AutoCanada Inc
TSX:ACQ
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AutoCanada Inc
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Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoCanada Inc. Third Quarter Results Conference Call. [Operator Instructions] Thank you. Raj Juneja, Chief Financial Officer, you may begin your conference.
Thank you. Good morning, and thank you for joining us on today's call. For today's call, I'm joined by Paul Antony, our Executive Chair; Michael Rawluk, President of Canadian Operations; Bill Berman, President of our United States Operations; Peter Hong, our Chief Strategy Officer; and Michael Cunningham, CFO of our U.S. operations.During our call, we will follow the presentation we posted on our website. If you don't have the presentation, it can be found on our investor site under the Presentations and Events tab, and there's a link there to download the presentation for this call.I'm going to start with the legal language on Slide 2. Let me remind everyone that certain statements in this presentation and on our call are forward-looking in nature, including with respect to, among other things, future performance and the implementation of the Go Forward Plan. These statements include involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. AutoCanada does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligations to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information about possible risks, please see our AIF dated March 15, 2018, which is on the SEDAR website as well as on our website within the Investor Documents and Filings Section. With that, let me turn the call over to Paul Antony, our Executive Chair.
Thanks, Raj, and good morning, everyone. Thanks for joining the call. The agenda for today's call is on Slide 3. We're going to provide you with an overview of the company, a recap of the third quarter and then discuss our Go Forward Plan, our acquisition strategy, and finally, our real estate strategy. Let me begin with an overview of the business today.Our new executive team is listed on Slide 5. Since our last call, we've added a number of new executives. Raj Juneja was appointed Chief Financial Officer. Raj was previously a senior partner at Davies, a leading Canadian law firm. Raj has a core focus on tax and related corporate finance, with more than 17 years experience working with public companies. He has considerable expertise in corporate finance, capital markets and M&A.Peter Hong was appointed Chief Strategy Officer and General Counsel. Peter also came from Davies. He is one of Canada's leading M&A and securities lawyer, with more than 20 years experience. He has worked on some of Canada's more complex M&A securities and finance transactions and advised public companies and their boards on strategic and governance matters.Michael Cunningham was appointed CFO for operations in the United States. He was previously CFO of Potamkin Automotive Group. Potamkin has 16 brands spread across 5 states and 34 locations. Previous to that role, Michael was the Vice President, Finance, Western Region of AutoNation, overseeing over 70 dealership locations.Raj, Michael and Peter joined Michael Rawluk, Bill Berman and myself to round out the new AutoCanada exec team. The team is very new. We all started in the midst of the third quarter, and I'm excited to start the fourth quarter with a full team. Despite that, we managed to get a number of new initiatives off the ground this quarter and expect to see meaningful results next quarter and next year.The third quarter was not a good quarter if you simply look at results. If you recall where we were, you'll see some signs of early wins and that we're excited about and know we can build upon.Let me start filling in some details. Slide 6 speaks to AutoCanada's unparalleled position in the market. We're a leading player in what continues to be a very strong sector. Sales in the industry are very strong even if not on track to match last year's record-breaking numbers, besides which our growth potential in our existing markets is very high. We foresee strong sales numbers from sometime -- or for some time, to come, given the low unemployment level, still relatively low interest rates and new technologies being introduced in new vehicles.Beyond our new leadership team, we have expanded the broader management team, allowing us to strengthen all aspects of our business. And by aligning management and shareholders' interest, we're all incented to deliver value for shareholders.We have many opportunities for growth. Model retailing in highly fragmented business in Canada. There are approximately 3,500 dealerships and 2,200 dealers in an aging demographic. Auto retailing is becoming more capital-intensive, as OEMs and customers have higher expectations of dealers. Public company participation in this sector is becoming more accepted by the few OEMs that were reluctant. The U.S. market has no issue in this regard. All of this underscores our strong market position with unprecedented opportunities.Slide 7 breaks down our market position by geography, showing where our dealerships are located, the revenue and gross profit we earn by jurisdictions. The company has had a long-standing objective of reducing its dependency on our home base of Alberta, and we continue to make progress in this regard.Slide 8 offers another view of how we earn our revenue. The chart on the left provides a breakdown by a manufacturer, with the 2 graphs on the right showing revenue and gross profit by business line. The biggest change over the last year in brand revenue is related to General Motors. Our 3-way agreement at the beginning of 2018 that gave us full control over GM dealerships also resulted in a divestiture of 4 dealerships where we held an economic interest. We added 2 new GM dealerships as part of our U.S. acquisition, but GM sales now represent 11% of our total revenue from 21% last year. You'll see the other category is up significantly this year. These brands include Mercedes, Toyota, Kia, Honda and Mazda. This category is up as many of the stories in this category were acquired in our U.S. acquisition earlier this year.This slide is also an important reminder that our business is made up of several divisions. New vehicle sales are very important to our success, though we were able to generate considerable gross profit from parts, service and Collision as well as Finance & Insurance. Growing top line revenues in these parts of the business is very important to us for our Go Forward Plan and includes initiatives to do exactly that. We'll speak to those shortly.Let me now turn to the results of last quarter.I'm going to start with a brief recap of some of our corporate developments and then ask Raj to speak to our results.Please turn to Slide 10. There are 2 key developments to highlight. The first was our sale-leaseback transaction for 2 of our dealerships. The transaction let us put our capital to a more effective use. We applied the proceeds from the $55.5 million transaction to fund the acquisition of a new Mercedes dealership in Edmonton as well as to repay outstanding mortgages on the properties. We also negotiated an amendment to our existing 3-year credit agreement to increase our total funded debt-to-EBITDA ratio covenant to 4.5:1. After June 30, 2019, the ratio reverts to 4.0:1. Raj Juneja will now take you through the financial highlights of the quarter. Raj?
Thank you, Paul. I'm on Slide 11, which provides the financial highlights of the quarter. I'm going to provide more limited comments and financial results than we have in the past to provide greater time to focus on our Go Forward Plan.In the third quarter, revenue was up by 3.9% over last year, which included an increase in revenue from new and used vehicles as well as from parts, service and Collision. The only area of the business that saw a revenue decline was Finance & Insurance. This decrease in Finance & Insurance is partly attributable to less Finance & Insurance revenue per vehicle in our U.S. operations.Gross profit was $134.8 million, down 2.3%. Reduction in gross profit is partly attributable to efforts to turn over older inventory, which resulted in lower margins.Our operating expenses were up over last year by $17 million. I'd like to explain why our operating expenses have increased by so much.Big difference from 2017 to 2018 is that we had 4 GM stores in 2017 that we sold earlier this year, and we now have our U.S. operations. Those GM stores had revenues of $103 million in Q3 2017 and our U.S. operations had $141 million of revenue in Q3 2018. As a result, our U.S. operations had 38 more -- $38 million more revenue than those GM stores had last year. However, the operating expenses associated with our U.S. operations was $21 million in Q3 2018, while the operating expenses associated with those GM stores last year was only $11 million. This difference accounts for the -- for $10 million of the increase in our operating expenses.I'm going to turn to Slide 12, which will explain the balance of the increase. The balance of the increase in operating expenses is for startup costs associated with our Go Forward Plan and certain nonrecurring expenses. There are a number of critical steps we're taking as part of our Go Forward Plan, and Michael will elaborate on each of the initiatives shortly. Total startup costs for Go Forward Plan in Q3 was approximately $800,000. There were also a number of nonrecurring expenses in the quarter, including vehicle inventory adjustments, management transition and other severance costs, costs associated with winding down dealerships for disposal as part of our Go Forward Plan and bank and legal fees that amended our credit agreement. These additional nonrecurring costs totaled approximately $7 million. I'll now turn it over to Bill Berman to provide some information on our U.S. operations.
Thank you, Raj, and good morning, everyone. In the quarter, the U.S. operations recorded a loss of $2.2 million, which included $1.4 million in nonrecurring expenses. The U.S. team and I will be focusing on further expense reductions and should see significant progress on the expense side in Q1 of 2019. Through the balance of 2018 and through 2019, the U.S. team will be implementing various initiatives, systems and processes to drive top line revenue and gross profit. I'm very positive about the U.S. operations on a go-forward basis. I'm encouraged by the talent of the associates and their desire to win. We have a strong brand mix with the right franchises in the right locations and a solid team that will be able to maximize the U.S. business. I'll now turn the call back to Paul Antony.
Thank you. Since we always get questions about FCA, let me offer of a brief update on our FCA dealership. Please turn to Slide 14.FCA continues to be our largest OEM by revenue, with our 17 dealerships accounting for over $300 million, or 36%, of revenue this quarter. FCA has had a challenging year in Canada, with its sales down almost 13%. Despite this, we have reason to see better days ahead. Our dealerships have significantly reduced inventory levels, and they're now focused on selling down past-model inventory. On this metric, we're in a much better position today than we were a year ago. We're also very optimistic about the product line. Two models, Ram and Jeep, both of which be the key to driving increased volumes. Of note, Dodge has adopted a 2-truck strategy with the Ram: the Ram 1500 and the Ram 1500 Classic. The strategy appeals to a broader cross-section of potential customers, which we certainly welcome.Slide 16 introduces the Go Forward Plan. Our goal is much more than turning around the business, so it is certainly designed to do that. Rather we've adopted a far more ambitious objective with this plan. We're striving to become a leader in our industry. We are targeting new opportunities, and we'll streamline our processes, and we'll excel as a cohesive team.Slide 17 provides an overview of what the plan aims to achieve. For too long, we've operated as a holding company, with 60-plus dealerships operating relatively independently, and we believe we can gain much more by being a cohesive team. As of a couple months ago, each of our dealerships paid most of their own expenses, and we had not used our collective buying power to negotiate discounts with our largest vendors.We have been identifying these vendors and have just begin to negotiate contracts. In addition to already negotiating contracts that will save us over $1.5 million in 2019, we have formed, and are forming right now, strategic alliances, which take advantage of our size and scale and benefit all parties involved.We have identified a number of nonperforming assets that we expect to dispose of in the near future. These assets include a few nonperforming dealerships and some pieces of land that were originally purchased for open points. We expect to reduce our carrying costs by doing so and realize proceeds of approximately $50 million.Also we believe our general managers are fundamental to the success of this organization and, accordingly, Michael Rawluk has spent the last 60 days visiting each dealership and meeting with our general managers to reinforce his commitment and gather feedback.In addition, the management team has taken steps to align our general managers with the company and shareholders as a whole.And finally, we're optimizing all of our lines of business with a focus on the parts that are less cyclical and provide higher profit margins.Michael Rawluk will provide details on how we're doing that in the next number of slides. Michael?
Thanks, Paul. Let's start with Finance & Insurance on Slide 18. This is a very profitable part of the dealership business, and we're applying unprecedented focus and attention on developing this area. We've introduced new AutoCanada-branded products for used vehicles and have commenced and coordinated a training program for all personnel working in this area. We expect this initiative will have a material impact on our earnings in 2019.Slide 19 shows that we've also created a special finance division. Nationally, 30% of all credit applications submitted through the dealership finance portals are subprime. And according to Trans Union, 60% of all millennial inquiries are subprime. This is a very important and growing segment of the automotive retail industry, and we have hired an experienced Vice President to lead our new special finance division. We've already started offering subprime financing at our dealerships across the country, and we will also be launching a new national online presence for this division before the end of the year. We expect this new team to deliver at least 3,000 new and used vehicle sales in 2019. In addition, I want to be clear that we're not risking our own money. All our financing is nonrecourse through established subprime lenders.Our Go Forward Plan includes several other initiatives outlined on Slide 20. To date, our Collision centers have largely operated independently. This is a very important and strategic part of our business and allows us to maintain support of the vehicle and our customers throughout the vehicle's entire lifecycle. We believe that fixing vehicles the way they were built and according to OEM standards are paramount to our customers and our associates. We have started to negotiate supply contracts, such as paint and sundries, and build strategic alliances with key vendors. We expect a number of other efficiencies and growth as we start to optimize and grow our Collision center presence throughout the country.We're launching a new Wholesale division. Among other things, the Wholesale division will help us be more competitive with customer trade-ins as well as take advantage of the geographic arbitrage opportunities on used vehicles.There are other initiatives that will deliver benefits over the next year. If you turn to Slide 22, they're outlined there. Used vehicles are a less cyclical part of our business while also providing customers for our parts, service, Collision, Finance & Insurance divisions. We have several other initiatives to increase the sale of used vehicles. Ultimately, we want to see our used vehicles grow to the point where they match new vehicle sales on a one-to-one basis.We also want to increase the occupancy of our service bays, which is currently at 65%. By 2020, we anticipate getting it up to at least 72%, with a goal of achieving an absorption rate of 100%. We have several initiatives directed at increasing our service bay occupancy, including establishing or utilizing a call center, along with the leading service CRM for all of our dealerships. This is an area of the business where we can really leverage our size and scale to develop a significant competitive advantage. We are currently evaluating several service CRM and business development center platforms and expect implementation to begin in Q1 of 2019. This initiative alone will increase net earnings by $16 million annually.We also have several other initiatives that we are considering for after we fully implement our Go Forward Plan. But before I turn it over to Paul, I really want to thank our 4,000 associates, our dealers and our OEM partners for their continued confidence and support of all the new initiatives. Everyone's hard work is starting to bear fruit, and we are very encouraged with our performance in October.
Thanks, Michael. While our Go Forward Plan is designed to support organic growth, we'll continue to make strategic acquisitions. Slide 22 outlines our approach for that. We're going to continue to seek out dealerships that help improve our brand diversity and geographical presence.We have an extremely robust pipeline of acquisition opportunities under consideration right now, and we'll apply a very disciplined approach with proper due diligence before moving on any.We're seeing multiple decreasing given the recent decline in new sales, which we believe is to our advantage.Finally, some thoughts on our real estate holdings. As outlined on Slide 23, we do not believe the value of our real estate is reflected in our share price. In addition, buying real estate on acquisitions of dealerships significantly increases the EV/EBITDA multiples paid and, as a result, we expect only to acquire real estate in very limited circumstances going forward. Our plan is to dispose and leaseback up to $50 million worth of real estate this quarter to free up funds for future acquisitions. With the proceeds expected from the disposal as part of the Go Forward Plan, we'll have approximately $100 million of funds to make acquisitions. We are considering what our long-term strategy should be in respect of the balance of the real estate.I'll finish on Slide 24 though. But before I do conclude, I'd like to address a couple of questions that I know will be coming. I know there'll be questions as to the earnings increase we expect with our Go Forward Plan, given our comments on Q2, and then questions as to what base case that earnings increase will imply on top of. To answer these 2 questions, without taking into account any possible acquisitions in 2019 and assuming a similar new vehicle sales market as we're seeing today, we expect a minimum EBITDA of $100 million in 2019, which takes into account the elements of the Go Forward Plan that will be fully implemented in 2019.To conclude, I know there's a lot of information to digest here, and we have been busy. We have a very strong leadership team and 69 dealerships spread across Canada and in Illinois. We are doing and will do a great deal with this foundation. Our team of more than 4,000 AutoCanada people are excited by the changes we are making, and they will be the key to our success. We have come through a very difficult period for our company, our employees and our shareholders. The changes we are introducing, new leadership and new achievable Go Forward Plan, give us enormous confidence that we can deliver much better results as our plan starts reaping their expected benefits while we earn creditability through performance.Before we finish, I want to take a moment and thank our wonderful associates, our strategic partners, financial institutions, our strong OEM partners and our patient investors. Your faith and patience will be rewarded. Though a little premature, initial feedback from October is showing strong signs that our Go Forward Plan has begun to take hold, and we are encouraged to see the results of full implementation over the course of 2019. With that, I'll open up the call to your questions.
[Operator Instructions] And your first question comes from Michael Doumet with Scotiabank.
Paul, you attempted to answer the question, but I'll ask it a little differently too, just as it relates to that $30 million of EBITDA and all of the moving pieces, obviously, as we try to put them together for the first time. $100 million in 2019, I mean, does that capture the full $30 million I know you expected, I think, originally, within 18 months? Or is there a little bit that flows beyond that as well? Just trying to get a sense.
Michael, it's Raj. It doesn't encapture the full Go Forward Plan. It encaptures the elements of the Go Forward Plan that we're comfortable will be fully implemented and will reap the benefits of in 2019. And so the elements not included in there, we haven't included anything for increases in used car sales, increases in service revenues, improvements we expect to make in our Collision business other than certain expected cost reductions. So more to come in 2020, and maybe we'll surprise you with that in 2019.
I didn't mean to put you guys on the spot, but does that -- is that a big portion? I mean, just a sense of -- is that a big portion of the $30 million that can flow through? Or is it just maybe a smaller portion? Just trying to get a sense really of the Overall expected improvement.
It's a material portion of it. I think at the end of the day, when we fully implement the elements of the Go Forward Plan, including what we mentioned in respect to service, I think at the end of the day, it's going to be more than $30 million, but we're not going to see it all in 2019. I think it's going to be over a couple of years. But there is a material portion in 2019. We've assumed it at $100 million that we continue to see a weaker new sales market like we're seeing today, and so we've tried to be conservative.
Okay. That's helpful. Maybe also turning to FCA. So those sales in Canada -- or FCA sales in Canada are down 17% in the quarter. That compares to 10% in the U.S.; that's a plus 10% in the U.S. So I'm assuming there's sort of allocation differences there. And then maybe just second question on FCA. Your sales for FCA were up 2%. So I'm wondering if you can reconcile that back to maybe the reason why your gross margins are a little bit soft in the quarter.
Yes. It's hard for me to explain the difference between the U.S. and Canada. The market as a whole in Canada in FCA sales has been down. As you mentioned, we have seen an increase, but what we've been focusing on is clearing out older model inventory. And because of that, we feel like we're in a much better position going into next year than we were last year at this time. In terms of the inventory itself, we actually have really good inventory. The only thing we're short on is the new Ram heavy-duty truck, which we're expecting to get by Q2 next year, but that's a higher model truck. And so even though it's in demand, the volume of that is not super large anyways, is what I would say. So we feel very comfortable with the inventory we have, feel very comfortable with the brand and the new products they've come out and feel very good about FCA going into next year.
Your next question comes from Chris Murray with AltaCorp.
Raj, I'm trying to understand, structurally, the operating expenses. I'm trying to make sure that I understand particularly how maybe the U.S. operating expenses are going to change. So I guess, if we can kind of walk through some of that and maybe get some more color around all the different moving parts.
This is Bill. On the U.S. side of things, right now, we're just trying to vet everything out. During the initial transition and trying to incorporate into the AutoCanada family, we found lots of inconsistencies and lots of things to be able to kind of ferret out. But through the remainder of this quarter and going into the first quarter of next year, we'll be able to streamline that, get our expenses structurally in line on an operational business and then be able to go out there and drive top line revenue and gross.
Okay. So basically, that $10 million delta you're expecting to probably normalize back down a little bit?
Agreed.
Your next question comes from Matt Bank with CIBC.
I just wanted to follow up a bit on that U.S. So just to understand, I mean, quarter -- even after backing out that $1.4 million of nonrecurring expenses in the U.S. with negative earnings, and this is the most profitable quarter of the year. So is this a significantly negative earnings run rate business in the U.S. right now? And can you just give a bit more detail as to why?
Looking backwards, obviously, the results show that. On a go-forward basis, I don't feel that to be the case.
Okay. And then you guys mentioned answering a previous question some of the opportunities that will hit after 2019. So can you just talk about the converse? What are the most immediate opportunities that will help this year? It sounds like Finance & Insurance would be the most immediate. And just share a bit more detail there, please.
Yes. The things we're expecting that will definitely drive results next year are Finance & Insurance and Special Finance division itself, the Wholesale division. And then we expect significant savings both in the Collision division and just the company as a whole as we negotiate these new contracts.
Okay. And then in the Finance & Insurance, it sounds like most of the opportunity is within used. Can just confirm that and just share a bit more in terms of how that plays out?
That's correct. Most of the opportunity on the actual Finance & Insurance products is in used. And we've negotiated some contracts there that will bring a lot of additional revenue, but that's isolated to used vehicles.
And is that revenue per vehicle will be the main thing and you're not really assuming a lot in terms of used vehicle volume growth? Or is this Finance & Insurance supposed to also spur volumes in the near term in used vehicles?
It's just per vehicle is what we've assumed for now.
And we are expecting volumes to go up in the used vehicles as well.
Yes. We have not included in kind of the guidance.
Correct.
Your next question comes from Derek Dley with Canaccord Genuity.
Appreciate all the color there on the Go Forward Plan. Just wondering in terms of the subprime initiative, when I think about the margin in that business to you guys, is it similar to what you're getting in F&I today? Or is there any discrepancy there?
It' Michael here. So you're saying that -- your question is whether the margin in selling subprime cars...
Yes. So maybe, Derek, I mean, there is origination fees that you earn as part of those loans and then would be selling a lot more cars is another part. And was that what your question was? Was it about the origination fees? Or...
So it is. Right. So when I look at the Finance & Insurance business, you kind of run at, I don't know, 91%, 92% gross profit as a percent of revenue in that business rate. Is that -- I mean, it seems to be just an origination business going forward. So is the margin structure similar? Or is there any difference there?
Again, there are 2 pieces to it, right? So one piece is originating the loan, which is kind of a brokerage fee, and the other is -- our expectation is as a result of being able to service a market we previously didn't service, we're going to have the increased volume from that. Does that make sense?
Yes. Look, on a conservative basis, we are predicting we'll sell at a minimum additional 3,000 used new cars.
Okay. That's helpful. Just in terms of the timing of the implementation of some of these initiatives, I mean, from like a cadence perspective in terms of 2019, should we expect a lot of it to be more back-end weighted as these initiatives kind of take time to have some more relevance with consumers?
We're doing our best to have everything being put in place now so that we're running at full force by Q1. Q1 is, obviously, usually a very slow -- slower quarter when you look at the year as a whole. But the ground -- all the groundwork has been done. We have, like, our special plans. People spread across the country. We'll have our new online presence up by 2019. And so the hope is that we're going to hit the ground running at full force come 2019 Q1.
Your next question comes from Maggie MacDougall with Cormark.
So I just wanted to ask a couple of questions just on how the Wholesale and subprime businesses are being setup just to make sure I understand that really well. So it sounds like you're going to -- you're not going to capitalize the subprime business yourself. You're just going to, as, I think, my peer just said, originate a piece of business, take a fee on that and then take a margin on selling the car.
Correct.
Okay. And what's involved in setting up that office? Is that something that over time will become more efficient because you'll have a greater amount of data on those subprime customers? Is it difficult to get started in the short term? I guess, just a bit of color in terms of what's involved to get that up and running properly.
It's Michael here. So just to give you a little bit of color, the subprime business is very different than traditional car sales where you're actually selling credit first and it's lot of working with the customer and providing counsel, like credit counseling. And so it's very different from traditional dealership model. So typically, like, the goal of our industry is to try and have at least 25% to 30% of your sales in that nonprime/subprime category. And so that reflects the external information that we have on the industry as a whole. Last year, less than 5% of our total sales were to nonprime and subprime customers. So we identified that as an area of underperformance, and so our approach was to establish a regional structure-specialized teams that are solely 100% focused on dealing with credit-challenged customers. And so far, within last 90 to 100 days, we've hired over 45 seasoned and experienced subprime professionals under regional national structure, and they're starting to sell cars to this segment, and they're having a great success.
And the only thing I'd add to that is all those additional hires, most of those are 100% commission based.
Pro forma.
Okay. That's great. And then on the wholesale business, in addition to sort of the arb that may present itself by virtue of pricing differences between regions and currency differences and so on, is this something that will actually help you manage inventory on a go-forward basis as well?
You bet. So the purpose of this is, this helps us get really competitive on trade-ins and facilitates us being able to capture deals that before we once were unable to capture and considered lost. So having this kind of hedge against that with a wholesale structure we see as being a huge value-add to our organization.
Okay. And then one final question for me and appreciate if you're unable to answer this, but just curious if you have a view on the time line to make the U.S. business EBITDA-positive.
Look we're -- I would say that we have a view. I don't know that I want to share that right now. We're operating as hair on fire right now, really, really trying to get this organization operating in a good rhythm, both in Canada and the United States. And so like last quarter, we're -- I didn't feel comfortable giving guidance because I didn't necessarily know what I didn't know, and we didn't know what we didn't know. We think that we're there in the United States. We think we have a pretty good handle on it. But I don't want to comment until we're 100% sure. So I would say, we feel confident that the U.S. organization is going to be a great organization for us. It's just involving us rolling up the sleeves a lot more and working a lot harder and probably with a quicker rhythm than we would have liked to have, considering how much we paid for it. But we're going to get there.
Okay. I apologize, I just had one final one, if that's all right. I'm curious on the collision initiative that you've established, where you comment on your interest in perhaps acquiring stand-alone collision centers going forward. I believe there may be some synergy with your existing dealerships, where perhaps they don't have a collision center and could direct business to that stand-alone location. Would that be something that could be of interest within that strategy?
So we have tons of business coming to our dealerships where we actually don't have collision centers. And so we're ending up -- we're forced to send them out to get the vehicle repaired. And for us, we see this as being a huge opportunity. And I can say that both Bill and Mike out of the U.S., they operated for AutoNation, and AutoNation, I think, had over 80 collision centers. That seemed to be a great asset for them. We actually feel very strongly as well and that should help us with parts as well and keeping the car in the family as -- through its lifeline.
Right. So theoretically you could acquire collision center and then direct more revenue to it, which would provide you with some synergy.
You bet.
Your next question comes from Stephen Harris with GMP Securities.
Just a couple of things I wanted to talk about here. First, can we talk about the balance sheet? We saw that you had your covenants raised on your line from 4.5. You finished the quarter at 3.81. How do you see that evolving? And where is the level you'd be most comfortable with it going forward?
So as you can imagine, covenants are something I'm paying a lot of attention to and are going to continue to pay a lot of attention to. My expectation is that it's going to continue to -- or it's going to start coming down. Earnings are going to be increasing and so feel pretty comfortable on that. Where do I want to see it? I think, ultimately, we need to be at a 2.75:3 range, and I do realize we're high at this stage, but I feel comfortable we're going to bring it down in the near future.
Do you think that the Q3 level is the inflection point? Or does that happen in Q4?
I believe it's the inflection point.
Okay, great. And Bill, I'm just wondering, at a higher level, maybe not -- to remove ourselves from the numbers, but the U.S. business has clearly been disappointing for shareholders. I'm wondering if you can sort of give us some high-level thoughts about what's wrong and what are the ways you can go about fixing it.
Well, let me start off, first, with a positive. I think we have a very good franchise mix in the U.S., 2 Toyota stores, 2 General Motor stores and the nice premium luxury 6-pack in Central Illinois, which is very unique. Our locations are where you want to be in Chicago. With that said, there have been some challenges. We -- half of our stores are union, which makes things a little more difficult. And prior ownership and the prior integration team really didn't operate at a very high level. So there's lots of inconsistencies, lack of standardized systems and processes, just lack of good business acumen across the board. So Mike, myself and our entire team up there are, basically, kind of starting from scratch and building a foundation and then building it up from there and then use it as a platform to do bigger and greater things in the future.
Are there changes that need to be made at the dealer principal level?
So we've made a couple of changes already, and right now, we're happy with the team that we have. But once again, it's a performance-based business, so we'll take that case-by-case.
Okay. Great. And just to maybe turn to the subprime side. I think you talked about 5% as being where ACQ had been in terms of subprime customers as a percentage of total. What's normal across the business? And is what you're doing playing catch-up with where your competitors are? Or do most of the -- not thinking the individual dealerships, but the other chains out there. Are most of them already in this business and AutoCanada has lagged? Or are you jumping ahead?
So I think AutoCanada would be at par with the industry. But I know that both Bill and myself have experience in this area. We know what's possible. We have strong data externally. We know where the market is. And this is an important strategy to sell more new cars. And the OEMs are happy when you sell more cars. And fundamentally, our strategy is simply sell more cars, make more money.
Okay. And what -- if it's 5 now, what could it be?
Well, it could be 30. And so we're going to run as hard as we can to 30. Our commitment for 2019 is 3,000 incremental car sales. Kind of mostly -- I would say, majority of that will be new car sales and with some used as well. But again, you sell more cars, make more money. And this is an important segment. And we have to develop specialization and use our scale and our scope to build deep specialization in this part of the segment. And we believe it's going to give us competitive advantage.
Okay. And come back to the risk part of this. Subprime has, obviously, carried a bit of a negative connotation after the real estate crisis about 10 years ago in the U.S. and a lot of the issues around there gathered -- centered around gathering data and information from customers. So if you're on the front-end interfacing with customers and, God forbid, some of them don't tell you the truth about their income or their debt position or whatever, and that's the information you provide to the lender, are you on the hook for that in any way? Is there any recourse back to you at all? Or is this entirely a fee-for-service business with no downside?
The second statement, fee-for-service, no downside, no recourse. Let me be absolutely clear is, there is no risk to us at all. We are acting as a fee-for-service. We're a broker. We're an intermediary. And we're building out specialized teams that work with customers that need this type of service to help them buy cars.
So the lender, ultimately, does their own due diligence on the customer after you provide them with the lead?
Correct.
Okay. Great. And finally, on the arbitrage business in used cars and selling that to -- into the U.S. market, can you flesh that out about what that could be? What does the arbitrage opportunity look like in terms of an average sale price on a given vehicle in the U.S. versus Canada?
I think -- so I want to be clear, it's not just the U.S. I mean, we noted the U.S. as being a potential part of the market. We actually sell a lot of their vehicles through auction, and through auction, the vehicles end up in the United States. So we aren't going to be taking currency risk and so on so forth. A big part of it is, geographically, in particular, like, you'll have pretty big swings in different markets across the country just from out West to out East. And so we feel with the network of vehicles that we have, along with our access to dealers and access to customers that we're able to just take advantage using our own data of differentials and markets across the country and in the U.S. and just play to our strengths. So specifically, when you're talking about the United States market, we're not going to get involved in arbitrage in currencies and so on so forth. That's not our business. Our business is, basically, supplying vehicles where there is demand and arbitrage potential.
Okay. So do you have a sense of what that part of the equation could add to your used car, I guess, looking on some sort of a margin basis?
Yes. I think, as Raj stated, we're not really going to comment. We haven't added that into the whole plan, the used car. We do see that this is a significant part allowing us to take advantage of trade-ins, which we weren't able to potentially offer enough before to flow the deal through on the new car. And so giving us that competitive advantage between dealerships and other dealers that we sell to, just allowing us to take advantage of being able to pay more because we can get more for that vehicle.
Great. And then one final question. A lot of these programs will require people to staff them. You talked about the -- what's going on with subprime in terms of headcount. What are you looking at overall? And is there a period here where you need to invest before you see payback? Or is the payback pretty much within the same quarter that you're hiring people?
So the investment isn't that large. We've already outlaid $800,000 as part of Q3. And on a going-forward basis, the additional incremental OpEx is not that much. We have a few new VPs that are part of this and a new director and an additional 5 or 6 people for training. But other than that, everyone is commission-based. We don't see it hitting OpEx.
Your next question comes from Stephen Kammermayer with Clarus Securities.
Just on the impairment charge in this quarter. Is the majority of that related to the Grossinger acquisition as well?
No, it was all in Canada.
It was all in Canada. Okay. And then...
Yes. Usually, with impairments, those are things that you do in Q4. However, since we started in Q2, we felt like we were forced to adjust, actually, even a portion, probably about $4.5 million, $5 million, were recovery in Q2 that we reversed. And so it's a bit of a doing-it-too-early exercise. But we don't expect any additional impairments at the end of the year. Basically, we're trying to make sure that we took whatever impairments we need to now, so we won't need to take any in the future.
Okay, okay. And then you're noting the majority of the Go Forward Plan benefits will hit in Q1 of '19. Would you expect some more sort of onetime charges then in Q4 as well as you implement this plan?
No, not expecting any material onetime charges in Q1.
Sorry, no, Q4?
Q4? I'm not expecting. I mean, there has been things that kind of popped up that we ended up taking in Q3. I'm not expecting a ton of noise for Q4, but you can't guarantee at this stage. I'm confident that Q1 -- by the time we get to Q1, we're going to be running at a great speed. That's all I can say at this stage.
Okay. And then on the plan to increase the used vehicle sales to 1:1. Do you run into any problems with the OEMs or some pushbacks from them that plan to sell more used vehicles?
It's Michael here. No, the OEMs are very supportive of the used cars. A lot of them have great certified preowned programs, where they help us sell cars through subvented rates and additional warranties. And they recognize that this is a healthy and necessary part of the business.
So Bill, you probably would echo that?
Absolutely. The OEMs are great partners when it comes to used vehicles. They're a source of a large percentage of the cars. The stronger used vehicle department that you have, the stronger the residuals ultimately become, which helps drive additional used car sales, additional customers into your service departments and then, ultimately, into new cars.
Okay. And just one more for me. On the -- on the land sales, sales-leasebacks, you noted another $50 million expected in Q4. Is there anything on the bank lines that will not allow you to sell further land? Or is there a maximum you can sell before the bank starts to say, hey, we need some cover?
Yes. So under one of Our revolving facilities, most of our real estate forms security for that. And by selling $50 million of real estate, our borrowing base would not be affected. But if we went and started selling additional real estate, our borrowing base would be affected, and we'd have to think about restructuring that facility.
[Operator Instructions] Your next question comes from Roland Keiper with Clearwater Capital.
There were some nonrecurring expenses in the quarter, some were addressed in the MD&A, the management transition costs in the U.S. operations, but there were some others that were noted being the credit agreement costs associated with implementing Go Forward Plan and inventory adjustments. Can you quantify those particular 3 items, please?
Yes. So $7 million...
[indiscernible]
Yes, sorry, so $7 million included $3.2 million of management transition and so the balance covers the rest.
Including the $1.4 million?
It includes -- no, it doesn't include the $1.4 million in the U.S., but it does include -- $7 million does include the $3.2 million of management transition costs.
Got it. You've got $53 million of assets held for sale, representing 3 dealers that you've got agreements in place with. When do you -- when are these scheduled to close? And I was going to ask you what the EBITDA impact is going to be.
You mean, the EBITDA increase from the sale?
Well, you've got 3 dealers. So that lose -- there's $53 million of carry value in assets held for sale. I assume you lose -- I don't know if these things are negative EBITDA or not or what they produce?
So what we have for sale are...
These are subject to an agreement...
Assets that are -- we believe, are nonperforming. And so there's some land and there is some dealerships.
When do you expect to be able to close those?
We're expecting that some will be in this quarter and some will be in Q1.
Got it. The minority interest that you spoke to about the GM stores, previous management raised this is an issue. How should we think about on a net basis on those 5 stores how the minority interest might change? Like, is it half a store net on 5 stores to give up the right incentives to new -- to the managers?
I'm sorry, can you repeat that question? I'm trying to digest.
Yes. So it's in your plan that there's going to be a change. You have these phantom options is how you refer to it in your slide deck for these GM stores.
No, no, those aren't GM stores. Those are for our general managers. This is on how we're comping our general managers going forward. So our general managers are aligned with us as shareholders and management to see the whole organization do well versus just our store.
Got it. And then will this have an impact on your minority interest line?
No.
No. They are just cash-settled share appreciation rights.
[Operator Instructions] And you have a question from Matt Bank with CIBC.
I just wanted to follow up a bit on the underlying assumptions in this $100 million for 2019. So in terms of the macro environment, I understand that you're assuming a flat market. But we are currently seeing industry volumes in decline. So I'm just wondering what you guys are seeing at the store level in terms of consumer health? And what gives you confidence in the flat outlook?
Listen, a big portion of our Go Forward Plan we've talked about was the subprime, which kind of naturally provides a hedge against declining sales. And so we have that. And then again, we also have the used cars that we also believe provides a hedge. And so irregardless of the volumes that we see, of course, we don't want to see the decline any further than we have today. But we feel that we're in great position to actually probably stay status quo at minimum, if not grow, as a result of engaging with these new initiatives. And so if you think about the volume of used cars sold in North America, both Canada and the U.S., it's pretty constant versus the cyclicality of the new cars. So our hedge on the used cars being one and then our subprime business, which we feel is quite additive, number two. We actually -- it's tough because we don't really want to go on the record saying half this stuff, but we're very -- we're cautiously optimistic that, regardless of what the industry does because of where we were, we're saying that we don't see it declining.
Okay, great. And I know that you don't want to focus too much on the new cars, and I'm just sort of curious anyway, in terms of how the new car same-store margin goes from here, how does that look? And why wasn't there -- why wasn't new car sales part of the highlights of the Go Forward Plan?
Well, I think that new car sales are a part of the Go Forward Plan. It's just that -- and they are a big portion of our business, like, we think we are a new car dealerships. And so a lot of that subprime business is focused on delivering new cars to markets that we didn't serve before. And so I'll let Raj speak, but our belief is that -- and there should be no question here, we're very, very invested in new car sales. That's -- if we've delivered anything but that to you, we want you to understand that's a big portion of our business. And we're talking about the underserved portion of it with subprime. Raj?
Yes. So there is a number of parts of our Go Forward Plan, which do involve new car sales. However, what we're doing is, we're highlighting aspects of the business that weren't appropriately optimized in the past, and these are the big opportunities and so that's why we're raising it. It seemed like the -- in the past, there was focus on new car sales, a recognition that other parts of the business were very profitable, but the necessary steps to optimize those parts of the business weren't taken. And in some ways, it's low hanging fruit, and that's what we're going after.
[Operator Instructions] And we have a question from Michael Doumet from Scotiabank.
Just wanted to make sure that I understand this correctly. If I just look at sort of the assets held for sale and then your comment about reducing carrying costs and realized proceeds of $50 million and then in the real estate strategy, there is $50 million there as well. Simple question, I mean, is it $50 million in total? Or is the expectation that it could be a little bit higher than that based on those 2 numbers?
Between the 2, it's $100 million.
So it's between the 2.
Yes. Between the 2, there'd be both of them, it's $100 million.
Okay. Perfect. So I just wanted to make sure it was additive and it wasn't the same comment.
Yes. There are 2 separate things: one part is assets that are nonperforming, so we're going to sell those; and then another part is selling $50 million, which we leased back.
[Operator Instructions] And we have a question with Steve Kammermayer with Clarus Securities.
Just on the subprime. I understand that when you arrange it, you take a fee. But when you actually sell the car, would it be lower -- is it safe to assume it'd be a lower-end car, lower-margin car? Or is it sort of spread out all over?
So no, it's not safe to assume it's lower-end cars. They're all makes models. As Michael said, I think, 30% of the applications coming through on the lender portal are subprime, and so we just -- we're going to tap into that market. And again, if you think about the millennials, a good portion of the business of millennials is subprime. And many of those are going to be new cars. It's just that they don't necessarily classify as prime.
Okay. So that wouldn't impact the new car margins going forward then.
No.
No.
[Operator Instructions] And we do not have any questions over the phone line at this time. I will turn the call over to the presenters.
Listen, thanks a lot, everybody, for today. We really appreciate everybody's patience as we've kind of -- getting a hold and understanding the business, so really appreciate that. Thank you, operator. Thank you, everyone, who have participated in today's call. And we look forward to speaking to you at our year-end. Take care.
Thank you.
This concludes today's conference call. You may now disconnect.