continues to exceed our goals as we sold an average of 76 used vehicles a month per dealership in Q2. Over the last 12 months, we've sold an average of 58 used vehicles a month per dealership compared to 42 in the prior year on a trailing 12-month basis. We are also proud to report that our finance and insurance business same-store gross profit per retail unit increased to $2,942, up 11.6% or $306 per unit. As global leaders in this segment, the sustainable success of our F&I division is a result of leveraging industry-leading data analytics paired with in-house national training and development focused on maximizing opportunity as we continue to improve upon the sale of products per deal and gross profit metrics. As we continue to further expand our presence in the industry and control vehicle ownership life cycle, our go-forward initiatives and ancillary businesses, including RightRide, our Special Finance division, wholesale export and AutoCanada collision centers are making strong contributions to the bottom line. These businesses are strategic drivers that are still realizing their full potential. With respect to RightRide, we are very pleased with the progress that we've made in this area. We have developed a digital sales and marketing strategy, enabling customers to apply for credit online and purchase a vehicle anywhere in Canada. This completely digital and virtual experience is supported by remote vehicle delivery nationwide. We currently have 7 locations with 4 in the pipeline to bring our total to 11 stand-alone locations by the end of this year. A meaningful portion of our competitive advantage is a direct result of our operational analytics, cutting-edge data warehousing technology, robotic process automation and applications along with world-class reporting are only some of the results of a focused investment in this area. AutoCanada is a data-driven company. We make daily operational decisions based on math and facts, combined with expert knowledge of our many long-term industry specialists. This scientific approach to sourcing, analyzing the distributing data in a consumable form to our frontline decision makers has allowed us to unlock the potential of each dealership and OEM brand. Management and dealership team members across all of our business units have access to real-time dashboards that provide them the context to make optimal decisions. Data has played a significant role in our inventory management strategy, something that has been a priority for us since October last year, and we continue to be laser-focused. At the end of July, we had approximately 3 months supply of new vehicles not including our production pipeline. We have managed our inventory supply well and have moved to a more centralized coordination of inventory in order to better balance our requirements across the dealerships. In addition, we are focused on pre-selling inventory before it arrives on ground. We entered August with 65 days supply of used vehicles based on selling a minimum of 60 used vehicles per dealership per month. It's worth noting that 77.5% of our used vehicle supply is coming from lease returns and trade-ins, so we definitely have an advantage in this area. It's true that used vehicles are difficult to source right now, but we stockpiled massive amounts of used vehicle inventory during the winter through a dedicated, centralized used vehicle buying strategy. This strategy paid huge dividends by allowing us to enter the spring market with ample inventory, which also drives a high replenishment rate through vehicle trade-ins. While we recognize that Q3 will be difficult for production across all OEMs, we do not see new or used inventory impacting our sales pace into Q3. We are confident that the allocations we will receive will address our retail needs and that Q3 production will be somewhat stabilized compared to previous quarters. We're excited to share that we have established an acquisition and integration team in anticipation of our pending pipeline of acquisitions that Paul will speak to shortly. Rooted in people, systems and processes, this acquisitions and integration team is solely dedicated to the full operational transition of dealership and collision center acquisition targets until they are transitioned to the AutoCanada playbook and ready to be handed over to the appropriate operations platform team. Additionally, this team access transition support for the integration or reintegration of certain operational-related projects that affect change in the dealerships or collision centers. They also assist the mergers and acquisitions team with forecasting, due diligence and facilitate the closing of the transaction. This was a tremendous quarter, no other way to put it. Some people are surprised by this performance, but we're not. Going forward, we are confident that our unique recipe of proven processes repeated day in and day out, coupled with the data-driven decisions by our specialized industry experts will continue to help us advance our competitive strengths. AutoCanada's mission is to compete and win. To this end, have a look at the quarter. Back to you, Paul.
Thank you, Michael. When we think about growth opportunities, we often reference 3 distinct phases: crawl, walk and run. Our Canadian operations have clearly entered -- sorry, the run phase and are prime to continue the momentum, while aggressively pursuing growth opportunities. As part of this growth strategy, we continued the expansion of our used digital retail division with the acquisition of Mark Wilsons Better Used Cars. It's one of Canada's premier used vehicle dealer operators. Mark Wilson has deep roots in the Ontario market with strong brand name recognition and a loyal customer base. Dealership retails between 150 and 200 units per month, with the facility capacity to recondition and sell up to 500 units per month. As one of the best used vehicle dealer operators in the country, adding Mark Wilson and his team to AutoCanada further improves our bench strength and talent pool and allows us to access best-in-class practices. With our Haldimand acquisition in December 2020 and with Mark Wilsons in August, we're beginning to build that footprint of used dealerships, which will support our used digital platform. 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. Jim Douvas and his team have made impressive gains already in the U.S. market. For the brands we represent in the Chicago land market as reported by Chicago Automobile Trade Association, we've outperformed the new retail market in Q2 by 46.1 percentage points as compared to the prior year, and we also beat the used car retail market for Q2 2021 year-to-date by 59.7 percentage points when compared to the prior year. Our strong performance this quarter 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. In fact, through our extremely disciplined due diligence process, there have been some opportunities that we've had to pass on as they didn't pass our diligence review or meet our strict hurdle requirements at the end of the day. We'll continue to be extremely disciplined as we evaluate these opportunities to ensure they fit with our stringent criteria. 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 factors can ensure we move beyond our internal hurdle rates. We also know the markets in which we function, particularly Canada, country-wide exceptionally well. We believe this positions us to execute post acquisition as well as anyone. We remain well positioned to execute on our acquisition strategy in the coming quarters. We've established a significant transaction pipeline with dealerships and collision centers representing over $500 million in annual revenue currently being evaluated under signed LOIs and purchase agreements. The LOIs, subject to due diligence, represent $200 million in annual revenue. Signed purchase agreements for dealerships located in Ontario, subject to OEM approval and other standard closing conditions represent over $300 million in annual revenue, inclusive of brands we do not currently operate today. We expect to close on these deals before the end of this year. Beyond these deals, we're at varying straight stages of the acquisition process with other targets that have not yet reached the signed LOI stage. 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. 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. We believe we have stabilized the fundamentals of our business while identifying and developing several growth vectors, new cars aside, with our North American platform, 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. We're excited about what the future holds for AutoCanada and remain 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'll turn it over to the operator for any questions. Thank you.
[Operator Instructions] The first question comes from Chris Murray with ATB Capital Markets.
At the risk of sounding kind of repeating the question, the question does become the sustainability of earnings. And Michael, thank you very much for giving us an idea of your inventory positions as we go into Q3. As we look at Q3, this is going to be probably a tougher comp because Q3 last year was probably the first quarter that we've really seen the performance. So a couple of questions on this. One, in terms of your ability to continue to retail used vehicles, how do we see that continue to perform? And then the other question is around the collision repair and maintenance line, where we saw a sizable shift in gross profit for Q2. Just wondering if you could maybe discuss the -- your ability to continue to sell into Q3 and maybe what's going on in the parts and service business.
Okay. So I'll unpack that here. So we'll talk about used vehicles for starters. So the demand for vehicles is strong. There is renewed enthusiasm for vehicle ownership. There's lots of first-time buyers. There's tons of pent-up demand in the system. And there are still people that are still sitting on their money waiting for the full cycle of the pandemic to be done. So there's still continued pent-up demand. So the demand -- on the demand side, it's strong. Now the important thing on the used car side is to reference that data point that 77.5% of the used vehicles that we retail come from lease returns and trade-in. And so it's that replenishment rate that will help us to meet that demand. Now although prices at the auction rationalized based on the Manheim Index and the ADESA index and stuff like that at the auction, that's in the open market where you have multiple bidders bidding on the cars. The lease returns are preset residuals that are not adjusted by current market conditions. Those were set 3, 4, 5 years ago. And the trade-ins are not an open market transaction. The trade-in is a negotiation between us and the customer, and they're not primarily negotiating the price of the used vehicle. They're negotiating the price of the payment of the new vehicle with the contribution of the used vehicle. So it's not a very clear transaction, and it's not an open market with lots of competitors. So all that to say, we see -- I don't think anybody would argue the fact that demand is going to be strong for some time and there's pent-up demand. And that based on the replenishment rate and the nature of how we acquire used cars that we expect margins to continue strong for some time. We've often -- and you'll hear this from people in the auto retail industry, multiple people is that we are entering -- have entered and are entering the golden age of automotive retail for a number of those factors at used cars. Margins, sustainability of margins. If you compare -- like every quarter, we compare to a basket of U.S. peers that we've been tracking, the AutoNations, the Penskes, Lithias and so forth. And if you look at our margin performance, we are in the mix. We're happy to be in the mix, but we're not overshooting this group. And that's both kind of humbling because we have more ground to take. The journey is certainly not done. It will never be done, but we have more ground to take in that regard. But it's also encouraging because the fact that we're not overshooting the U.S. peers speaks to the sustainability of what we're doing on the margin front. We're better than we were, for sure. But we're just getting in the game. We're just in the league here with everybody else.
Okay. Go ahead.
The last part of that, I believe, was part service and collision. So we are seeing a return to the movement of vehicles. We follow retail fuel sold year-over-year, month-over-month. We follow the mobility indexes out there and across the country. And we've been managing -- using the debt to improve upon to manage our margin profile in that whole area of the business and then waiting for the volume to come back. And there is a return on that volume, and that's a steady improvement. We're continuing to see those trends into July, and I think that we have an active summer of driving, which ultimately leads to improved parts and service. In addition, our performance in F&I, which is primarily the sale of extended warranties and protection products that ultimately are serviced and prepaid maintenance and different products that are serviced at the dealership, that will continue to provide growth, embedded growth as these warranty and insurance contracts start to come to fruition.
Okay. That's helpful. Then my next question, I don't know who wants to take this one, but just thinking about the M&A story at this point. I think you made the comment that these will be brands that you don't represent. And one of the questions I had, as you guys are aware, there's been some new reports, and I guess one of the major U.S. publics is thinking of coming to Canada. And certainly, they represent a number of brands, including some that you don't have because of some hesitancy around public company ownership. Can you maybe speak to your thoughts around any impact around brands being willing to do business with you folks because you may not be the only public company in Canada anymore as well as any color you can provide us on what type of brands you may be actually looking to add to the portfolio?
So I'm not sure I understand the first part of the question when you say can we speak to that. I'm not -- I don't understand the question.
Yes. Sure. So what I'm trying to understand is some of the OEMs have been hesitant to work with AutoCanada because you are a public company. Just wondering if there's more public companies now in Canada, if you see their positions moving in your discussions?
So I would tell you our experience is we don't have that experience, and we're having discussions with virtually all brands. And so I can't comment other than that than we're having discussion with all OEMs.
All right. And then any color on the type of brands you might be looking to acquire?
Well, again, so the color is, it will represent brands we own and don't own. And I think it's easier to figure out the ones that we don't own and draw a circle around those and say we intend to own them.
Your next question comes from David Ocampo with Cormac Securities.
Now that the U.S. market is entering into that walk phase, can acquisitions now become part of that story? I understand you did one last year, but a bigger part of the story, maybe not even just in Illinois but in other states or even regions.
Sorry, my line is breaking up. Could you repeat that?
Yes. So the U.S. market has improved quite dramatically here. And I was just wondering if acquisitions can now become a bigger part of the story, maybe not even just in Illinois but in other regions or states?
So that's a great question. I would say, a year ago, we were just looking at the U.S. to stabilize it? Because obviously, if everybody remembers, and I'm sure, how can you forget, I think the analysts and investors had written it off for dead, and our goal was just to get it to at least breakeven so we could decide what to do with it. And we've been fortunate -- I can't even explain how fortunate we are to get Jim on board with his team. Dave now turn this into a platform. And as we start executing against our initiatives in the United States, just like we are in Canada, we feel the same possibilities will open up to us in the U.S. And so to answer your question, it's now become a platform versus before, it was quite a burden. And so again, we're still early innings. We're proving out the thesis on it, and we're going to be disciplined about it. But early indication is that we will have the optionality to be able to have platforms both in Canada and the U.S.
Yes. That sounds good. And with your leverage now down to basically nothing, do you guys have an update on how much dry powder you have available? I think the last time you indicated to us, it was close to $250 million.
Yes. I can take that. We'll talk about in excess of $300 million. You can do the math to kind of get yourself back into that 2.5x to 3x leverage, and you'll come up with a number. We just give a broad number in excess of $300 million, but it's -- obviously, it's going to be more than that. We generate -- we actually generate a good amount of cash. And I think looking at free cash flow over the last 12 months, we are quite impressed when we think about what we're able to generate against what our fixed cash outflows are. So again, it's -- we're exactly where we want to be.
Your next question comes from Michael Doumet with Scotiabank.
Great quarter. I wanted just to touch on kind of one of the drivers of the sustainability discussion. On the parts and service side, there was a nice rebound in the quarter. You're approaching 2019 levels. Maybe you can give us a sense for the cadence there month-to-month through the quarter. But I guess if I remember correctly, 2019 parts and service wasn't necessarily a high bar for you guys. I think there was some technician turnover as you tried to ramp that business up progressively. So just to get a sense for the pace of the recovery as well and maybe what the upside is? I don't know if you want to communicate that through occupancy rates or something like that.
I'll take it for just a moment. The issue in talking about any of this stuff is we are in unprecedented times. And so you can kind of step back and say, to Michael's point, miles driven was down. It's starting to come back. We're looking at all these different metrics to give us visibility on how much it's coming back. And we know that new cars and used cars are in short supply, which means that the car park is getting older, so people are going to need to repair their vehicles more. And -- so I mean there are so many different ways of looking at it. And for us to sit back and say we expect it to do this or do that in the midst of this recovery, it's -- I don't know that we necessarily want to go there. What -- just using common sense, it makes sense to me that because there's less cars and more miles are starting to be driven that people are going to need more and more service, so need more customer pay versus warranty repair. And yes, you're right, in 2019, we had a low occupancy rate. We were hiring technicians, and we had our DealerMine call center really ramping up. And so I think the new normal hasn't really made itself visible right now. And so the sustainability of the parts and service business, I would say, in my estimation, this is just -- this is my gut feeling that over the course of the next couple of years as there's a shortage of used vehicles and new vehicles, more people are going to need to repair their vehicles. And so I see that business being sustainable over the next 2 to 3 years. But that's just -- that's more gut than data. And I'm sure somebody could take an alternate view, but that would be my view. Michael, I don't know if you can add to that.
The only thing I would add is that it's parts and service and collision are -- it's a long journey. And I think if you look at the trend of our service business over the last number of years, that it's been slow and steady progress, except for the impacts of COVID. And so we feel like we're back on the trail of slow and steady progress. The positive indicators, our performance over the last couple of months. I think the summer has been quite active for miles driven, and we're starting to see that. Selling used cars -- selling more cars will eventually have a delayed impact on service. And our performance in finance and insurance and selling protection products, prepaid maintenance, extended warranties for cars, all these products that are serviced by the dealership will eventually kick in and that will be a lag, and that will be another growth factor that will really promote service. But it is slow and steady, but it's worth it.
Got it. It's helpful. And then maybe just a second question. You commented on the inventory, but I wonder if you can speak to that versus your peers in Canada. I mean, obviously, in the U.S., stats are available and the number is a much lower number. So 3 months of inventory sounds pretty darn good. Just to compare it versus your peers and whether or not you think there's potential for share grab as things tighten through in Q3?
What was that last comment shared what, sorry?
If there's a share grab because you're better positioned versus your peers.
Okay. Got you. The inventory question really varies by brand, and we have to be a little bit sensitive to not calling out the challenges and successes of individual OEMs. But I would say for 1 of the OEMs, as an example, we were looking at approximately 3-month supply of inventory in Western Canada, and we were looking at the national day supply and it was at 0.8. And you heard that right. National was at 0.8. We were close to 3. And so especially in some brands where we were really able to bulk up in the winter and get production orders in the system and carry surplus inventory, we're seeing a significant competitive advantage. In other brands, we're running with the group, but we've increased our turn and earn, so we've increased our sales pace. So even though our inventory day supply is the same, our sales rate has increased, so that translates into more inventory for us. But I think the question, if you step back from the new vehicle inventory question is do we have enough inventory to continue our sales pace. Yes, we do. Do we think that our inventory strategy put us in a competitive advantage compared to our peers? Yes, we do. And then the turn and earn situation and the limited new inventory available will help to keep us in that competitive advantage, in that pole position when it comes to inventory.
Interesting. And maybe just to push on that a little bit harder. When do you expect inventories to normalize, if ever? Again, I don't know what your views are, but the timing of it and whether maybe this is kind of structural in the industry.
So we're -- it's a moving target. We're constantly talking to the OEMs about when production comes back. They don't have a lot of certainty, but I can share a few things with you that will help frame it. One is we just received a number of our October production allocations for a number of brands, and we were very pleased. So this is inventory that will be going to production in October and rive on our lots probably mid-November. So we were very, very encouraged by that production. Now if you look at the size of the Canadian market compared to the U.S., roughly, let's just call it, we're the size of California. And so it doesn't take much for Canada. It doesn't take much spillover from the U.S. for Canada to get their cut built with inventory. It's just we, as a country, we have to perform, and we're on a turn-and-earn allocation globally competing against other countries for allocation. But as Canada comes back and we produce, all it takes is just a little shift in U.S. production to the Canadian market, and we're full. And that's really what we saw in October, and we're very pleased. The other component of it is that indications from all OEMs is that production will be steady to slightly improving over the next 6 months. So as retail sales start to soften seasonally in the winter, that will allow us actually -- that stable production level will allow us to actually start to build up and bulk up our inventory once again for the spring. And then we repeat the cycle all over again. We've seen this. I'll end with this is that people in the industry have seen this play out before, most notably, I would say, like in the 2009 era with all the chaos and financial and OEMs and that type of thing. And the real exciting part is when your margins get reset because supply and demand rationalizes and puts the leverage back on the retailer, which is where it's at right now, and then the volume starts to come back with the enhanced margins. Now it takes some time. It takes multiple years for the system and dealers to give up these enhanced margins. These are normalized margins for us. And nobody in the industry is going to give them up easily until the full production cycle catches up, gets ahead. We get over inventory like everything cycles and then only then there'll be pressure on margins to go down. But like that's a multiyear cycle. So once the volume starts to come back with these enhanced margins, it's going to be pretty special. It's not -- there's so much demand out there. It's not that sensitive or plastic that the margins will go away immediately. They won't, and it's going to take a while to catch up.
That's great color, Michael. I appreciate it. I'm going to try to squeeze one in, and I apologize. But for the targets with purchase agreement, I just want to make sure I understand that, is the final hurdle OE approval? Or is it more than that?
Yes. So that's typically it. It's not like -- and whether it would even be that for brands that we own. So that's typically it.
Your next question comes from Luke Hannan with Canaccord Genuity.
I just wanted to revisit the M&A pipeline, Paul, I think last call, what we had heard from me is you said that pricing wasn't necessarily where you wanted to be. It looks like just based on the size of the pipeline, the fact that you progressed sort of in executing that M&A, it sounds like maybe that's changed. Can you share any color on that?
Look, I think, hindsight 2020, and I'm actually thankful that we started many of our negotiations and signed our deals up when we did because expectations now, we're performing well. But so is the market, right? And so we have a bunch of deals that when you look back in the rearview mirror, compared to what sellers are wanting today, they're extremely attractive. And so we're basically executing on the pipeline of deals that we actually feel are opportunistic and make a ton of sense from a synergy perspective that we can actually even buy down the multiple. And so we started this journey. We have actually met -- I'm just trying to think. I think February of -- January, February of 2020, to start down our M&A path. But obviously, COVID stopped that. And that said, we had a bunch of deals in the pipe at that time. We just kept working them and working them, building relationships. And so we still have a strong funnel to execute on. That's been cultivated for the last couple of years.
Got it. And then I'm curious if you can share at all. You talked about the $500 million in annual revenue that you have in the pipeline, but those are all under LOI. Can you share maybe -- quantify maybe in terms of annual revenue if that helps maybe the discussions that you're having with other dealership groups that maybe aren't necessarily under an LOI but are still interested in being part of a transaction?
What would you like me to share? I mean I don't know really what you're looking for it.
The incremental, maybe, in terms of annual revenue, the size of the pipeline.
I see. No, we can't.
That's fair. Fair enough. But on the $500 million that you do have under LOI, can you share maybe the margin profile of what those businesses typically like? Is this sort of in line with where you guys are at currently above, below?
Again, it's pre-synergy or post synergy, and this is part of our secret sauce. So we think we've got a bunch of acquisitions that are going to be highly beneficial for us that we intend to announce as I think we said before the end of the year. And we'll just leave it to you to be the judge of that. And hopefully, history is going to prove us right.
Okay. Okay. That's fair.
Don't mean to be so vague on it. But...
No. No, I understand. That's fair. The last one and then I'll pass the line here. As it relates to F&I, really good performance this quarter. I'm just curious, what are the biggest levers or the biggest opportunities for growth moving forward here? Is it just higher attachment of those F&I products to the cars that you're already selling? Or maybe is there white space in your product menu that you feel you can fill in? Just maybe if you can share some thoughts there.
Yes. You got it. So it's filling in the product menu, getting more products, something for everybody. And then it's just salesmanship. It's -- we measure that by products per deal. Although we report gross per unit, what we obsess about is products sold per deal. And so we continue to grow our products sold per deal through training and analytics and opportunity, and it really is like baseball, like we said, Moneyball. It's so nuanced, and the data is so granular. And then we find opportunities. We deploy our training team. We rework menus, rework product portfolio, practice, train, track to get the sales up. And that business continues to forge ahead, again, not on margins. And I want to emphasize that. It's not improving margins. It's improving products sold per deal. And July -- I saw the other day that July was another record in F&I. So this team and the people that are selling just continue to amaze with their performance. But it's salesmanship.
Your next question comes from Krista Friesen with CIBC.
I just wanted to follow up on some of those M&A comments. I can appreciate that the deals you're working on right now you're looking at a while ago where the multiples were lower. But can you comment on how and if the multiples have moved up for current transactions and if you're seeing kind of pressure -- upwards pressure from increased competition from U.S. competitors entering the Canadian market?
So I didn't -- so to be clear, I didn't say the multiples have gone up. I -- what I hope I said was I think pricing has gone up because every dealer is doing well. I'm not saying that the multiples are actually driving up, but the earnings of the dealers over the course of the last couple of years have gone up. So if you compare '19 to '21, like I said, we're having a great year. And we've got the machinery in place to have record-setting quarters in the industry. And that's why we measure ourselves as compared to the rest of the market, right? But that said, every dealer's doing really well right now. There's a shortage of inventory you don't have to discount your vehicles and on and on. And so I think that pricing has gone up. That said, a lot of the deals that we are on and signed up to and in discussions with, we had started the ball rolling 1.5 years ago. And because of COVID, many of these have taken a hiatus and then come back to life. And so we feel like we're dealing with reality when we're in our acquisitions because we're basing them off of historical numbers that we think are repeatable versus where the industry we think is going to be over the course -- as Michael said, over the course of the next 2 to 3 years. Like when Michael said, it's the golden age of auto retail, I agree with them. Over the next 2 to 3 years, these are going to be unprecedented times. And that's because of inventory shortages and your ability to procure and sell used vehicles and F&I and all of these other products that we've become, we believe, best-in-class at. And so I would tell you that our goal is to execute on the deals that we have, integrate them, take a step back and look and see where the market is. But to start from scratch right now, to go into the market and necessarily just go and buy based on earnings from '21 or '20, I don't know how repeatable that's going to be in 5 years. So we're just being very cautious about how we deploy capital. Does that make sense?
Yes. I appreciate the clarity on that. And then just on the used vehicle side, I realize roughly 77% of your vehicles are coming from off-leases or from trade-ins. But can you comment on what sort of increase in prices you've seen on the remaining 22% of those vehicles from, say, October when you started accumulating your inventory to now?
I'll let Michael talk specifically about that.
Yes. So I have to break that into 3 segments. So the one that gets the most airtime is the auction segment, so the public auction, which drives all the headlines and all the public indexes. So from October to, say, now, the market was -- what you could follow the index, but the market was quite -- the index went up in the spring and stayed there for the early part of the summer and then started to come back in June. Right now, I would say, from peak to -- which would be the beginning of June to, say, last week, there would probably be a 5% drop in the pricing of vehicles at the auction, which that's an important point of clarity. The segment -- the secondary auctions, which are the trade revs and the e-blocks and the trading and buying direct among dealers and rural dealers and in different locations and that type of thing, have experienced a significantly less drop. So where the public auction was about a 5% drop from peak, that would definitely be like about a 1%, maybe 2% drop on the secondary auctions. Again, keeping in mind that the public auction has U.S. buyers and global buyers and everybody, and it is massively transparent and the person who owns the car is the person who keeps their hand up last, right? So that's the most sensitive from the pricing. Now for the 77% of the vehicles that we have, the acquisition pricing hasn't changed, and it hasn't changed really all year. And that's because the lease returns, as indicated, the price is pre-embedded in the residual when the contract is originally set. And then the trade-ins are -- it's not a public transaction, and it's part of a multi-process where the customer is really buying a car payment. They're not negotiating the price of the new car. They're not negotiating the price of their trade-in interest rates. They're not discretely negotiating each aspect of how to get that to that payment. They're negotiating the payment. And so we're more in control of our acquisition cost at that time. So the real sensitive part of the index from a business perspective is that small, we'll call it, less than 10% of our vehicles that we stock that are actually purchased at the public auction, if that helps.
Your next question comes from Maggie MacDougall with Stifel.
I wanted to just circle back on your used digital strategy. You had a bit of a time line over -- I believe it was a 36-month period to have that system up and running and hitting a few milestones. And you've made 2 acquisitions of high-volume used car dealerships. Would be great to understand where you're at in that life cycle and what we should be considering in terms of progress markers over the next couple of quarters.
Yes. So I would say that I was probably aggressive on timing. And the reason I was aggressive on timing was I had this belief that we'd be able to roll up used car dealers in the same fashion that we do new car dealers. And it's just not the case, finding like high-quality dealers that have a repeatable process is instrumental to building up a platform. And so, for us, it's been a lot of evaluating. And we had mentioned we've turned down many deals. It's important for us to make sure that we're bringing on the right partners. And so I think I underestimated how it was going to be to roll them up. And with that said, I don't know that I've underestimated by 5% or 20%. But I definitely -- I underestimated it. And so we're only doing these as they appear to be right. As I've said before when I question, the reason we're here is because of acquisitions gone bad, and we're not here to practice. We're here to do it right. And so it will take a little bit longer. If you ask me how long does 36 months go to 38 months, I don't know the answer to that. I just know that we're being very cautious.
Maybe one for Mike. Do you anticipate starting to break out the Haldimand and like the separate sort of digital use "sales". I know -- I realized they're not -- the strategy is not complete yet, but break that out separately from the AutoCanada legacy used car volumes.
Not yet. I mean, we have to wait to see or we have to wait to get some level of materiality, so we're very conscious of that right now. So we're not going to be looking to break that out.
Okay. And then just one final question, and it's just a really quick follow-up. You talked about the golden age of business for this industry over the coming years. And I think I understand correctly what you're referring to is a very strong demand for personal transportation. And the impact that's going to continue to be felt within the industry for a number of years related to supply chain issues, which originally began as a chip shortage and has impacted a whole host of other parts and all kinds of other end markets. And that's just a factor of it taking some time for global inventory to get back to basically an equilibrium with demand. Is that an accurate way to summarize that?
Yes. So I would say I totally agree with that. And I've also spoken to some OEMs, and the feedback I'm getting is that inventories could get back to normal pre-pandemic in the next year, 1.5 years, but that's not going to fill the void for vehicles that were lost as a result of the pandemic. And so there's probably a 2- to 3-year window of a shortage of new cars. And then put on top of that, a lot of used vehicles come from the rental car fleets. And rental car companies right now have virtually no vehicles for sale. And probably that's the last bucket to get filled. As production starts ramping up, you first supply retail consumers, but the last bucket to be filled will be the rental vehicles, and so there's a shortfall there. And then to couple that, to Michael's point, there's going to be a year or so gap for vehicles that weren't leased because of chip shortages and supply chain issues. And so all that to say, there's going to be strong demand, low supply probably for the next 2 to 3 years. And we see that as being a great opportunity to be a car dealer. Sorry, Michael, would you add anything there?
I would say, simply put, it's a seller's market right now.
Sorry. I could have just said that.
Yes. And it's going to be for some time. And I do want to emphasize one thing just when it comes to the sustainability of margins and the auction and everything else like that is just emphasize this factor that as dealers, when we're doing trade-ins and pricing stuff, we're constantly working retail down. So we have all sorts of systems and software that take into account what that vehicle is selling for on a retail basis right now. And then we work our margins down and then we take our recon off. We don't go wholesale market auction up. The auction market is such a small percentage of, we'll call it, the supply side of the used cars in Canada. It's mostly trade-ins and secondary sources and lease returns and commercial and on and on, so we do retail down. So because it's a seller's market basically right now, that allows us a lot more leverage in negotiating and setting the terms of pricing for all products in the transaction.
But actually, one last thing I'll just add is this is something we've talked about in the U.S. and in Canada, and it's a question we often get asked because we're buying so many used vehicles and because our used-to-new ratio is gaining strength, how do you protect against a fall in used vehicle pricing. And I would tell you that with Michael and the team in Canada and their data analytics, the way they've thought about inventory, they're able to spot trends on pricing like immediately. And in the U.S., we've done a similar thing where Jim has built out a used vehicle only team that marks to market the vehicles almost on a daily basis. And so we see pricing on used cars when it does drop it to be a gradual drop, not like 30%, 40% the way it kind of went up. And so we see that as a bit of a hedge against the business. And that's a question that I would be asking myself if I were everybody on the phone, so I just thought I'd put that out there.
I suppose 1 follow-on question does come to mind and something we've seen in other "commodity markets," not that a car is exactly the same as a commodity, but where you get to a point where the price increase has been so substantial that the consumer turns around and walks the other direction. Have you had any indication that, that is occurring? Or are we far away from that as of yet?
So I think it's appropriate to think of the car market as a commodity market to some degree. And so I agree with that comment. And the sensitivity of pricing is a good question, and the way I would frame that is that people are buying payments. And that's the most important thing. So if you look at the percentage, like I forget the exact number, but it's over 80% of the cars we sell were financing. And that's us arranging the financing for people. Now that doesn't include the percentage of people that are putting it on their lines of credits and home equity lines of credit and what have you. So we're selling payments all the time, and the average term is in excess of 72 months. And we do a lot of 84-month auto financing. So a $2,000 increase or a $3,000 increase in the car payment sounds like lots, but that's like $4 biweekly on a payment. And so that's the nuance that makes these price increases less sensitive to the consumer.
Yes. That makes sense. It's the same dynamic in the housing market. I do appreciate it. I'm conscious of your time, so I won't keep you any longer.
Your next question comes from Trevor Reynolds with Acumen Capital.
Just wondering if you could comment on any potential impact of the online start-ups that we've seen such as the clutch and how you guys view that growing market?
Yes. So I personally have not seen any indication of it other than the hype around it. I would say that their issue is going to be inventory, and I think that's going to be an issue for the next 2 to 3 years. And so from my previous life with where I came from with building a brand, building a brand is an expensive -- it's an expensive thing in the Canadian market. And so I think over the course of the next 2 to 3 years, their concern is going to be sourcing used vehicles and spending against the brand that they need to build in order to sell those vehicles. And so I don't really know how to comment. I don't know what the outcome is going to be, but it doesn't -- it feels difficult. That's why we're -- the way we look at it, consumers are going to want to buy cars online for sure. And there are still a lot of consumers that want to buy cars in store. And so what we want is we want to be able to -- we want to be able to transact with the consumer, both online and in-store. And with our scale and size across the country, we feel that we're probably best positioned to be able to do that and, in a true omnichannel fashion, being able to just be where the consumer wants to be. And so I don't really -- like I haven't really spent a lot of time thinking about the Canadian players in the market. I have certainly watched in the U.S. that's usually a good indication of what's coming for Canada. But I think the cost to actually get something like that up and running could be fairly significant if you don't have an existing platform for recon and sourcing.
There are no further questions at this time. Mr. Antony, you may proceed.
Listen, we really appreciate everybody's patience as we continue to build the company, and we're excited about the future. There's certainly a lot of question marks around sustainability and what the future looks like, but what we have to build on is our history that we've created over the last 3 years plus the history of the company. So thank you for everybody's patience, and we look forward to talking to everybody on the next earnings call. Thanks a lot.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.