AutoCanada Inc
TSX:ACQ
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AutoCanada Inc
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Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the AutoCanada Third Quarter 2021 Earnings Call. [Operator Instructions] I would like to remind everyone that certain statements in this presentation and on our call forward-looking in nature, including, among other things, future performance and the implementation of the go-forward plan. These include statements involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. AutoCanada does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information about possible risks, please refer to our 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.
Thanks, Chris. Good morning, everyone, and thanks for joining us on today's third quarter results conference call. For today's call, I'm joined by Paul Anthony, our Executive Chair; Michael Rawluk, President of our Canadian Operations; Peter Hong, our Chief Strategy Officer; and Casey Charleson, our Vice President of Finance. We released our Q3 results after the market closed yesterday. A copy of our results is available for download on our website. For today's call, we will be discussing the current state of the business, discussing the financial results and providing an update on both our Canadian and U.S. segments. With that, I'd like to turn it over to Paul.
Thank you, Mike, and good morning, everyone. Our teams continued and relentless focus on operational excellence delivered yet another record setting quarter in Q3. Starting with revenue where we recorded our highest ever third quarter figure of $1.2 billion through adjusted EBITDA of $68.3 million, which was an increase of 25% over the prior year on a normalized basis. This was once again a tremendous performance from top to bottom. These results continue the trend of sustainable improvement and the execution of our complete business model and strategic initiatives. Particularly impressive was the continued strong performance of our U.S. operations. The management team transition that occurred in late Q1 2021 drove a fundamental shift in the operating and sales culture of the dealerships and led to improved metrics on multiple fronts. As a result, we reported third quarter U.S. adjusted EBITDA of $7.4 million, an improvement of $2.7 million over the prior year. Gross profit increased by $14.5 million to $32.5 million, an improvement of 81%. The U.S. team also increased used retail unit sales to 2,338 from 842 in the prior year, an improvement of 178% and supported the improvement in their used to new ratio to 1.58 from 0.57 in the prior year. We remain thoroughly impressed with the progress we're seeing from the new management team and believe we're on the right path to margins more typical of our U.S. peers. We've swung the results by $22 million to the positive when comparing TTM Q3 2019 to the trailing 12 months of Q3 2021 on a normalized pre-IFRS 16 basis. This business continues to have runway to grow. Our recently announced Crystal Lake acquisition is an example of how we will leverage the momentum with our U.S. management team. Crystal Lake is AutoCanada's first Stellantis dealership in the United States. It expands our presence in the Chicago metropolitan market and is expected to generate approximately USD 72 million, an annualized revenue. We see strong potential for continued growth and improvement in the United States with the right management team in place and with the right focus on selling used cars and driving profitability. More broadly, over the past few quarters, we've discussed several key structural advantages that support the strength and resiliency of our business model. Over and above these advantages, we have a number of value creation growth levers that will drive the value of AutoCanada well beyond where we are today. I'm going to highlight several of these, which are top of mind for the org. The first growth lever is our new vehicle sales represented by our core OEM dealerships. We have demonstrated our market leadership in new vehicle sales over the last 3 years, including consistent outperformance of the Canadian market, which we've done again this quarter while regaining the trust and confidence of our OEM partners. Our used vehicle sales is our second growth lever supported by our same core OEM dealerships. We've taken our average of used vehicles sold per dealership per month from under 48 to 68 this past quarter, and we see used vehicle sales representing a tremendous growth lever in addition to providing a strong hedge against the cyclical swings, which can exist in the new vehicle sales market. Third is our subprime and near-prime business, represented by our RightRide dealerships that cater to a challenged elements of the market. We have 7 locations today, and we have visibility to 35 stand-alone locations over the next 3 to 5 years. At its run rate, typically 3 years following a location's opening, we see each location generating approximately $1 million in adjusted EBITDA with very little capital investment required. The return on capital on this growth lever is extremely attractive to say the least. Fourth is collision, where we've been accelerating the pace of our collision shop acquisitions of late, and we expect to continue that pace. The premise behind our strategy here is that OEMs are taking back their mineral rights and will work with OEM dealerships [Audio Gap] to carry out safe and proper [Audio Gap] the insurance market is also moving in this direction at the same time. Fifth is Used Digital where we are still in the crawl phase as we build out the back-end foundation of our future success. This continues to represent an excellent opportunity for the company to establish itself as a national presence in Canada, Acando, Carvana and CarMax in the United States, but without the cash burn. Sixth is our parts and service business, which represents yet another opportunity for the company to leverage its BDC or dealer mine partnership to optimize the back-end profits associated with our new and used vehicle sales. The pandemic paused some of the initial momentum we pushed out in late 2019. But with kilometers driven increasing, this business is coming back. On top of these growth levers, we have what we'll call our rocket boosters with F&I. Our results over the last 3 years clearly reflect the impact of this segment on the business tied to the great success we've had on new and used vehicle sales. Same-store F&I gross profit has increased from $36 million in Q3 2019 to $56 million in Q3 2021. Same-store F&I growth per unit is ranked first in Canada and in the United States at $3,139 in Q3. Supporting all these growth is our focus on business intelligence. We have excelled in leveraging our in-house data science team to make decisions about inventory in, frankly, all segments of the business in addition to simply managing our learnings and actions on our 10-day sprints. In addition to these core organic initiatives, M&A remains our current focus. We are very confident with the value we'll bring with our acquisition pipeline. I'll have more to say on acquisitions, our diligence and our pacing at the end of this webcast. Our strong performance in the third quarter reflects the sustainability of our business model and demonstrates that we're successfully managing through the current market environment of global supply chain challenges impacting OEM production. We believe these OEM production capacity issues will normalize over the coming quarters and expect the market to return to pre-pandemic levels in late '22 or early 2023 as vehicle production begins to come back and margins eventually normalize for both new and used vehicles on a sustainable basis. In the meantime, we'll continue to build on our positive momentum and focus on strategic growth initiatives to drive industry-leading performance regardless of changing market conditions. We've been building muscle into our complete business model and now we're beginning to focus more on resources on the integration of our pipeline of acquisitions. Our employees in Canada and the United States continued to work tirelessly and have once again delivered excellent performance. Without them, we are nothing. Thank you so much. We're encouraged by the very strong momentum across our business and we remain well prepared to face any challenges in our current environment. I'm going to come back to speak more about our business model and strategy and more particularly on acquisitions in my concluding remarks. But for now, I'll turn it over to Mike.
Thanks, Paul, and good morning again to everyone on the call. I'll use this opportunity to touch on 3 themes coming out of this quarter: one, the scale of improvement in our performance as compared to 2019 and how our foundation continues to strengthen across all segments of the business; two, some perspective on our performance gains in the U.S. against our most recent OEM dealership acquisition in that market; three, and then some thoughts on the industry's current inventory hurdles and how AutoCanada is managing against these challenges. First off, I wanted to highlight our performance on a TTM or trailing 12-month basis as compared to 2019. To put greater perspective on the strengthening of our core over the past 3 years, references here will be based on pre-IFRS 16 accounting. TTM adjusted EBITDA to the end of Q3 2021 is $183.7 million. This compares to a TTM adjusted EBITDA in Q3 2019 of $55.2 million. Over that same period, our consolidated EBITDA margin more than doubled from 1.6% to 4.2%. Operating expenses as a percentage of gross margin improved by approximately 14.7 percentage points, moving from 91.2% to 76.5%. We've had 9 consecutive quarters of positive free cash flow. Over the last 24 months, we generated just under $300 million in free cash flow. This compares to negative free cash flow for the trailing 12 months to Q2 2019 of $19.5 million. Our model is demonstrating that we generated good cash flow and net debt improved from $202 million at the end of Q3 2019 to $30 million at the end of this most recent quarter, bringing our net debt leverage from 3.7x to 0.2x. The second point I wanted to discuss or to address is simply an acknowledgment of the gains we are now seeing in our U.S. segment. And with those gains, the comfort and confidence we have in completing the acquisition of Crystal Lake Stellantis earlier in the month. Looking at normalized results, our U.S. operations had a negative $11.8 million adjusted EBITDA for the trailing 12 months ended Q3 2019 as compared to generating positive $10.6 million on a normalized TTM basis to Q3 2021, a positive swing of $22.4 million in real improvement. We continue to see strong gains in total new and used retail unit sales growth with the U.S. growing by 65% year-over-year. Despite the ongoing challenges with inventory, the U.S. was able to come in just ahead of prior year on new and positive 178% on used. U.S. adjusted EBITDA margins on a normalized TTM basis reflect 1.8% as compared to negative 1.7% in 2019. The acquisition of Crystal Lake will further accelerate the gains that the U.S. is pushing through. My third and last point speaks to the current inventory challenges the industry is facing. What is somewhat unique with AutoCanada, though is that we're securing our OEM allocations based on our strong market performance over the last 24 months. It's a turn-and-earn model. The more we can sell and the more we can outpace the market, which is what we've been doing over the last 3 years, the more allocation of inventory we will earn. On top of that, I would emphasize that AutoCanada was ahead of the game, early adopters to building a used car strategy that was applied through 2020 and 2021, as evidenced by our ability to move our new and used -- our used-to-new ratio from 0.71 in Q3 2019 to 1.22 in Q3 2021 on a TTM basis. With the challenges upon all of us on new we are very well positioned to leverage our momentum and focus on selling used as a hedge across the segments of our business. All of these points speak to the strength, resiliency and sustainability of the complete business model. This is not just about new but it's about used, F&I, parts and service and collision repair. And on top of all of that, we have our value and growth drivers that Paul has spoken to earlier. I'll now turn it over to Casey.
Thanks, Mike. At the consolidated level, revenue came in at $1.2 billion, an increase of $189.7 million or 19%. Gross profit came in at $220.2 million, an increase of $40.8 million or 23%. Net income was $38.8 million, an increase of 8%. Adjusted EBITDA came in at $68.3 million, which was an increase of $7.2 million or 12% over Q3 2020. In our Canadian operations, total retail vehicles sold came in at 19,264, an increase of 2,000 units or 12%. The Canadian operations generated revenue of $1 billion, an increase of 12% versus the prior year. Gross profit was $187.7 million, an increase of 16%. Net income was $33.8 million, a decrease of $0.5 million. Adjusted EBITDA was $60.8 million, an increase of $4.5 million. Other key highlights include the following: same-store gross profit increased by $28.2 million or 19%, and our gross profit percentage increased to 18.3% from 17.7%. The same-store used-to-new retail units ratio increased to 1.29 in the quarter from 0.86. Same-store F&I gross profit per retail unit increased to $3,139, up 26% or $650 per unit. Same-store F&I gross profit dollars increased $12.9 million or 30%. In our U.S. operations, revenue was $188 million, an increase from Q3 2020 of 79%. Gross profit was $32.5 million, an increase of 81%. Net income was $4.9 million, an increase of $3.3 million. Adjusted EBITDA was $7.4 million, an increase of $2.7 million from Q3 2020. New vehicle gross profit increased by $3.2 million and new vehicle gross profit percentage increased by 4.4 percentage points to 10.2%. Used vehicle revenue increased by 266% and used vehicle gross profit increased by 146%. The number of used retail vehicles sold increased by 178% to 2,338 units. I'll now turn the call over to Michael Rawluk to discuss our Canadian operations.
Thanks, Casey. Good morning, everyone, and thanks for joining us to review this all-time record quarter. Our teams have lots to be proud of this quarter. We outperformed the new vehicle market, set a new record for revenue, improved our margins, lowered our operating costs and significantly improved net profit. This record-setting result belongs to each one of our 4,200 team members throughout Canada. High performance is only possible with high-performing teams. We are grateful for your passion and perseverance. We have operated with the belief that grit wins, and this has definitely proven to be the case. A special thank you goes out to our OEM partners and strategic vendors who continue to work alongside us in this difficult and ever-changing environment. Thank you. There has already been a lot of information covered during this call, so I'll focus my section on the 2 most important topics these days. One, margin sustainability; and two, inventory supply. Although gross profit margins are strong at 18.4%, our original target in the Go Forward Plan was 17%. So while strong, we consider this close to our original view on sustainable margins. When you compare all of the operating segments to the Q3 2019 results, the margin improvements are surprisingly even. Unlike the improvements in the U.S. publics, which are primarily driven by exceptionally strong new vehicle growth, our margins are up across the board. It's important to note that in Canada, we are not permitted to sell new vehicles above the manufacturers MSRP. This constraint, combined with historically strong new vehicle margins, has resulted in moderate improvements of approximately 150 basis points. Our diversified improvement in margins is the result of process improvements pricing strategies and less discounting overall. It's true that strong consumer demand has allowed dealerships to hold their prices, but we have also become stronger salespeople along the way. Dealerships and their numerous commission-based employees have come to enjoy these new gross profits, and they're not going to let them go easily. The catalyst for lower margins will be excessive base supply of inventory combined with aging stock. In other words, dealerships will have to start discounting again when they get too much inventory, and it starts to sit on their lots too long. Although this will likely happen at some point in the future, we don't see this scenario occurring anytime soon. Our new vehicle inventory continues to be a challenge, but it is still manageable. The situation varies among the OEMs, but the common theme is that production has hit bottom and is slowly improving. Based on our historical sales pace in Q4 2020, we have 48 days supply of new vehicles on ground and 76 days supply when you include vehicles already in transit to the dealership. The entire allocation in the production system is sitting at 139 days. However, the further upstream the vehicle, the more vulnerable it is to delays resulting from microchip shortages. That said, this is the highest volume of vehicles that we've seen in the system for over a year. Even if these vehicles get delayed, we already have 76 days supply secured. We're quite happy with these numbers and frankly, are enjoying the benefits of demand exceeding supply. I'm not sure who would change the situation even if they could. We're looking at used vehicle inventory, we have 56 days supply at 60 vehicles retail per dealership per month. Used vehicle inventory is a challenge, and this is where the competitive advantage of AutoCanada shines. We have the economies to employ specialized buyers, have industry-leading data and strategic advantages with OEM closed options, trade-ins and lease returns. All of this, combined with the will to outwork the competition provides us with confidence that we can continue to grow our used vehicle sales rate. When supply finally catches up with demand, we will benefit with the improved quantity of vehicles, especially high-margin pickup trucks and achieve gross profit growth through volume gains. This process will take at least 18 months, which provides us with more time to strengthen the organization so that when we are back in a battle for market share, we are ready to compete and win. In conclusion, our teams are very proud of this quarter and continue to make improvements across the entire business. We are not sitting back enjoying these strong margins, just the opposite. We are obsessed with strengthening and improving this business, outworking the competition and becoming the dominant team in the Canadian automotive industry. Over to you, Paul.
Thank you, Michael. Our strong performance this quarter reflects the fundamental strength and resiliency of our business model and our operational playbook allows us to be ready to execute on our next leg of growth and acquisition strategies. As part of this growth, we continue to advance our acquisition strategy with several recent acquisitions, including 2 collision centers in Airdrie and Montreal. And as I mentioned earlier, we also added to our U.S. platform with the acquisition of the Crystal Lake Chrysler Jeep Dodge Ram dealership, representing our first Stellantis dealership in the United States. In terms of our ongoing acquisition strategy, we remain well positioned to execute on our acquisition pipeline in the coming quarters. In terms of timing, we know people may have expected us to complete a few more acquisitions by now. However, with these first few deals, we're taking a little longer to go through our due diligence process. We're reviewing these potential acquisitions with a greater degree of scrutiny to ensure that we're not taking on any undue risk within these opportunities. We believe this process will accelerate as we get through these first few deals, but we want to take our time to properly test our detailed due diligence with these initial transactions. We will continue to be extremely disciplined as we evaluate these opportunities to ensure they fit within our stringent criteria. As a reminder, our significant transaction pipeline with dealerships and collision centers represent over $400 million in annual revenue, currently being evaluated under signed LOIs and purchase agreements. The LOIs subject to due diligence, represent $100 million in annual revenue, signed purchase agreement for dealerships located in Ontario, subject to OEM approval and other standard closing conditions represent over $300 million in annual revenue, inclusive of brands we do not currently operate today. Beyond these deals, we are at varying stages of the acquisition process with other targets that have not yet reached the sign LOI stage. We're assessing this extensive pipeline of acquisition opportunities qualitatively and quantitatively with the goal of diversifying by geography and brand in addition to expanding our network of used dealerships and collision centers. In terms of industry themes and where we see things headed, we believe our business model remains resilient to fluctuations in the new vehicle sales cycle given our diversified business mix and extremely flexible cost structure, in addition to our several growth factors new cars aside, including F&I, parts and service, collision repair, near-prime, subprime and used only retail. We also believe that any near term pressure with inventory constraints is likely a positive dynamic for the industry as it creates additional pent-up demand that would be more rationally released over a multiyear recovery. From a longer-term perspective, while potential disruption exists from ongoing industry megatrends such as electrification, autonomy and mobility services, we are proactively investing in our various growth initiatives to not only avoid disintermediation, but also fortify our position in the shifting industry landscape. As we've said before, we continue to be proactive and vigilant as to what the future holds with any ongoing impacts from the macroeconomic environment related to COVID-19. We believe we've stabilized the fundamentals of our business, and the team has been mobilized to approach each one of our growth opportunities with the same intensity and vigor with which we rebuilt this company. We're excited about what the future holds for AutoCanada, and we remain poised to take advantage of the disruption and consolidation in the industry and plays a new path forward and the evolution of the company. Now I'll turn it over to the operator for any questions. Thanks.
[Operator Instructions] Your first question comes from Chris Murray, ATB Capital Markets.
So maybe turning to the inventory question a little bit, and I'm not sure who wants to take this, but a couple of pieces to this. First of all, I think last quarter, you had talked a little bit about the fact that your OEM allocations -- we're looking pretty good through the quarter. I guess you're talking about 76 days with stuff that's coming to you. I guess the first question I got is do you see, at least as we go into early '22, some of these things normalizing a little bit in terms of inventory supply. And then the other question I have, this is more of a broader piece. And maybe just listening to your commentary, maybe you're already there. But some of the OEMs have talked about wanting even more disciplined in production, keeping inventories maybe tighter long term. Just wondering your thoughts around where you guys see inventory levels going longer term? And does it become a bit of a market share gain again?
I think Michael should take the question. I'm happy to maybe add something at the end.
Okay. So with inventory, our forward day supply, which is based on last year based on a 90-day sales rate is 140 days as a total group. And it varies, some of the OEMs are struggling more than others. Our historical sales rate, 90-day historical rate, if you use the last 90 days, we have 125 days supply of inventory and 67 on ground and in transit, but we're heading into the slower seasonal lows for sales. And so it's probably more like 75 days supply. And do we see that improving? I think moderately, it's a little bit patchy. Like sometimes we get a great allocation. And then the next month, it's really light. So it comes and goes. But at the end of the day, we have 75 days supply of inventory on ground and in transit. We're happy with that. 140 days in the pipeline. And as the pipeline starts to stabilize, that will start to get released. Your second question about whether or not we'll get into a battle for market share. And I remember specifically, 2009, '10 and all the disruption that we had there, and it was the same commentary about OEMs being more disciplined and less incentives and on and on. And that lasted for a while, but eventually, inventories build and we're back in that game, again, battling for market share. And our goal is to make sure that when and if that happens again, that we're a stronger company that we use these times to build lower costs, improve efficiency, strengthen the operation so that when and if we start to battle for markets again that we're in a significantly stronger position to do so. Does that answer your question?
Yes, that's helpful. And then I think, Paul, you had something you want to add?
Yes. Listen, I mean we've had this question previously as well. It was just to cap what Michael was saying, he's going from his experience. And I agree, I've actually spoken to a couple of executives at some of the OEMs, and they said, on paper, it all makes sense, less cars in the system means less incentives and so on and so forth. But automakers are their OEMs, they're building -- like they build vehicles, and that's what they do. And the second that it comes to the potential for them to lose market share is the second, I think that all bets are off. And to Michael's point, it's very difficult to kind of maintain that rhetoric.
Okay. So if that's the expectation, can you maybe walk me through kind of where the model is today then because at the same time, you're probably having some sales are more complicated as kind of pricing. But as inventories normalize, should we expect transaction volumes to go up, would be, I guess, the logical way to think about this? And then that gives you other opportunities in the F&I business and parts and service. Is that -- am I thinking about the way that you guys have structured the model correctly?
Michael?
Okay. The way -- let me know if this answers your question properly. But the way we're thinking about it is that the volume is going to be what it is on the new car side based on the allocation. And so we are focused on margin. It's simple math, right? Volume times margin equals growth. So we're really focused on margin and quality of transaction because we feel constrained on the new vehicle side. That said, we feel like we have lots of runway on use. So we're using this time to continue to build up our used capacity and volume and elevate the production system for used vehicles at elevate and stabilize. Once new vehicle volume increases and allocation increases, there is so much pent-up demand in the system. It's hard to properly articulate how many sold orders we have, how many consumers that are out there looking for cars, how many fleet companies are over mileaged, out of warranty can't fill their orders, rental car companies that are running cards exceptionally old, can't fill their orders. And so once the production comes back, it's going to be a pretty special time for the car business because we'll be able to take advantage of that period of both increased volume and margins as demand slowly catches up with supply. This is an 18 -- anywhere from like 18- to 36-month process to when it starts to finally normalize. By the time that all that pent-up demand gets satisfied in the system and the inventory starts to build, which is a lag on that and the inventory that starts to build gets to age. Only at that point in time, will dealers start to feel pressure to discount and soften margins. that's at least a 36-month process before you start to feel that pressure. By the time that happens, we'll have significantly more economies, efficiencies. We'll have a stronger model in place and we'll be able to compete and win even in a market where we're battling for market share again.
Okay. That's helpful. And then one last question just on the M&A front. Paul, you mentioned the fact that you've got a number of transactions that are under purchase agreements and you're just waiting for some closing conditions. It sounds like -- are the -- can you describe what these closing conditions might be? And what's kind of required between today and getting some of these transactions to close that sound like they're already signed?
I would just tell just as much internal process as it is external. The level of scrutiny that we're undergoing internally is probably, as I mentioned in the call, it's probably at a higher level. We're very, very cognizant of the reason that we're here and that was because M&A went off the deep end before we got here. And so we're triple checking everything. And so it's taking a lot. And I would say pressure testing that against our diligence right now against what it could be in the future as we kind of streamline the process. The first deal is because they are significant. As far as sizes go, we want to be very, very measured and very methodical and make sure we don't miss that.
Your next question comes from David Ocampo, Cormark Securities.
When I take a look at your kind of used-to-new vehicle ratio, it's quite elevated and quite a bit above your 1:1 ratio. But just thinking a little bit longer term and when new vehicles do come back into the marketplace, do you expect when consumers shift their preferences, they will start to gravitate back to 1:1 or are you guys going to put out kind of a much larger target?
I mean I can maybe take a little bit of that, but I'll pass it over to Michael. I would tell you that -- and we talked about this in our Board meeting that not all the people that are buying used cars right now would have been new car buyers. And at some level, this is kind of resetting our expectations of the art of a possible. And we now believe that these higher levels of used car penetration in new are possible. And for sure, there's going to be some overlap with new as you do as volumes start to normalize. But I think that what we talked about was our expectation is that we should be above the 1:1. Michael, I'll let you take it.
Yes. My thought is that -- and this has proven historically outside until we had the pandemic. It was for a long period of time, the number of cars sold in Canada was really consistent and increased by population growth by like 2%, 3% a year. And then the fluctuation of new and used changed within that, but the total numbers of cars sold was extremely consistent. So we've always thought -- our team has always thought of used cars as a hedge. And sometimes when new comes back and it overshoots, it does take some market share, so to speak, or cannibalized as used. At the same time, when there's disruption in new, which seems to be more sensitive to the economic situation, used tends to fill in and fill that gap. And then at the end of the day, the total number of cars sold is consistent. So -- we have -- in our minds, we don't think like operationally, and if you talk to our dealers and our operations team, we don't think in terms of used-to-new because it's about just like increasing the number of cars sold. And that's why we had Project 50, which is a minimum of 50 used cars per dealership. We're over 60 now, and we've got some big targets for next year. And so we're just looking at that as a separate business segment to say just continue to provide growth on your used cars, understanding that when new comes back, in a big way that it will provide a headwind for used.
Great. That makes a lot of sense. And then just circling back on your U.S. margins and you made a comment in your prepared remarks that you expect that to gravitate towards peer average margins, maybe not in the near term, in somewhat distant future. Is that possible with your current footprint? Or will you actually need to get significantly more scale through acquisitions for that to happen?
Everything we're saying is it is possible with our current footprint. We don't -- although slow and steady wins the race for the U.S. We're proving things out kind of one store at a time. We're not into buying dealer groups in the U.S. necessarily unless they're opportunistic. But we certainly see a path to being industry leaders in the United States as well and using our current footprint as the platform.
Your next question comes from Michael Doumet, Scotiabank.
My first question, just maybe a quick one. I think back in Q2, it seemed like GPU was as good as it gets, until, I guess, we saw Q3 here. So with the lack of new inventory, how should we think about GPU in the next couple of quarters? Do you think Q3 levels are somewhat sustainable? Or is it more of a blend of kind of the Q2, Q3 levels?
Michael?
Yes. I would say when you look at front-end gross, I would say probably more of the same for the foreseeable future. And F&I is still creeping up seasonally. The winter is a little bit higher for F&I. And that's, again, that -- that's not really margin driven that business. Like what's driving our F&I numbers is products per deal sold. And so we track our F&I, but of course, as a big part of that is a foundational to that. We're tracking how many products are we selling, and again, like credit insurance, extended warranty, tire warranty, all the different things like that. And because one is margin, which is maybe not as sustainable and the other one is process improvement, salesmanship and just overall quality of transaction. And so what's driving our F&I is the PPD or products per deal. And so that is sustainable and who knows like they continue to improve that area of the business. So that is more long term and the new vehicle margins for the foreseeable future, again, this is like a multiyear process of inventory, catching up with all the demand, slipping over all the commercial fleet, flipping over all the rental car companies building stock on the dealership and then it's sitting on the dealership lots until it starts to get aged. And then only at that point where we start to feel pressure to discount again. So I don't know, I think we're in for a really good run here for a long time.
That's helpful. And then maybe just on the gross margins. Specifically, the targeted gross margins you commented on the Go Forward Plan of 17%. Are there any areas maybe use or F&I where you believe you've kind of exceeded prior targets maybe on a sustainable basis such that maybe we don't head back to 17%. I know mix is certainly part of the equation here, but just thinking longer term.
Yes. I would say like the thing that I'm most pleased about from a gross margin perspective is the improvements across the board and the improvement as a percentage of using 2017 as a baseline. The improvements are surprisingly even to each other. If you look at the U.S. peer groups, which we track, the new vehicle margins have way overshot. And again, that goes back to my comment that in the States, it's quite common to sell over the manufacturer suggested because that's the way to look at that is suggested retail price. But in Canada, we're bound by all sorts of consumer legislation that we're not allowed to sell over the advertised MSRP. And so if you look at our new margins, we haven't overshot historically what AutoCanada has done. But the U.S. publics, a lot of them are more -- are double what they were in 2018. And so if I look at that from an industry perspective, I think to myself, okay, that's probably going to correct itself at some point in time. When we're sitting at 150 basis points over where we were in 2018 or 2017, it doesn't feel like there necessarily has to be a correction there. Parts -- parts and service are healthy. We've improved those through all sorts of pricing matrixes. And that's -- there's a lot of sophistication that went into improving that. We redid our whole parts catalog from top to bottom, looked at all of our effective labor rate like those are structural improvements. And then used. Used Is very reasonable where we are, and we think it's sustainable.
Yes, that makes sense. That's really helpful. And then maybe just one last -- a question on capital allocation. I mean, you keep building cash here at a faster rate than you're spending it on M&A. And presumably, that changes in the next couple of months. But in the medium term, do you think you can continue to source new deals in a stronger market sufficiently to kind of keep this balance sheet easy?
So I'll answer that. The answer is yes. We've never had so many opportunities put in front of us, but we're -- we obviously have PTSD from the turnaround and the effort that Grossinger took. And so wanting to make sure that we're getting it right because it's a heavy lift turnaround, like we'd rather just buy good stores and make them better versus buying broken stores and getting them up and running and then making them better. And so we absolutely see the way to deploy all that capital. I would say a lot of the questions we're getting today are all around sustainability. It sounds like of margins and so on. But I think you guys are missing the punch line. And I don't know -- I mean it's -- I think we've demonstrated we're not -- we don't want to talk the stock. We don't really do a ton of marketing on the company. But hopefully, everybody understands that, yes, like we think that the earnings are sustainable. Michael and his team are building out the business model for the next evolution of the business. But we also have growth levers that also we believe, take us into the next evolution of this business. And I don't know that everybody really understands and maybe it's our fault for not explaining it properly. Our growth levers like RightRide, subprime, near prime -- we have 7 locations open. Each one throws off $1 million of EBITDA. We'll have over 35 of them open in the next 3 to 5 years. Collision repair is a big market for us, used digital and M&A. And I think that while we can sit and talk about the sustainability of the earnings, that's kind of table stakes for us. It's now about the next evolution of the business, which Michael said, we're not sitting celebrating the fact that we've got some of the best quarters of the company's history. We're actually figuring out what the market looks like next quarter and the quarter after that and the year after that, so we can stay ahead of the market. And so I'm not -- I guess I just -- I'd like to mention that because I think it's getting lost in translation.
Yes. No, I appreciate those comments. I guess, no, we all see the growth, Paul. It's just, I guess, what base to use to calculate the growth on top of. But helpful comments. I appreciate it and nice quarter as well.
Your next question comes from Luke Hannan, Canaccord.
Michael, I wanted to start with something you had mentioned in your remarks there. I think you said that there's 76 days of new vehicle supply when you include those vehicles in transit. And I can appreciate it's tough to sort of quantify the amount of demand that's sitting on the sidelines right now. But of those 76 days, I'm just curious, how much of those have been, I guess, presold or not to the point where those units are already spoken for?
Yes, that's a great question. I think on average, the way to think about it is we're starting each month with approximately 15%. That's very conservative, but each dealership starting each month with about 15% of their new vehicle target presold by vehicles that are in transit and paid for already.
Okay. Excellent. And then on M&A, I'm curious, Paul, maybe you can speak to this. I mean we've seen that there's, of course, a larger U.S. player that's entered the Canadian market. And so I'm curious for those targets that are maybe outside of the LOI specific section of your M&A pipeline. Have multiples there increased at all specifically as a result of this other player entering the Canadian market? Or is it still consistent with what you've seen historically?
I think it's still the same. In fact, the competitor you're talking about being Lithia coming into the market, I think it's great for us because they're rational buyers. It's not that they're overpaying. They do -- they've got an M&A engine. They know how to do it. They know what they're doing. And they buy stores that make sense for everything that we can see. But it's not like they're sitting there and paying multiples that are higher than industry norms. I would say that the tough part right now from my experience is the expectation of sellers because they've had these barriers. Everybody is trying to talk about getting multiples for 2021 and pro forma 2022. And so bring everybody into reality and saying, that's not normal, maybe before it wasn't normal because you have new cost structures. But getting to a happy medium, I think is kind of where we all want to get to you. And I think that if anything, the U.S. player in the market has actually helped us give validity to the valuation that we're putting on dealerships.
Got it. And on a similar note, I mean, Lithia, they have their -- of course, their driveway solution that they're rolling out right now in the States seems to be getting traction. I think they're on pace for 15,000 units sold through that by the end of the year. Is there any, I guess, concern on your part of all that is -- that they'll bring the solution into the Canadian market and therefore, kind of take away this first mover advantage on being able to develop a national digital retail strategy, then being able to bring it here ahead of when you might be able to have years ready.
I'm not concerned about that. I think that we have -- we have the people, we have the knowledge. I think we understand this market as well, if not better than anybody else in market with digital used. And what the world that I come from is all about transparency around that car sale, which is what's needed. And I think that we have access to data that we'll be using that will help accelerate us.
Excellent. Last one for me and then I'll pass the line. It's nice to see your outperformance relative to brands that you represent the broader market. Nice to see you get back to that this quarter. Although, candidly, it is somewhat a bit of a lower magnitude than 1.5 percentage points that it has been in the past. If I recall correctly, in Q3 of last year, it was close to the tune of 7 percentage points. So I'm just curious what the main driver of that was, and if you expect that, I guess, level of outperformance to improve in quarters to come.
Michael, over to you. I have my answer, but I'm curious to hear what you'd say on this.
Yes. The new vehicle volume, the most difficult segment in the market right now from a supply, build and supply is pickup truck market. And so we are definitely in the bottom, if you read what's happening with GM and Ford and Stellantis with pickup trucks -- that. And if you look at our OEM day supply, those are by far the bottom, and that's where we're struggling. The -- we're making up volume through cars and SUVs. But the pickup trucks -- the lack of pickup trucks has definitely created a bit of headwind. The cup half full on that scenario is that's our highest margin vehicle. And so when that segment comes back to life, I think that we're -- definitely, we will see that in probably stronger new vehicle margins. And then the last component, too, is when you're comparing year-over-year you're always looking at your baseline. And Q3 last year was such an exceptional quarter for us where, again, in Canada because we had such a hard shutdown in Q2 that Q3 just came back so strong in this market. And we have been dreading all year lapping Q3. And we're actually really pleased. We're really proud of ourselves and we're very pleased that we're not only able to lap that quarter, but also beat it. So -- and again, when pickup trucks come back, you'll see that volume will get a bit of tailwinds with that. Does that help?
Yes.
Your next question comes from Maggie MacDougall, Stifel.
I wanted to touch back on the digital used strategy. I noted in the MD&A -- a little bit more detail around that in terms of like showing the higher-volume dealerships that separate from the firm -- from the rest of the firm as well as some goalposts around volumes that you'd like to have within, I think, an 18-month time frame. So first of all, can you give us a bit of update in terms of what your expectations are to achieve enough sort of national presence, manufacturing or reconditioning however you want to call it, in order to proceed to the walk stage, which is when you would actually overlay the digital platform on top of the infrastructure that you've built?
Yes. I think when we look at the whole digital used, as you know, we had said that we're going to build out our scaffolding, which was the used car -- the physical used car dealerships across the country and then overlay digital retail on top. And that way, kind of killing two birds with one stone, where you've got reconditioning centers inside of these used car operators plus you're getting volume. So you're not necessarily going backwards just on expense. And so what we've also learned was buying -- and this is what I said, I think, the last quarter, it's taken a little bit longer than we would have expected. And that's because buying used car operators like Haldimand Motors and Mark Wilsons that not only represent that size and scale, but kind of fit with the AutoCanada mold they've got process in place. They've got access to inventory. They're just high-quality used car operations. Those aren't as easy to find. And so we've also been looking at build versus buy and what it takes to stand up just like with RightRide we've -- I think we mentioned we have 7 RightRides going to 35. I don't think we need anywhere near that for our used digital. But I would say that once we have coverage more or less across the country, we feel confident we can overlay the digital on top of that. With that said -- and by the way, that's when I would say that we're at the walk stage when we have that coverage. We're also -- we're not doing this -- like we're not waiting to build out the footprint for all the used digital -- or sorry, the physical locations. We're actually -- we're working hard actually building out the digital infrastructure right now. So...
Right. So once you have the scaffolding you'll just have the digital infrastructure ready to go?
Right. And then we have the ability to then start toggling cars and driving traffic through digital, like both online or in-store.
Once your -- like your Mark Wilsons and your Haldimands are at the point where you've put that digital overlay on top, will you then still require -- like how does the in-person experience change at those locations? I'm trying to think through the transition phase of moving to digital from analogue for those operations. should we still need the people. It's just -- maybe it changes a bit.
Yes. So I think we've said this right from the start, we don't necessarily think that we're going to flip a switch and sell cars 100% online. What we want to be is true omnichannel. We want to meet the customer where they want to be met and whether that's in-store or online. I say this over and over again, but I think there's this misconception that when people talk about digital, the digital transaction, they think that you sit at home in your pajamas and scroll around on an iPad, you hit a button and then magically, a car comes out of a vending machine, and it shows up at your house.It's just the front end like the digital part of the transaction is just the front end of the funnel, but the back end is still pretty laborious. Like it's go procure the car. It's get the car home blow the french fries out of it, recondition it, put a new windshield in, give it a how many point inspection then market the vehicle. All that stuff has not changed. The only thing that's changing is the ordering mechanism on the front end, allowing for signatures and then the delivery of the vehicle, whether it be in-store or online. And so the way we're looking at it, it's not that you're going to just necessarily flip a switch and you're going to be buying cars online and they're going to show up at your doorstep. Haldimand and Mark Wilson currently sell cars online and we're taking learnings from that. Auto Canada, our AutoCanada stores sell cars online. We're taking learnings from that, but we don't think it's binary, either you're selling online or in-store. We see it as being a spectrum.
That actually brings me to another question I had, which is around data. In my opinion, a lot of these traditional businesses such as your own have a major opportunity to capture data that there -- may have access to and use that in interesting ways in the future. And so thinking through your digital excursion here with the operations you already have, where you're going, your background, can you talk a little bit about adjacencies, you may be able to explore perhaps a tie-in to providing some financial solutions, fleet management, subscription services, all kind of things and how that could play into the data that you guys are collecting both as a physical retailer and also the digital retailer in the future.
So I would love to answer that. But I would say that, that, for us, I think we talked about business intelligence being rocket-boosters to our business. I would say that's going to be proprietary for us. and we see that as being a huge accelerant to give us a competitive advantage over everybody else in the marketplace. So I would say for now, we're taking our data, we take learnings from the data that we've created and watching trends and giving us, what we would say, giving us the ability to look around corners. And I would say that's pretty proprietary.
There are no further questions at this time. Please proceed.
Well, listen, we really appreciate everybody's time today. And I guess it's -- I guess we'll talk to everybody next year in March for the next -- for the Q4 earnings call. But thanks, everybody, for supporting us. We hope to deliver, again, exceptional results. So thank you.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.