AutoCanada Inc

TSX:ACQ

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Grant, and I'll be the conference operator today. At this time, I would like to welcome everyone to the AutoCanada Second Quarter 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. 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 AIF which is available on SEDAR and on 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.

[Michael Borys, executive]

Thanks, Grant. 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; 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.

[Paul Antony, executive]

Thanks, Mike, and good morning, everyone. I'm excited to report that our positive momentum continued into Q2, and our team delivered another record-setting quarter, demonstrating the strength and sustainability of our complete business model. We are very proud of the accomplishments of this team, and believe the platform we've built makes this momentum quite sustainable.

We recorded our highest ever Q2 revenue figure of $1.7 billion, which drove adjusted EBITDA of $75.6 million, which is an increase of 7% over the prior year. Normalizing the prior year results for government assistance were up in Q2 by $8 million, which is a 12% increase over the prior year. These results were the product of strong performance across the board and in all areas of our business on both sides of the border. To put it simply, this is an exceptional quarter, and I'm going to give you a few highlights.

Our Canadian operations once again delivered strong performance, resulting in record Q2 2022 results. Our Used segment, which has remained a priority given new car supply constraints, saw continued strength, as the ratio of Used to New retail units increased to 1.69 from 1.48 in the quarter, and 1.54 from 1.13 over the last 12 months. F&I gross profit per retail unit average also increased to $3,349 in the quarter, and that's up 17%, or $491 per unit. Parts, service and collision repair gross profit increased by 29% to $78.2 million. Canada's adjusted EBITDA of $65.4 million increased by 9.3% over the prior year, normalized adjusted EBITDA of $59.9 million.

The U.S. led by Jim Douvas and his incredible team has also shown continued success with a fifth consecutive quarter of year-over-year growth in adjusted EBITDA. Total retail unit sales increased 10%. This included an increase of 1,452 Used retail vehicles sold, which is up 81% over the prior year. This also drove an increase in Used to new to 2.47 from 0.77. F&I gross profit per retail unit average increased to $4,005 per unit, and that's up 68.2% or $1,624 per unit. We reported second quarter U.S. adjusted EBITDA of $10.1 million, and that's an improvement of $2.5 million over the prior year when normalizing last year for government SBA loan forgiveness. To put it into context, we've seen a remarkable transformation of the U.S. business over the past 12 months.

The trailing 12 months adjusted EBITDA is $37.1 million, which compares to a loss in 2019 and a breakeven in 2020. We remain incredibly pleased here, and I personally am incredibly proud of our team. Overall, our strong performance in Q2 reflects the ongoing sustainability of our business model, as well as our ability to continue navigating a range of industry issues, including OEM production delays and inventory challenges. I'm immeasurably proud of what we've built and the platform's ability to thrive in a variety of market conditions and drive industry-leading performance. This performance, combined with the continued strength in our balance sheet, has also allowed us to focus on M&A, as evidenced by our acquisitions of Audi Windsor, Porsche Center London dealerships, Burwell Auto body, which is a luxury brand focused collision center in London, Ontario, and most recently on August 2nd, Kelleher Ford and Collision Center in Brandon, Manitoba.

We completed $78.8 million of acquisitions in the second quarter. These acquisitions allow us to further expand both our dealership platform, and national collision center footprint across Canada. Our M&A pipeline remains strong, and we're well-positioned to continue to execute in the coming quarters, with a number of dealerships and collision centers representing in excess of $125 million, and annual revenue currently being evaluated.

Before I turn it over to Mike, I'd like to discuss the Used vehicle market and our decision to take $10 million of incremental charge for Canadian Used vehicle inventory this quarter. We've seen a slight reduction in Used prices and margins recently, and thought it prudent to adjust our current pricing to maintain our operational metrics and objectives. Having said that, used vehicle prices remain at historically elevated levels through the end of the quarter, and we've seen follow through in Q3. In other words, we haven't seen Used vehicle pricing soften materially over the last few months, as broader macroeconomic headlines seem to indicate lots of risk.

As you'd expect, we continue to monitor this closely. And any event based on what we're seeing on the ground operationally, when combined with continued lack of new vehicle production, has expecting that the Used vehicle market will remain strong. With approximately 4 months' supply currently on the ground at our stores and pricing we are now comfortable with, I believe we're in excellent shape to capitalize on the continued market opportunities. We remain nimble in regard to our stocking and pricing levels.

For new vehicles, we have approximately 2 months' supply in stock. We continue to sell well into our pipeline, and command pricing power, while waiting for production levels to return to normal. As always, we continue to work closely with our OEM partners to source as much inventory as possible. Our employees in Canada and the U.S. have once again delivered excellent performance, and we can't thank them enough for their efforts, which are driving our results. Thanks so much to our entire team, our OEM partners and our customers.

I'll come back to speak more about our outlook and strategy in my concluding remarks, but for now, I'm going to turn it over to Mike.

[Michael Borys, executive]

Thanks, Paul. Our operating model continues to perform. To reiterate some of what Paul just spoke to, we had yet another record quarter, and we continue to see strong results ahead of us. Our reported $75.6 million of adjusted EBITDA in the quarter represented a 12% improvement over prior year's normalized results. Against the backdrop of a well-performing business model with good free cash flow generation, we remain disciplined in the management of our balance sheet and debt level, as we look forward to pursuing our organic and inorganic growth strategies.

In the second quarter of this year, we completed our normal course issuer bid, purchasing and canceling 1,730,321 shares for an aggregate purchase price of $56.6 million. At the time of instituting our NCIB, we stated that our shares were undervalued. And based on the strength of our balance sheet, coupled with our long-term outlook and the cash flows the business generates in the normal course, we saw an opportunity to create value for our shareholders, while continuing to ensure we could execute against our M&A pipeline. Following through this logic in late June, we launched a Substantial Issuer Bid. And then just last week, we announced an increase to our price range and extension of our SIB. We increased the announced price range to an offer price of not less than $25 and not more than $28, extended the expiry date of the offer to August 15th, and maintained our $100 million offer to repurchase shares.

Specific to our operating performance and our recent capital allocation decisions related to share buyback, I wanted to speak to our operating cash flows over the last 12 months, while also providing some visibility in perspective to how we see these operating cash flows trending. Reference this year will be made to pre-IFRS 16 accounting to simplify the discussion as it relates both to adjusted EBITDA and financing costs. TTM adjusted EBITDA was just over $220 million to Q2 2022.

In March 2022, reporting on our Q4 2021 results, we provided guidance that our pro forma normalized adjusted EBITDA of $216 million at the time, would represent the floor of our expectations for 2022. There's no change to that guidance, and we remain positive on our outlook. We've since provided an update that our pro forma adjusted EBITDA has increased to $234 million as at the end of June 30, 2022, or $287 million on a post-IFRS 16 basis. TTM cash financing costs were just over $40 million. Backing our incremental costs associated with the $350 million debenture financing and associated call premium and fees, we moved that number closer to $25 million. With rising interest rates, we expect it to increase, though we are somewhat protected by our 7-year term $350 million, 5.75% debenture, plus $275 million in interest rate swaps that provide some buffer over the next 24 months, as rates rise.

Cash taxes were just over $30 million in the last 12 months. While we continue to optimize our cash tax position, we expect this will grow as our earnings grow in the years ahead, and we always have to deal with various timing blips from time to time, based on installment schedules. But internally, we have pretty good visibility over at least the next couple of years.

TTM CapEx was $41 million. This is above our last 3-year average spend of just under $30 million. We expect a few years likely falling in closer to that $60 million mark, as we work to complete 2 dealership properties under development in Maple Ridge, BC. Those dealerships are slated to open in the second half of 2023. This amount is also inclusive of growth capital, which would deliver a return. Working capital over the last 12 months was a draw of $65 million, but a net generator of cash of approximately $10 million in these last 2 quarters. Some of that draw down in the second half of 2021 was driven by acquisition activity, and some other typically nonrecurring items. Working off at TTM EBITDA of $220 million and normalizing for some of the items I've noted, we have a business model that in the normal course is generating in excess of $100 million before acquisitions and share repurchases.

A recent analysis of our U.S. public peers of free cash flow conversion, tagged the average of the group at 77%. Applying the same methodology to our TTM metrics, our free cash flow conversion falls in at 82%. All of this is to reinforce the fact that the business model we've developed over the past 3 years is working, and has proven to be resilient in good times and in bad or uncertain times. We'll continue to be prudent in managing our balance sheet, and will remain diligent in our capital allocation decisions.

I'll now turn it over to Casey to discuss Q2 results.

[Casey Charleson, executive]

Thanks, Mike. At the consolidated level, revenue came in at $1.7 billion, an increase of $405 million or 32%. Gross profit came in at $279.3 million, an increase of $61.4 million or 28%. Net income was $39.1 million versus $37.7 million in the prior year. Net income for Q2 2022 includes $10 million of incremental inventory write-downs. Adjusted EBITDA came in at $75.6 million, which was an increase of $8 million, 12% ahead of normalized adjusted EBITDA in the prior year. In our Canadian operations, total retail vehicles sold came in at 23,051, an increase of 3,814 units, or 20%. The Canadian operations generated revenue of $1.4 billion, an increase of 32% versus the prior year. Gross profit was $236.4 million, an increase of 26%. Net income was $31.9 million versus net income of $33 million in the prior year. Again, the year-over-year change was impacted by $10 million of incremental inventory write-downs in Q2 2022. Adjusted EBITDA was $65.4 million, an increase of $5.6 million or 9% ahead of normalized adjusted EBITDA in the prior year.

Other key highlights include the following. Same Store gross profit increased by $18.8 million or 10% and our gross profit percentage decreased to 16.6% from 17.2%. Same Store Used to new retail units ratio increased to 1.59 in the quarter from 1.37. Same Store F&I gross profit per retail unit increased to $3,683, up 25% or $741 per unit. Same Store F&I gross profit dollars increased $14.2 million or 26%. Same Store parts, service and collision repair gross profit increased to $64.6 million, an increase of 13.7%. In our U.S. operations, revenue was $248 million, an increase from Q2 2021 of 30%. Gross profit was $42.9 million, an increase of 44%. Net income was $7.1 million, an increase of $2.4 million. Adjusted EBITDA was $10.1 million, an increase of $2.5 million over normalized adjusted EBITDA in the prior year.

New vehicle gross profit increased by $2 million, and new vehicle gross profit percentage increased by 5.6 percentage points to 13.9%. Used vehicle revenue increased by 111%, while used vehicle gross profit decreased by 60%. The increased volume of Used vehicles, sold drove our back-end grosses, enhancing our overall profitability. The number of Used retail vehicles sold increased by 81% to 3,249 units.

I'll now turn the call back over to Paul to discuss our outlook and strategy.

[Paul Antony, executive]

Thanks, Casey. So, a few additional comments before we wrap. First on the organization. We are so pleased with the recent expansion of our exec team. Since they joined in April, all 3 new executives have hit the ground running with their respective management progress on a number of initiatives. They've been personally visiting each of our stores and engaging our dealers, working with them to find more opportunities. The experience and leadership they bring is already complementing our existing operations leaders, and they're well-positioned to execute on our strategy -- strategic growth initiatives.

Next, I'd like to discuss our RightRide Used Digital Division. While we're continuing to review the option of integrating these 2 divisions to create an omnichannel Used digital sales and marketing strategies that cater to customers wanting to purchase vehicles anywhere in Canada, represent opportunities for AutoCanada through both of these platforms, and with Canada's existing infrastructure, leveraging scale, domain expertise and existing industry relationships across the country, a path to maintaining and rapidly growing volume and profitability remains very clear. As of today, we have 10 RightRide operating locations open, and remain on track for 6 additional locations before the end of the year. We anticipate having between 18 and 20 stand-alone locations operating by the end of the year. We also expect to share additional specifics on our strategic thinking in the future.

Third and lastly, I'll touch upon our perspective on our valuation and market perception. As Mike mentioned, we've recently taken a number of actions to manage we completed in Q2. We followed that with the launch of our SIB in late June. And just last week, we extended the expiry date of the offer, expanding the price range of our offer price and maintained our $100 million bid to repurchase shares.

Ultimately, we believe our shares remain undervalued. From speaking with shareholders regularly, I get the impression the market continues to price in a discount to our earnings based on market sustainability questions. What is unique and likely misunderstood about the [indiscernible] is to drive resiliency and stability, so that we can sustain our operations in both good and bad times.

I've reinforced several things over the last few years in [indiscernible] improvements, from building back strategic relations with our OEMs, driving and emphasizing the sale of used vehicles, driving our agendas and data intelligence, enhancing our parts and service business with our centralized business development center, building out a Collision Center network aimed at -- building out our RightRide new digital strategy in support of substantial future market opportunities, and sustained growth beyond the AutoCanada core, a fundamental reset in the U.S. designed to drive meaningful EBITDA contribution, and a sustained effort to expand the AutoCanada platform via responsible M&A, with an eye on ensuring we maintain a solid balance sheet, if we go back to the 2008-2009 period with the financial crisis and the last major [indiscernible] in new auto sales, well below current discounts already being applied.

In short, we don't believe the market is giving our business enough credit, not only to the complete business model that we've developed over the last few years, but also just as importantly, to what we see as an emerging recurring revenue model for AutoCanada, transactional with our customers. And frankly, to that, we see it to the contrary. We've been mining our data for customer retention metrics and going back as far as we can -- and over 60% of our customers that purchase a vehicle from one of our dealerships, are coming back to us to have their vehicle serviced or buy another car. This actually illustrates the outstanding job our dealerships have been doing in building great enduring relationships and partnerships with our customers, and it further highlights the recurring nature of our customer-centric model. This is in direct alignment with our OEM balanced scorecard, dealer pay plans, CSI metrics and other standing stewards of the brands we represent.

Okay. I'll get off my soapbox, but I definitely remain very excited about what the future holds for AutoCanada. Our business model is durable. Our balance sheet is strong, and we remain poised to take advantage of whatever the market throws at us.

I'll turn it over to the operator for any questions. Thanks a lot.

[Operator]

[Operator Instructions] There are no questions at this time. Please proceed.

Well, listen, we really appreciate everybody taking the time. And I guess we'll see everybody at the next quarter, and hopefully again, delivering great results. So, thank you very much.

[Michael Borys, executive]

Ladies and gentlemen, this concludes your conference call for today. Thank you.