AutoCanada Inc
TSX:ACQ
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AutoCanada Inc
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Good morning. My name is Racquel, and I will be your conference operator today. At this time, I'd like to welcome everyone to the AutoCanada Fourth Quarter 2020 Earnings Call. [Operator Instructions] I'd like to remind everyone that certain statements in this presentation and on our call are forward-looking in nature, including, among other things, future performance and the implementation of the Go Forward plan. These includes 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 Kevin McPherson, Director of Finance. Please go ahead.
Thank you, and good morning, everybody. Thank you for joining us on today's fourth quarter results conference call. For today's call, I'm joined by Paul Antony, our Executive Chair; Mike Borys, Chief Financial Officer; Michael Rawluk, President of our Canadian Operations; Tamara Darvish, President of our U.S. Operations; and Peter Hong, our Chief Strategy Officer. We released our Q4 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, Kevin. Before I get started, I'd like to wish everyone a good new year and start to 2021. We recognize 2020 was challenging for many of our customers, employees and partners, and I'm hopeful that 2021 is a positive year. I'll begin by saying that I'm, once again, impressed by our team's performance in Q4 as we delivered yet another record-setting quarter. The team's relentless execution on daily actions and measures continue to tighten the screws on the business model and position us to sustain top-tier operating performance. Starting with revenue, where we recorded an all-time record fourth quarter figure of $876.1 million through adjusted EBITDA of $40.5 million or $30.6 million on a pre-IFRS basis, which was 92.2% better as compared to Q4 2019. We improved year-over-year performance across almost every metric. I was particularly pleased with our adjusted EBITDA margin improvement, which increased from 2.6% to 4.6%. Despite the challenges posed by COVID, our team outperformed the market for the eighth consecutive quarter, and that's our primary barometer for measuring performance, which provided continued validation of the foundational work that has been accomplished since this management team took the helm just over 2 years ago. This performance also confirms my long-standing view that AutoCanada as a platform, has several major structural advantages in the market. First, and one, digital. The role that digital experience plays in the automotive retail life cycle continues to expand at an accelerating rate and the need to provide a seamless omnichannel experience is increasingly self evident. The significant experience AutoCanada brings to the table, including professionals who have lived automotive, software and digital within the operation and on the Board, positions us exceptionally well to benefit from these trends as we shape the future of our business. We also believe the marketplace model, which was central to digital automotive for the last 20 years, is shifting towards a significantly more dealer-centric approach, reducing friction in the sales process as a result in driving unit economics for the dealer. This also benefits AutoCanada in the near term. Number two, scale. We are seeing significant benefits associated with having a true centralized platform. This is not only economic, but includes access to more human capital and development of stronger OEM relationships. Three, diversification. As we have reinforced, this isn't just about selling new cars. We believe it's critical to support the entire customer life cycle, including financing, warranties, parts, service and more recently, collision in the used-only space. We're putting the customer experience first, which, in turn, provides a company with balance. Four, acquirer of choice. AutoCanada has seen a significant uptick in the number of acquisition opportunities and has a robust pipeline of potential targets. This allows us to remain disciplined while realizing the meaningful benefits of moving dealerships onto our platform. Number five, balance sheet. Our balance sheet is as strong as it has ever been, and Mike will further detail. Importantly, this gives us over $250 million in dry powder for M&A or other strategic initiatives within our target leverage metrics without having to go and raise equity. We will be disciplined in managing this number, but it also allows us to play offense at a point in the cycle when it's most valuable for us to do so. Six, and lastly, data. If there's anything my prior experience of building and operating an automotive data business has taught me, it's the best operators are the ones that manage their business through data-driven decisions. Over the last 2 years, our team has developed a data-first mentality. Now every facet of our business from managing inventory to operating our service departments, is monitored and tracked through our in-house data analytics team, enabling all of our operators to make data-driven decisions. You'll hear us come back to these themes during this call and in the quarters to come. But for now, I'll touch on some operational highlights. In Canada, Michael and his team continue to operate at a high level and deliver industry-leading results. As I said before, for the eighth consecutive quarter, we have outperformed the Canadian market as same-store new retail unit sales increased 0.7% compared to a market decline of 4.9%. Our used vehicle segment was once again a key driver of the success in Q4 2020. Same-store used vehicle gross profit increased by $3.2 million or 27.9% compared to last year. Our used to new retail units also increased to 0.93 from 0.84, the ninth consecutive quarter of year-over-year improvement, and our trailing 12-month used to new retail units ratio improved to 0.95 compared to 0.78 last year. In the U.S., we continue to see improvements as Tammy's initiatives to focus on profitability and improvements to the expense structure, along with improved market demand contributed to the U.S. platform, reporting Q4 2020 adjusted EBITDA of $1.2 million. That's an increase of $2.3 million over last year. This represents their sixth consecutive quarter of normalized adjusted EBITDA year-over-year improvement. We expect to begin shifting our focusfrom cost structure management to now entering growth mode over the coming quarters through the same vectors utilized in Canada, used vehicles, parts and service and F&I. Regarding the Q4 balance sheet, we continue to successfully manage cash with a focus on preserving liquidity and our financial flexibility, ending the year with a net debt of $89.5 million and a net debt leverage of 1.3x. That's well below our target leverage range of 2.5 to 3x. We generated strong free cash flow of $131 million in 2020 compared to $100 million last year. I must say our employees in Canada and the U.S. have worked tirelessly and delivered excellent performance under really challenging conditions. Thank you so much. We are indebted to you. We're entering 2021 on a very solid footing, we remain well prepared to face any changes in our current environment. I'll come back to speaking more about our business model and strategy in my concluding remarks. But for now, I'll turn it over to Mike.
Thanks, Paul, and good morning to everyone on the call. Echoing Paul's sentiments, this past year has marked a significant and positive turn for the company on many fronts. Operationally, the teams in both Canada and the U.S. have come a long way in building resiliency to our business model so as to be that much better positioned to counter the cyclicality of the business, supporting stable growth and protecting against recessionary environments. What we refer to as our complete business model is a key pillar to how we see our business growing. Speaking to the bottom line, on a pre-IFRS 16 basis, our annual normalized adjusted EBITDA has improved to $81.7 million for the year as compared to $59.9 million in 2019, a 36.5% improvement. Normalized adjusted EBITDA margin on a pre-IFRS 16 basis has improved to 2.5% as compared to 1.7% in the prior year and 1.6% in 2018. We continue to make progress in moving closer to our U.S. peers margin profile, adjusting for percentage of real estate owned. From a balance sheet perspective, looking back to the start of this year, we refinanced our debentures in February 2020, just ahead of the onset of COVID-19, setting ourselves up well with liquidity and improved financial flexibility through 2020. At year-end, our net debt leverage was 1.3x. This compares to 2.6x at the end of 2019 and 6.6x at our peak in Q1 2019. On a lease-adjusted basis, we've set our target at 4.5x. At year-end, our net lease-adjusted leverage was 4.3x. Free cash flow in the year was $131 million compared to $100 million in the prior year. We've continued to maintain strong discipline in converting our earnings into cash, and it's worth noting that this was our sixth consecutive quarter of positive free cash flow. We've indicated and analysts have echoed that we have approximately $250 million of dry powder. That is to say we can deploy capital at that amount at some return and remain within our stated net debt leverage target. This dry powder supports our ability to finance any potential transactions responsibly, while ensuring that we maintain the company's strong balance sheet and overall financial flexibility. I have to end my piece here as I have since the end of the first quarter of 2020. We cannot know what the future holds for us with COVID-19. But with the actions we've taken to strengthen the business and the balance sheet, we are well positioned to weather any outcome. With that, I'll turn it over to Kevin to discuss our results.
Thanks, Mike. At the consolidated level, revenue came in at $876.1 million, an increase of $67 million or 8.3%. Gross profit came in at $152.7 million, an increase of $13.1 million or 9.4%. Adjusted EBITDA came in at $40.5 million, which was an increase of $19.4 million or 92.1% over Q4 2019. In our Canadian segment, total retail vehicles sold came in at 13,940, an increase of 729 units or 5.5%. The Canadian segment generated revenue of $778.4 million, an increase of 11.5% versus the prior year. Gross profit was $136.1 million, an increase of 10.8%. Adjusted EBITDA increased to $39.2 million, an increase of $17.1 million. In our U.S. segment, revenue was $98 million, a decrease from Q4 2019 of 11.9%. Gross profit was $16.6 million, which was relatively flat against Q4 2019, showing a decrease of 1.4%. However, gross profit percentage increased to 17% versus 15.2% in Q4 2019, showing the continued focus on profitability in our U.S. segment. Adjusted EBITDA continued to improve, coming in at $1.2 million, an increase of $2.3 million from 2019. I also want to speak to our annual impairment test of nonfinancial assets, which is required under IFRS. This quantitative test resulted in an $11.2 million recovery being recognized in our Canadian segment for Q4 2020. This recovery was driven by our improved forecast from our Q1 2020 views. I will now turn the call over to Michael Rawluk to discuss our Canadian operations.
Thank you for taking the time to join us today. We are very proud of our dealers and the entire AutoCanada team for continuing to persevere through the uncertainty of COVID, while at the same time, producing exceptional operating results and outperforming the Canadian market for the eighth consecutive quarter. Thank you to our entire team across Canada. We'd also like to express our sincere gratitude to our vendors, who have been true business partners as we collaboratively managed through this challenging time. Lastly, we want to extend a special thanks to our OEMs, who have battled with us over the last year. Before COVID hit, we were gaining traction in many of the Go Forward initiatives, while at the same time, enhancing our culture. Dramatic events and challenges presented by the pandemic allowed us to accelerate our restructuring to a level that could not be achieved in a normal operating environment. It also transformed our culture into one built on performance, trust and most importantly, grit. Nothing makes a culture stronger and more whole than adversity like steel tempered in fire. Today, we can say with confidence, we are a new company, a better company. We have a high-performance culture built on a solid foundation of trust and grit. We are fully aligned and in sync with our OEM partners. Today, their goals are our goals. We are working collaboratively with every OEM to the point where it feels like we're all working for one company. We continue to build competencies in the used car business and sold more used vehicles in 2020 than any previous year in the company's history. Our new businesses, including collision, wholesale export and subprime sales or RightRide, are now fully operational and poised for a breakout year in 2021. We've also established dedicated online sales departments across the country to serve the consumers shift to digital and remote purchasing. On top of all of this, our dealerships are operating at a high level, while leading their local markets and winning OEM performance awards. A meaningful portion of this progress is a direct result of our focus on data and building world-class operational analytics. We have invested a significant amount of time and money over the last 2 years in building an industry-leading data warehouse and business intelligence team to support insights and daily decisioning, unlike anything we've seen in the industry. At AutoCanada today, data is everything. The most common thing you'll hear in our offices and dealerships is feelings aren't facts, show me the data. In an industry primarily managed by feelings and emotion, we are data-driven and make daily operational decisions based on math and facts. This scientific approach to sourcing, analyzing and distributing data in a consumable form to our frontline decision makers has allowed us to unlock the potential of each dealership and OEM brand. The success of this approach is most evident in our finance and insurance business, where we have increased our gross profit by 12.8% or an additional $316 per unit in Q4 to $2,783, setting another all-time record and further solidifying our global leadership in this area. It is also evident in the success of our margin and expense improvements throughout the organization. Most notably, the 5.5% improvement in parts, service and collision margins from 50.3% in the prior year to 55.8%. As we fine tuned and implemented best practices supported by our data-driven decision-making across the organization, we began documenting our processes in order to standardize them and support the onboarding of future acquisitions. We have invested a considerable amount of time developing these processes and recently launched the AutoCanada playbook, an operating system with supporting documentation and technology for each of our best practices. We are thrilled with the results of this system, especially considering future acquisitions. We've had the opportunity to implement this playbook in the 2 acquisitions that were completed since the management transition in Q2 2018, Mercedes-Benz Heritage Valley and Rose City Ford. The results have been remarkable. Comparing their 2020 performance to pre-acquisition levels, excluding any COVID-related subsidies, we have improved dealership probability by more than 50% at each location. This growth was driven by improvements in finance and insurance gross profit per unit of 30% along with parts, service and collision repair gross profit improvement between 15% to 30%. Just as significantly, both dealerships have materially improved their standings with their respective OEM. Mercedes-Benz Heritage Valley was recognized for new vehicle market share improvements, while Rose City Ford won the prestigious President's Diamond Club Award for the first time in their history, and we just received news yesterday that they won it again, which is especially exciting, considering it was won with the same management team as pre-acquisition. We have just completed what are traditionally the toughest months in the car business, January and February. Yet the excitement level and the environment feel like peak selling season. If this is what February feels like, we can't wait to see what happens as we head into peak sales months and COVID restrictions begin to ease. We have prepared for a tremendous year, and we are ready on all fronts from a battle hardened high-performance team to optimal new and used inventory levels. Despite the global supply chain challenges, we currently have enough new vehicle inventory to achieve our targets. We worked closely with our dealers and OEM partners during the winter to purchase new vehicles -- additional new vehicles, including inventory allocations that were declined by other non-AutoCanada dealerships. As I speak, we have over 100 days supply of new vehicle inventory with lots of vehicles on their way. Although historically, we carried more than 100 days supply, the data shows we have sufficient inventory. We also have a large amount of inventory in the pipeline scheduled to arrive at the end of March. In 2020, we initiated a dedicated centrally organized and data-driven used vehicle buying strategy to ensure we have -- we had enough inventory to continue our momentum in 2021. As a result of that process, we are also carrying over 100 days supply of used vehicle inventory. We are enthusiastic to be starting the spring selling season with ample inventory, and we'll continue to replenish our stock with fresh trade-ins as the new vehicle sales pick up in the spring. As a company and team, we're beyond thrilled about the future of AutoCanada and the future of the car business. There has never been a more exciting time for our industry. There is renewed enthusiasm for vehicle ownership. There are so many new and innovative vehicles being produced and launched and the designs and technology and the new products are like nothing we've seen in our lifetime. Furthermore, we're seeing that all the service parts and collision repair business is beingdriven back to the dealerships because of proprietary technology and complexity of repairs. We are ready for the next leg of our journey. We have confidence in our operating model and methodology like never before. We have confidence in our OEM partners and our ability to stay in sync and work collaboratively. And we are beyond confident in our dealers and our team members to execute at a world class level. There are many thoughts and debates around the automotive industry these days, but there is one thing we know for sure. Whatever happens, this team wins. Period. Over to you, Tammy.
Thank you, Michael. Good morning. I'm pleased to report another strong quarter in the U.S., demonstrating continued progress in our path toward profitability. I'll begin by speaking directly to the results in the fourth quarter. Adjusted EBITDA increased by $2.3 million to $1.2 million. This improvement is a direct reflection of our continued focus on cost management and profitability and improved market demand. All of which contributed to improved results for the U.S. platform, despite significant inventory shortages in the U.S. Our results in Q4 also include contributions from the acquisition of Autohaus of Peoria, on October 29, 2020, and the ceasing of 2 franchises in the prior year on November 11, 2019. Other notable highlights include new vehicle gross profit increased by $1 million and new vehicle gross profit percentage increased by 1.8 percentage points to 4%. These improvements are attributable both to an increase in market demand and our continued prioritization of profit over volume. Within our U.S. operations, market demand factors were more pronounced given the constrained availability of new vehicle inventory, resulting from the closure of vehicle assembly plants at the onset of the pandemic and the more stringent lockdown restrictions imposed by both the State of Illinois and the City of Chicago. Used vehicle revenue decreased by 28.7%, and used vehicle gross profit percentage decreased by 0.8%. Due to strong market demand in competition and sourcing, used vehicle -- in sourcing used vehicles, there was a sitting of used vehicle inventory supply available to our U.S. operations. Correspondingly, the number of used retail vehicles sold decreased by 29.1% to 664 units. Despite this decline in used retail units, as a result of the continued optimization of the retailing process and our leveraging of used pricing opportunities, used vehicle gross profit percentage continued to remain strong at 11.6%. Parts, service and collision repair continues to improve as gross profit increased by 26.5% and gross profit percentage increased by 15.6 percentage points to 56.3%. Our primary focus continues to be the optimization of the fixed operations cost structure. This includes maximizing technician productivity, improving effective labor rates on our service work and reducing the practice of discounting from our market average rates. In addition, our continued refinement of our F&I product offerings results in synergistic growth in both service, parts and collision repair and F&I. Operating expenses before depreciation decreased by $4 million and operating expenses before depreciation as a percentage of gross profit decreased by 22.3 percentage points to 83.8%. This reduction is due to our continued focus on sustainable expense management and was the foundation for the overall improvement to profitability. Overall, we are pleased that our disciplined actions to improve our complete business model are delivering results. These actions include continued optimization of our training and related business processes, particularly in new vehicles, used vehicles, parts service and collision repair segments; a continued shift in culture towards a focus on the customer versus focus on the unit sale; continued strict discipline over operational expenses; and finally, a focus on the optimization of fixed operations. We're also continuing to leverage successful Canadian operational initiatives. Looking ahead to 2021, with all of the improvements we've made to our business model in the U.S., we're looking forward to improving the business beyond breakeven profitability. I, too, would like to once again, express my deep appreciation to all of our dedicated team members. Your hard work and determination has been critical to the continued improvements of our performance. I would also like to thank you -- say thanks to our value business partners and our OEMs, who continue to be the key to us delivering on our U.S. performance. And I am so excited to be able to continue to lead our team forward in 2021. Now back to you, Paul.
Thanks, Tammy. I'd also like to say thank you for all the continued support from our strategic partners, financial institutions and OEM partners and investors, as Michael and Tammy have as well. In the face of this pandemic year, I'm ecstatic with the continued momentum that this company has exhibited through 2020, which has set us up to take advantage of growth and build on the scaffolding that we had set in place over the last 2 years. Our performance reflects the fundamental strength of our business model, teeing us up for our next leg of growth. As we look ahead to our next phase, the used digital retail initiative, we continue to refine and develop our strategy to drive diversification and vehicle sales and capitalize on the incredible momentum in the category as validated by the success of these initiatives in the United States by companies like CarMax and Carvana. This division will drive the development of a national network of used vehicle dealers through both organic development and acquisitions as well as an online platform and will represent Canada's first national used vehicle platform. We are rolling out this strategy in a multiphased approach that we call our crawl, walk, run plan. Currently, we're in the crawl phase, focusing on the Canadian preowned market building out and acquiring used car superstores, capable of selling in excess of 20,000 used vehicles per year as a foundation, while also developing the ability to efficiently recondition high volumes of vehicles at scale. As part of this effort, we recently acquired Haldimand Motors in November, one of Canada's premier largest used vehicle dealers. As our crawl efforts mature, we'll move into the walk and run phases, during which we'll overlay digital capabilities, build out a dedicated call center and harden the economic model while reinforcing a national brand. Used digital retail aside, we strongly believe in the industry's ongoing digital transformation. We expect to leverage our efforts with the used digital retail initiative across our entire platform, which we believe will complement the efforts and objectives of our OEM partners. Beyond digital initiatives, the strength of our operating platform and balance sheet has enabled us to remain on offense and attack other vectors of growth in a disciplined M&A strategy. We have an extensive pipeline of acquisition opportunities that we continue to assess qualitatively and quantitatively with the goal of diversifying by geography and brand, in addition to expanding our network of used dealerships and collision centers. With the $250-plus million of dry powder that Mike mentioned, we're well positioned to take advantage of these acquisition opportunities while maintaining our strong balance sheet and flexibility. And importantly, I believe the strong reputation AutoCanada has now built over the last 2 years has made us a trusted counterparty in looking at acquisitions. Whether we're working with individuals, generational family operations or with multistore and multiregional groups, people like to work with us because we work hard to deliver on what we say. As long as we remain within our target internal operating and capital allocation metrics, we're willing to work with vendors to achieve a deal that makes sense. As we've said before, we continue to be proactive and vigilant as to what the future holds with any impact from COVID-19. That said, we believe we've stabilized the fundamentals of our business while identifying and developing several growth vectors. New cars aside, including F&I, parts and service, collision repair, nearprime, subprime and used-only retail. Our team has been mobilized to approach each one of these growth opportunities with the same intensity and vigor with which we rebuilt this company. These are very exciting times for AutoCanada. Finally, we're poised to take advantage of the disruption and consolidation in the industry and blaze a new path forward and the evolution of our company. Now I'll turn the call over to the operator for any questions. Thank you.
[Operator Instructions] Our first question comes from the line of David Ocampo with Cormark Securities.
Paul, I'd like to zero in a little bit on the used strategy here, and maybe you could talk a little bit about the capital requirements, at least, in the crawl phase, how much it's going to cost to acquire those dealerships? And then moving on from that, what are the capital requirements from a technology standpoint?
Yes. Happy to. So there's a couple of ways to think about that. So we look at buying these dealerships kind of in the 1.5 to 3x EBT multiple. And so obviously, these dealerships turn out to be quite accretive for us. And so we don't think that there's a significant spend required to get us to scale, and we're trying to do this in quite a disciplined way. Secondly, we're not going to be able to fill out the entire country through acquisition. And so where we can't actually go and buy or make an acquisition, we're looking at greenfielding. And the cost of greenfielding is significantly less. So that's kind of the way we're thinking about setting it up. And then as far as the digital retail piece, the technology part of it, we don't think is overly expensive. I mean if you -- there's parts of it that can be like the -- basically the analytics around buying and procuring the used vehicles. But as far as delivering them and creating a marketplace for consumers to go on, value trades and be able to purchase the vehicle, that's already been done. And we can kind of take best practices, and we are taking best practices from many of the companies out there already that are already serving up great -- quite frankly, great customer experiences in the United States. And it's the back end that really is not changing, like the -- buying the vehicle, reconditioning the car, the hard labor that, that actually takes to get that car from auction or from a customer's driveway to us for frontline ready, that's something that hasn't really changed. So setting up this digital experience, which is -- that's highly important to us to allow consumer to transact online. It's not something that we think is going to take tens of millions of dollars. It's in the high single digits to actually develop. We're already working on it.
All right. And you mentioned that you're giving up part of ownership interest in the new strategy to get that multiple a little bit lower, I presume. But maybe perhaps you can talk a little bit about the 10% options that you'll be providing to either employees or service providers. If you can provide any incremental details around that, that would be great.
Sure. I mean, we socialized this at the Board level, and we looked at a bunch of different packages. And for us, we're basically standing up a new division of this company. It's basically a start-up within a public company. And there were a couple of ways we could have looked at it. One was to go buy something. And really, there's nothing that exists in Canada to what we were looking for. Secondly, would be to build it and go on 100% risk at AutoCanada and to build out the infrastructure and build out the machinery needed to be a used car platform and build greenfield locations and so on and so forth and then hire the talent to actually go and scale this. And in that scenario, that would have been, if it works out 100%, then that would be a great win for the company. If it doesn't work out, that would be a huge drag on our balance sheet. And frankly, something that the Board and management decided that, that wasn't the right methodology for thinking or framework for thinking about it. And then lastly, the way we thought about it was, look, if we go and do this properly, we acquired top-tier dealers in Canada, make them part of this new division. So if it's successful, obviously, the shareholders and the company is massively successful. And they're ultimately successful as well. And so what it does is it provides downside risk to the company. And so even in the worst-case scenario, the company still is in the position of acquiring used car transactions between 20,000 and 30,000 used car transactions incremental as well as acquiring these dealerships at accretive multiples. And so when we thought through the whole way of how to build this, this seemed to make the most sense. The most risk...
And then maybe a last one for me before I hand the call over. You provided some good incremental details about the liquidity event or liquidity option that the owners have, maybe you could talk a little bit about your liquidity events. I think it says here that you have -- you can exercise the liquidity event at any time and then there's an option after 10 years. Would that be payable all in cash? How does the dynamics work for that?
To be honest, I think I better off to send that over to Mike. It's something that I didn't really focus a ton on. And I think the only way -- the way I was thinking about it personally is that unless this thing is successful, the liquidity of this doesn't really matter, right? So if this thing is a massive success, then providing liquidity to anybody that needs it shouldn't be a problem. And if it's not a massive success, then even in the worst case, again, AutoCanada has acquired dealerships at really exciting multiples and that makes them accretive. And me or any other equity holders of this newco wouldn't necessarily do that well. And so I'm really focused on obviously building this thing out and hopefully having a great success of it. But Mike, I'll let you elaborate.
Sure. Yes. David, we have the optionality of covering off the liquidity event with shares of the company. So obviously, we can do it with equity, we can do it with cash. But assuming this is a success that we think it can be then more likely than not, we'll be looking at equity.
Okay. And you guys also have that option to purchase the shares if they're not doing well or presumably after a certain period of time, is that something that you would execute on, if you saw fit?
Yes, David -- sorry, if you're thinking about the Executive Chairman or Paul's interest, then, yes, 10 years. Either Paul has rights or the company has rights. So we can -- we have put call rights at 10 years.
Our next question comes from the line of Chris Murray with ATB Capital Markets.
So just maybe thinking about the core business and as we go into 2021, I think that one of the things that was a pleasant surprise is just the ratio of your operating expenses to gross profit through Q4. And I know we've been talking about that a little bit. But as we're going into '21, how do we think about your operating expense leverage? I think you've talked a little bit about -- you've done a lot of stuff on the cost side. I think the last time we talked, there was some expectation you may have to add some cost back to the system just to handle growth. But just how should we be thinking about that relationship as you start to get into more normalized operations? And has your thinking changed about having to add costs back?
I'll let Michael handle that question.
Okay. With regards to the expense margin, everything feels very normal to us. So I don't quite remember what was said or who said it in Q3 with potentially adding expenses back, but that seems like a lifetime ago. And for the last number of months, we're in a very normal operating environment, except for the rolling blackouts of lockdowns and restrictions and everything, especially around Christmas time in December. But things feel normal to us. So we don't have expenses lingering, or people on furloughs that were wondering if we bring back or not, like this is a very normal environment for us, if that answers your question.
Yes. And just -- I mean, I guess the other piece of it is with the existing cost base that you have today, you still feel comfortable that you can continue to drive gross profit?
Yes. Absolutely. We've got tons of runway. We are -- as of today, like we are ready for 2021 on all fronts and no additional cost, no excess capacity, no restrictions on capacity. We're ready to go.
Okay. And then, Mike, maybe you want to take this one. Just any thoughts around any additional cue payments or any other adjustments that we should be kind of aware of as we go into '21?
Look, I think it will continue to trail off. I mean we talk about internally whether we continue to call it out. I think we will, as we get any cues payments, it will be calculated on a dealership-by-dealership perspective. So it was down to like $2.8 million in Q4, I would imagine. I think we still may apply for some amounts in Q1, but again, I think that amount is going to continue to diminish as we move through the year. So -- and I think the program will actually kind of trail off as we move out of Q1. So call it de minimis in terms of overall impact to the business.
Okay. And then my next question is around the M&A strategy. And I mean, guys, I appreciate, the last couple of quarters the commentary has been, we've got a healthy pipeline. We've got a healthy pipeline. But we really, outside of, call it, the smaller transactions and maybe the specialty transactions around Haldimand, we haven't seen you guys execute on transactions. How should we be thinking about, I guess, 2 parts: one, your ability on being able to execute in 2021? Maybe I don't -- I'll be bold enough to ask you the question that do you guys have a number in mind of how many dealerships you want to actually try to acquire this year? And how do you feel about being able to do the due diligence requirements and actually the integration requirements of multiple dealerships, maybe all at once?
I would say, I'm going to make this a little bit longer than it maybe needs to be, but I just -- I think I need to say this. When we first got to AutoCanada, we were constantly being asked to come out and go marketing and talk to analysts, talk to investors and so on and so forth. And it felt to us like there was no point, right? Because we -- I tried that for probably 2 weeks. And when we did that, everybody said, yes, right, like you guys are disasters. It's never going to happen. Pack it up and go home. And so we have this mindset at AutoCanada, where we're just going to continue to under promise and over deliver. And so what I would tell you is, you haven't seen anything because we don't want to talk about stuff that we haven't accomplished. And so over the course of the next little bit, suffice it to say, that we're -- as a management team and a board, we're keenly aware that the reason we have this opportunity to operate AutoCanada is because of, I would say, the poor acquisitions that had been made in the past and that will not be a part of our future. As far as I'm concerned, we have perhaps the best M&A team, period, in North America to help us facilitate these transactions, combined with potentially the best operations team to actually enable the unlocking of value and synergies. And so we are very, very confident that we have the capability to drive value through M&A. And any transactions that we embark on will be highly strategic to the growth of our business. And I think I'll just leave it at that. As I have said that we have a lot in the pipeline, we are being very choosy.
Our next question comes from the line of Michael Doumet with Scotiabank.
You covered a lot of ground in the prepared remarks. I'm just going to maybe sprinkle a couple of questions tactically. Maybe starting on the quarter. The parts and service business was a touch softer than expected and understandably the reduced vehicle miles driven and certain COVID-related restrictions impact of the business. Just wondering if you can break out the Q4 softness in terms of customer pay work, warranty, collision repair? And what you think the trends are going forward?
Well, again, and I think this is probably best for Michael to answer, but I would tell you, you're right about the miles driven going down. And miles driven going down, therefore, means less service work. That said, and to Mike's point, something we've been reinforcing to everybody that we've been talking to this pandemic is not over. We have rolling lockouts or shutdowns from hard lockdowns to kind of softer depending on the province. And so if you're asking us to speculate what it's going to look like, we don't necessarily want to forecast that because now I'm reading about this Brazilian variant that we don't have an answer to, who knows? What we measure ourselves with, and this is why I tried to emphasize this on the call, that we will continue to outperform the market in every aspect of our business. And that's really the only barometer that we can use internally. And I would highly recommend you consider, too, is as long as we're outperforming the market, then regardless of the conditions, we have a sustainable and -- as sustainable as you could have business model. But I'll let Michael answer more of the questions, if you're looking to break things out. Michael?
Sorry, Paul. So I'll back up a little bit on it and go into parts and service question. So when we look at our margins across all of our business units, and this relates to the previous question, there are no ratios. And then, of course, we're tracking everything, right? So OpEx is broken down to a very granular level and gross something else. And there are no ratios that we think are surprisingly low or high. Everything is in the sweet spot, and we really feel like we have flow in our business right now. We're in the sweet spot with all of our metrics, operating, culture, everything. We're in the zone. The part that makes us excited is the continued runway on used vehicles and switching to fixed operations and is the recovery -- the impending recovery of our fixed operations. Because with everything going on right now, we still have this drag in miles driven. So the number that we've settled on to monitor this has been leaders of fuel sold -- retail leaders of fuel sold in Canada. And for the last 3 to 4 months, that's been in and around down 20% to 22% year-over-year, where our business we're in and around, like from a total sales perspective, around minus 6%, minus 7%. So we think we're really outperforming the country and everything we look at. We're outperforming the country in that regard, but we're also making up for it on our margin business. And so as we're kind of shifted away from the volume side of our parts, service and collision and really focusing on margin enhancement at a granular level, our expectation is, when mobility increases, which is inevitable, that our business is going to be even way better, and that's going to provide another jolt of energy and growth and gross margins into the overall model.
Great answer. That makes a tone of sense. So maybe just turning to the M&A pipeline, I can appreciate that every franchise dealer out there will look different and achieve varying levels of financial performance. I wonder if you can generalize the opportunities you're seeing out there, and you can say that, hey, 80% of the deals we're looking at, AutoCanada is better at selling used vehicles or more F&I or just give us a sense for what categories you think AutoCanada really outperforms versus the industry and where the synergies could come from? And just finally, I mean, you mentioned that 50% post-acquisition profit growth, I mean, is that a repeatable number in your view?
So where [Technical Difficulty] F&I and process. And then as well, if you recall, we talked about data and using data and analytics around our business. The other thing -- we're negotiating national, so on the cost side, we've negotiated national contracts. And so anybody [Technical Difficulty] we think that gives us preferential pricing on contracts compared to 1- or 2- or 5-store groups.As Part 2 of your question, I'm happy to let Michael chat about it. But you asked about, if it's repeatable. My -- our view at AutoCanada is, it is. There's a lot of stores that had been operated as a family business and not necessarily professionalized. And we think that the opportunity to professionalize that business and overlay our synergies result in asymmetric upside. But Michael, I'll let you opine.
Yes. I think that overall, the advantages are many, and Paul mentioned them in his script would be 6 points that he started off with. But I would say high level, our advantage is we're a professional management team. And we're a professional management team with a real data focus, and we have scale enough where we have specialized individuals for each segment of the business. So it's the whole concept of the division of labor and the specialization. So if you look at a dealership and you say, okay, that dealership is one business. And most independents, you have one General Manager, owner operator, oftentimes family business that's overseeing the dealership. The way we look at the business is we say, we have a new car division. We have a used car business. We have a service business, a parts business, a collision business and the finance and insurance business. And each 1 of those 6 departments has dedicated competitors that get up every day and live and breathe that industry. So for example, our parts business goes up against the NAPAs of the world. Our collision business goes up against the Boyds of the world. And as an individual owner operator, you can't get up every day and compete with specialized competitors that all they do is do that, and you're doing 1 of 6 things during that day. But at AutoCanada, we can compete where we have the large enough scale where we have a Director of Collision that goes head-to-head with Boyds with our collision business. We have a Director of Service. We have Director of Parts. We have dedicated whole team around finance and insurance. So we pull that business apart and we compete with it, and we treat it more as a mini mall of interconnected ecosystem of automotive businesses, and that's where we're really getting our lift is with that division of labor and that specialization on a foundation of data and specialized professional management. So we think absolutely, it's repeatable. We built this platform for growth, and we are ready for the next leg of our journey.
Got you. I mean you've done it for your business, so I imagine you can deal with acquired assets. The third question, can you provide -- so on the used digital retail division, can you provide some insights into how the Board will value the platform and therefore, the value the limited partner interest? And just as a clarification, is the limited partner interest, is that the value of the business minus the invested capital by AutoCanada?
So the answer to that is, yes. It's the value of the business minus the invested capital. And then I will -- I'll defer to Mike. Mike, if you'd like to answer that question.
Yes. So it is a value less the invested capital at a specified rate and then we do make reference. So outside of the Executive Chairman's interest where Paul can specify a price, when it comes to the vendors, that's where we'll be using an independent valuation. And the independent valuation will take a look at what's the value of AutoCanada to begin with and then begin subtracting the parts of the business. But we will end up deferring to an independent valuator for that piece. And then again, going back to the limited partner interest, as we've indicated, the holder of the -- of that interest after 3 years has a put right, so they can put it to AutoCanada. And then after the fifth year, we have the call rights, so we can call that at 5 years.
Our next question comes from the line of Luke Hannan with Canaccord Genuity.
I just wanted to focus for a moment on F&I, that was an area of strength for you guys in the quarter. So I'm curious to know what kind of white space, what kind of opportunity is there for you in this segment? And how would you sort of rank yourselves relative to peers here?
Well, I'll let Michael take that. But I've got to say, like, we feel like we are globally like F&I masters. And that's because of Michael and his team, led by Mikel Pestrak. It's incredible to watch. Michael, I'll let you take it from here.
Yes. So I agree, ranking to peers, we rank ourselves #1. And that's -- it's a real area of strength for us. This team continues to grow -- I don't know what runway is left, but they keep going and going. And even in January and February, we're seeing continued growth in that area. So it's very exciting. The most exciting part about F&I, I think, is going to be on the acquisition side, where that's going to be an area where we're going to get our quick and immediate win from acquisitions. And it's really -- that's where our focus like on data and numbers and process really shows up is in F&I because the F&I part of the business is really like moneyball. It really is granular data and analysis and operational analytics supported by process. And so we're pretty excited about our business. I don't know if there's anything more specific I can add about that.
No, that's very helpful. My next question, I guess, is just on the -- on sort of your capital requirements for 2021, I guess, that there's going to be some capital allocated to acquisitions. But -- and Mike, maybe this is more a question for you. How are you thinking about -- if we look historically, I think you've spent around $28 million, $29 million in CapEx and also in the past, there's been a dividend that you guys have paid as well. So how are you thinking about your capital budgeting for 2021?
Yes. So we did -- we pulled together our budget, obviously, in December. The numbers that we have for the current year, 2021, are not going to be dramatically different from what historically has been the case. And you're right, the spending has been about $28 million, $29 million over the last 3 years. So I'd say directionally, we're probably a little lighter than that in -- based on what we have right now in our -- with visibility on capital. I think on dividend, I'm going to -- I'll defer to Paul to speak to the dividend.
Yes. I mean I'm happy to speak to the dividend. The answer is we're still in the middle of a pandemic, and we suspended the dividend because we were uncertain. At what point that we're -- if something would ever go bad, would we look at ourselves and say, well, we should have kept the dry powder for safety of acquisitions or for safety of the company. And so while we're going through these times and there still is uncertainty, we don't think it's prudent to actually reinstate the dividend at this point.
Understood. Last one for me, and then I'll pass the line. Paul, when you think about the -- just your competitive positioning within parts and service and collision repair, what would be -- I guess, what would be some of the characteristics that make you feel like you're better positioned compared to the Boyds of the world, for example? What are some of the things that you believe will help give you a better value proposition to your customers coming out of the pandemic when volumes return?
I feel like I -- like this is -- I almost feel like I wish this question came and thank you because this is where I -- I mean, I have a lot of insight and spend a lot of time in this. We think about cars as a piece of hardware and a piece of software. And every day, cars are getting more and more complex. And if you think about that and you think about the fact that, if you want your iPhone fixed properly, you actually take it to the Apple store when you crack the screen. If you want a battery replaced, you take it to the Apple store. As cars are becoming more and more complex, the ability of the collision repair shop only to do all the collision repair work and sync the car up for calibration, which it needs to have in order for all the collision avoidance systems to work, it's becoming more and more rare. And so our belief is that as cars are becoming more and more complex and the necessity to actually bring that car to the OEM more and more makes it ever so more important for us to actually have collision repair centers to facilitate the repair of the vehicle just like we do mechanically for our customer. And so I would say that if you just think about it, the idea of bringing the car to a collision repair shop that's not affiliated with an OEM, in the future, could be problematic. And I think that's why you're seeing many collision repair centers actually become certified by the OEMs. But I think if you had a choice to bring your car to an OEM and get the car fixed or a collision center that might be certified by an OEM, but not necessarily represent, I think in the future, you'd probably want -- our bet is that you'd want to bring that back to the OEM. That's one thought. The other thought I would tell you that from my previous life with vehicle history reports that I learned, 60% of people that are in a collision will sell or trade that vehicle within the next 18 months. And if we don't have a collision repair network set up to facilitate the repair of that vehicle, it's possible to have brand defection. And so we want to actually handle our customers from cradle to grave and be able to look after the entire ecosystem. And so for us, it's both defensive and offensive. Hopefully, that answers your question. I don't know if I was being clear enough. I'm pretty passionate about this.
Our final question comes from the line of Maggie McDougall with Stifel.
So I wanted to circle back on something I thought was interesting from your preliminary comments, which was that you're using data analytics internally in a way that the business has never used them before. So can you elaborate on internal data analytics capabilities and then the synergies that these present as you consider to unlock doors between divisions? And as you continue to scale the business through collision, your RightRide program, used new growth initiative?
So we want to answer your question, but there's a little bit of secret sauce in there. So I will say that some of the analytics that we have, we prefer to keep on the AutoCanada playbook and have that be kind of our competitive advantage when we're thinking about acquisition. So I'm not trying to -- I am trying to avoid the question actually, just because we feel that's part of our secret sauce. So I apologize for that right now.
No problem. And the other question that I have was just, again, touching on something in your preliminary comments, which is that things are shifting away from online marketplaces in automotive retail. And I thought that was pretty interesting, given that there's been a lot of fanfare this year so far in launch as well around the pure-play e-commerce platform. So can you just elaborate a bit on this statement and how this may shape your strategy and perhaps how it's shaped it already?
Sure. So look, a lot of the online marketplaces, everybody is trying to scramble right now to figure out how to be a part of the transaction. And so you have these third-party marketplaces, and I don't want to name them specifically, but everybody is trying to figure out how to add value. Do we start handling the payment for the transaction? Do we look at the insurance for the transaction? Let's value the trade. These people are actually, though, at some point, when they were actually driving value by delivering customers to us as dealers, there is the potential for them to get disintermediated. And so when we look at it and we think about the cost that, that actually adds to the whole transaction just for them to be a part of the transaction, we think that, that money is better spent driving traffic to our marketplace or our digital storefront versus third-party marketplaces. And so we're just being very mindful of that. And that's -- listen, that's one of the reasons that we're starting our used car division and digital strategy is to drive traffic to our own marketplace, our own digital storefront versus these third-party marketplaces. And it actually will end up being a better customer experience, which is what we're trying to sell for.
Congrats on the progress you've made. I'll pass the line over.
There are no further questions. Management, the floor is yours for any closing remarks.
Listen, we really, really appreciate everybody's belief in AutoCanada and belief in this management team. And frankly, we, as a management team, want to thank our Board for allowing us the latitude and belief to execute on the strategy. And we'll look forward to under promising and over delivering at your next quarter call. So thank you very much.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.