AutoCanada Inc
TSX:ACQ
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AutoCanada Inc
Earnings Call Analysis
Summary
Q2-2024
AutoCanada’s second quarter was marked by a significant downturn impacted by a critical IT outage and challenging market conditions. Total sales fell 8.8% year-over-year to $1.6 billion with an adjusted EBITDA plummeting by $67.1 million from last year. The company reported a diluted loss per share of $1.47. In response, AutoCanada has halted M&A activities, frozen discretionary spending, and is focusing on core dealership profitability and deleveraging. They are also exploring strategic alternatives for underperforming assets. Despite the hurdles, AutoCanada is committed to restructuring efforts to improve future performance and restore growth.
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Thank you for joining AutoCanada's conference call to discuss financial results for the second quarter of 2024. I'm John, your moderator for today's call. Before we begin, I'd like to remind everyone that today's discussion may include forward-looking statements, which are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements.
I encourage you to review AutoCanada's filings on SEDAR+ for a discussion of these risks, the second quarter news release, financial statements and MD&A. [Operator Instructions] I'd like to remind everyone that this conference call is being recorded today, Tuesday, August 13, 2024.
Now I'd like to turn the conference call over to Mr. Paul Antony, Executive Chairman of AutoCanada Inc. Please go ahead, Mr. Anthony.
Thank you, and good evening, everyone. During the second quarter, AutoCanada faced a combination of factors that significantly impacted our performance. These include the CDK outage, which resulted in lost sales and profit during Q2, mounting OEM inventory and more specifically Stellantis, leading to higher days' supply and floor plan costs. Economic uncertainty marked by rising unemployment and falling GDP in a still elevated rate environment.
As these factors evolve, we were unable to implement our strategic initiatives swiftly enough to adequately counter increasingly challenging market dynamics. Our recent performance has not met our own expectations and it has become clear to me that we need to further deepen our focus on both deleveraging and the profitability of our core dealership operations.
With that said, during the second quarter, we engaged Bain & Company to accelerate key Project Elevate initiatives. We're also immediately halting all M&A and return of capital initiatives, have implemented a freeze on discretionary spending and are actively reviewing strategic alternatives for all non-core and underperforming assets.
In the coming months, we will concentrate with precision on enhancing the structure and efficiency of our core dealership operations. We are committed to making the necessary changes to stabilize the company and eventually put us back on the path to profitable growth.
I want to take this time to acknowledge our employees and OEM partners and thank them for their commitment and support during what was a challenging second quarter. I also want to welcome Sam Cochrane to the team. Sam is a seasoned executive and joins us as a CFO. He brings a wealth of experience navigating and leading companies through transformational change.
With that said, I'd like to pass the line over to Sam to discuss the second quarter financial results.
Thank you, Paul, and good evening, everyone. During the second quarter, we recorded total sales of $1.6 billion, down 8.8% year-over-year. Adjusted EBITDA of $27 million, down $67.1 million from Q2 last year and a diluted loss per share of $1.47.
There were a number of things that impacted our second quarter adjusted EBITDA, including the CDK outage, a $4.7 million management transition charge, $4.5 million in increased floor plan costs, a $6.8 million loss in our U.S. operations, a $1.3 million loss from RightRide and a $12.7 million net used inventory provision, which negatively impacted huge GPU in both Canada and the U.S.
Our diluted earnings per share also reflects these items as well as an $11.3 million impairment of intangible assets and a $13.2 million write-off of deferred tax assets related to the U.S. operations. Canadian operations second quarter revenue fell 9% year-over-year to $1.4 billion with same-store sales declining 10.5%. Canadian gross profit declined 19.9% to $223.8 million, with same-store gross profit falling 20.6%. Adjusted EBITDA was $32.4 million, down 63.7% from Q2 2023.
During the second quarter, our Canadian operations were negatively impacted by the CDK outage, an erosion in consumer purchasing power, lack of demand for certain brands, reduced service repair orders and a softening used vehicle market. These factors resulted in year-over-year declines in our new vehicle, used vehicle and F&I GPU, and pressured our parts and service and collision operations.
Further, growing floor plan expense due to higher rates and elevated days inventory more than offset a single-digit decline in Canadian operating expenses before depreciation versus the prior year, resulting in the drop in Canadian adjusted EBITDA experienced during the second quarter.
U.S. second quarter revenue fell 7.9% year-over-year to $191.2 million, U.S. gross profit declined 34.2% to $25.8 million, and adjusted EBITDA was a loss of $5.4 million compared to a positive $4.5 million in the second quarter of '23. This was driven by a decline in new, used and F&I GPU, which offset the increase in new light vehicle units sold.
The U.S. restructuring done earlier this year resulted in a 12.5% decline in U.S. operating expenses before depreciation, however, this was outpaced by the headwinds presented by the CDK outage and tough market conditions during the quarter, resulting in operating expense outstripping gross profit and leading to the second quarter U.S. adjusted EBITDA loss.
In light of the CDK outage, during Q2, we obtained covenant relief from our lenders amending our total net funded debt to bank EBITDA ratio covenant to 4.5 from 4 from June 28, 2024, to September 29, 2024. As of June 30, 2024, we had $185 million outstanding on our $375 million revolving credit facility with a total net funded debt to bank EBITDA covenant ratio of 4.09. We will continue to work closely with our banking partners as we navigate the next few quarters.
I will now turn the line back over to Paul to discuss the outlook.
Thank you, Sam. With the CDK outage that has now been resolved, the challenging economic and operating conditions that we experienced during the second quarter have not. Going forward, our sole objective will be to successfully execute initiatives that will structurally improve our core dealership profitability, reduce leverage and allow us to adapt to the evolving market landscape. We anticipate that these efforts may lead to some uncertainty as we realign our operations and resources.
However, this restructuring is necessary to position us for best-in-class performance over the next decade. We appreciate the support of our shareholders, employees and OEM partners as we work through this transformative phase. Our commitment to transparency will be a cornerstone of our approach, and we will provide updates to our stakeholders on our progress and any adjustments to our strategy in the coming quarters.
That concludes our prepared remarks. At this time, I want to turn the call over to our operator to open up the lines for Q&A.
[Operator Instructions] Your first question comes from the line of Luke Hannan from Canaccord Genuity.
Paul, maybe if you can just give us a 30,000-foot view on like what exactly has led to the business being in the shape that it's in today? And I realize there's a lot going on from a macro perspective, but we have also had several of the U.S. peers come out. And no, yes, there are some headwinds that they're seeing on the consumers -- on their consumer, but not quite as bad it seems like what you have laid out earlier today. So maybe just, I don't know, another higher-level view or maybe a little bit more detail on what exactly is going on here.
I mean, I think we talked about it, but -- and you probably haven't enough time to digest, but just a high-level bridge. There was roughly -- I think EBITDA pre-IFRS was $11.3 million or $11.2 million. There's roughly $20 million in inventory write-down and severance. There's roughly $5 million year-over-year interest expense differential this year versus last. And I don't want to throw exact dollar out, but I'm going to say -- we don't know the exact impact of the CDK, but 15% to 20% of the EBITDA reduction could be attributed to that.
And then we have some businesses that didn't perform this year versus last. RightRide is really off as opposed to last year and our U.S. business is way off. And if you add all that up, you're approaching $60 million of EBITDA as opposed to $80 million last year, which is the best in the company's history. But in previous years, '22 and '21, you're around that $65-ish million, $69 million mark. And so, we know what to do. CDK certainly didn't help, and it's up to us to go execute. But that's roughly the bridge.
And maybe just on RightRide for a second because I remember the thesis for that business. If I remember correctly, was that it should perform a little bit better even during more harsh economic backdrops, you should be a little bit countercyclical because you'll have sort of a top grading of the credit portfolio there, if you will. You have some maybe folks whose credit scores are on the precipice or the edge of moving into sub-prime, you should get more volumes or inflows into that business. So, I mean, what's driving the underperformance there?
That's -- so a couple of things. Interest rates, obviously going up makes creditworthy people harder and harder to find. And so, we're having less people approved. Second thing that we did as a company and this is on me. We basically started opening up RightRide stores when COVID hit, and it was the right thing to do, right? We were selling a lot of cars and taking orders for vehicles. And we started getting more into the prime -- near-prime space and lost focus in the sub-prime space. And frankly, sub-prime is a lot harder. It's a lot harder to do. It takes a different salesperson. It's a different sales process.
And so, for us, we focused on the lower hanging fruit, which is just selling vehicles because of the shortage. And so, what we're doing right now is all of our nonprofitable and non-core assets are under strategic reviews, and we kind of draw the line in the sand as an organization. And if a store is not meeting our expectation, we need to find a more permanent solution. So, we're not going to continue to allocate management time and financial resources to things that aren't meeting our expectations.
Last question for me. I mean, you did touch on the strategic alternatives you're looking to maximize value with those non-core assets. I mean, why not also expand that to just look for the best strategic alternative for the business as a whole rather than the non-core assets alone?
Right now, I think from our perspective, we've got a pretty significant plan to go and execute against. And I think it's up to us to actually go demonstrate. And during the demonstration phase, the people will reward us by buying our stock. And if they don't reward us by buying our stock, somebody will likely figure out a way to buy the company if it's undervalued would be my expectation.
Your next question comes from the line of Chris Murray from ATB Capital Markets.
I guess, maybe turning back a couple of pieces of the IT thing. So, first of all, with CDK. Just wondering, is there any possibility of any sort of insurance coverage either on your behalf or theirs in any sort of the recovery? And then alongside that, you also put a separate press release tonight about another cybersecurity incident. Wondering if we can get maybe a little more color about what that means and if that was tied to the earlier CDK as well?
I would say that at this point in time on insurance, we do -- we're working with our insurance partners to discuss what coverage we do have for cyber and business interruption. So that's what I would say on the insurance side, and that's TBD. On the -- was our most current release a result of CDK? I would say we don't have enough information to say at this point in time and so too soon to say.
And I guess, the other piece of that, I mean, just to try to figure it out, like how impacted is this new cybersecurity incident? Are we going to be looking at something similar like your operations are on par at this point? Or any color on that?
So, it seems like -- and I don't know how much I should say, but it seems like we were -- as a result of what happened with CDK, our BI team went ahead and started locking down things preemptively to protect the company. And my guess is, as a result of locking things down preemptively, it triggered another event. And we think that it's fairly sectioned off and probably not as impactful to the organization. But again, too soon to tell. But at first appearance, it seems like it's quite contained.
Maybe turning back to thinking about the inventory write-down. Sam, I'm not sure if you can just maybe repeat what the write-down was. But the -- just looking at it, can you maybe talk a little bit about the breakdown of the write-down? You did mention that Stellantis inventory is a little bit high. Was this to the new vehicles? Was there some used vehicles, which we've seen previously? Any color on the rationale for the write-down and what you're seeing so far in Q3 in terms of inventory returns?
I mean, I'll take that, and I can pass it over to Sam from there, but it was roughly $12.7 million in inventory write-down. It was on used inventory in both Canada and the United States. And we're continuing to monitor the inventory against market conditions to ensure that we're appropriately provided. Making sure that we get off this used inventory in this manner was a big contributor to the decline in our GPU and used cars reported during the quarter.
And basically, was it the kind of thing that the impact of inventory basically had to [indiscernible]. Is that the right way to think about it?
It's a few things. Obviously, with CDK being down, I don't want to blame everything on CDK, but with CDK being down, there was just a ton of vehicles not sold. And so if they're not being sold, they're kind of depreciating. And we've got data to say that we need to sell inventory in the first 60 to 90 days, otherwise they actually become quite less profitable. I would say the lack of new light vehicle sales that occurred during the pandemic meant that there's fewer good quality used cars available today.
And also, Stellantis represents roughly 25% of our dealer network in Canada, and the consumer demand for Stellantis has been soft. We -- this management team has certainly moved our reliance on Stellantis away from being a large Stellantis consolidator. Now we have all brands. But again, 25% of our network is pretty significant. And when Stellantis is soft, at 25%, it kind of impacts our used business because if we're not selling new cars, we're not getting trade-ins. And therefore, it's more difficult for us to actually go and acquire good used inventory for good gross margin.
But we're just going to watch the market dynamics as it relates to inventory and provisions. And also, I would say, just as a side note, this is something we're hyper-focused on with Bain that we've been spending time doing right now, making sure that we're managing proper inventory level in order to make sure that our flooring expenses are part of the bigger plan.
My last question maybe it's just on the strategic review process. It feels like the underlying business, ex CDK in Canada will call CDK a major contributor to what you were seeing here. Collision business seems to be going okay. You already called out RightRide is maybe an area for opportunity. But I guess, the other question is about the U.S. business. And just thoughts around that. I know we've had this discussion for, I think, several quarters now well about can you turn it around, what you can do with it? But is this kind of your way of thinking that or expressing that maybe the U.S. businesses should be sold or looked at with a different ownership record?
I think I said that, but all of the non-profitable and non-core operations are under strategic review. And we've really drawn kind of a line in the sand now that if a store is not meeting our expectations it's important for us to find something that we can actually more permanently execute on because just throwing resources at markets and areas that we don't seem to be able to have the ability to turn in a more permanent fashion. And if they're not meeting our expectations, we need to actually act differently.
Your next question comes from the line of David Ocampo from Cormark Securities.
Paul, I just want to stick with the strategic review. I mean, when we think about the non-core underperforming assets, can you maybe speak to the appetite in the marketplace for these assets? Because I mean, if you're generating negative profitability, I mean, it'd probably be hard to touch an appropriate valuation for those businesses. So just curious on your thoughts there.
Look, I think what I would tell you is that for this management team operating in Canada, even though they have a ton of experience in the United States, it's a different market, it's a different list. And so, spending time and energy to properly turn those stores, I don't think makes sense, given the current conditions.
With that said, a lot of the stores that we purchased, right, we were able to buy and kind of high grade like top grade. And I would -- with quite a bit of confidence to believe that there's a lot of people that these are brands that are highly desirable. And I would think that there are buyers that could actually go and execute where we don't have the competency or the patience actually do in a market like this.
And then just going back to the write-down, I mean, if I look at your inventory levels and just your commentary on the breakdown, it does seem like the write-down is only 3% of your used vehicle inventory. Just curious if there's any risk of further write-downs if the market continues to deteriorate here? And just maybe some commentary on how you're changing your sourcing just given the preference for lower-priced vehicles?
There is risk. I think, the risk is macro. But we have definitely been starting to source vehicles, cheaper vehicles. They're tougher to buy. But I think the risk is more on the macro level. And yes, I don't know what more I can add that I haven't already said. I think that we're being extremely cautious on all used vehicles given the buildup on the new cars. And recall that -- I mentioned we're working alongside Bain, and one of the key initiatives with us is -- and working together is making sure that our inventory levels and flooring is top of mind and paramount to this organization.
Then maybe just a quick one for Sam. I know you guys received relief from your lenders on some of your covenants. But when I take a look at your adjusted EBITDA numbers, it doesn't seem like it backs out any of those onetime related costs, at least in this quarter. How are the lenders looking at the adjusted EBITDA numbers? Are they excluding all those numbers, just so we have some better visibility on how to model out the leverage as we move throughout the year?
So, there is a different bucket of add-backs that the lenders look at and what you'll see there. For example, in the quarter, the significant one is we had $4.5 million of severance related to some senior leaders. So that wasn't added back to the $11.2 million, but that will be added back to the bank EBITDA. So that's probably a significant call out for your modeling.
And we could take it offline later today to if I have any?
Yes, absolutely. Yes, yes. And listen, we're going to have to work with them, obviously, going forward, and I appreciate their support.
Your next question comes from the line of Krista Friesen from CIBC.
So just on the comprehensive review of Bain, it sounds like you've been working with them for at least a month or two now. At this point in time, is there anything that's kind of started or any initiatives that have been started under their direction? Or is it still kind of just in a holding pattern right now to see how we move forward and I'd also just assume at this point that Project Elevate, that's pretty much been put on hold indefinitely?
So let me just unpack that. The Bain initiative and Project Elevate are both incorporated together to a certain extent. And I would say the view from Bain is it validates the opportunity for improvement in our business and to bring our cost structure more in line with our peers. And so, I would just go back to the cost structure of our peers and kind of use that for base camp. I would tell you that most of the execution is going to happen over the next 12 months. It's not going to be easy, but we are going to do it. There are going to be onetime costs associated with this stuff, and we're not going to give guidance on it.
But we do know the kind of work that we need to do. We'll have some costs. And some of the immediate things that we're going to do is halt M&A, share buyback, limit discretionary spending and growth CapEx and look at all the strategic alternatives for things that don't have sufficient profitability. But I would say that this is all stuff that we've wanted to do for a long time. I don't know -- I wouldn't say wanted to do, that the company needed to do for a long time, but you kind of look the other way sometimes when you're taking orders for cars versus selling them and it's a different world. And so now is the time.
And I guess, I mean, obviously, there's been a lot that's gone on this past quarter with the CDK hack and whatnot. Have you seen any sort of underlying improvement maybe even just recently with the recent rate cuts? Like is there any sort of silver lining you can point to either in the quarter or thus far into Q3?
Sorry. Could you repeat that?
Just any sort of silver lining that you can point to maybe you're starting to see a little bit of improvement in traffic, just given the rate cuts we've had here in Canada? Or is everything still pretty negative?
I don't want to say it's negative, but I would just say, look, CDK came back online at the beginning of July, but we still didn't have it fully functional until towards the end of July. We're kind of 1.5 weeks into August. It's too soon to tell is what I would share with you. But I would say that it's just something we can't forecast right now.
From my perspective, let's -- I think that we'll have more insight probably in the next month or so. But I think given everything that's been going on from two hacks and just -- and a poor quarter, I think right now, we just need to focus on the business.
There are no further questions at this time. I would now turn the call back to Mr. Paul Anthony, please continue.
Really appreciate everybody's support here, and we recognize our need to do better and are optimistic for the next quarter and hopeful that we'll be delivering far better results. So, thanks, everybody, for your time, and I'm sure many of you will speak to over the course of the quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.