AutoCanada Inc.

Good morning. My name is Colin and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Auto Canada first quarter 2023 earnings call. All lines have been placed on view to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question at that time, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. Listeners are reminded that certain matters discussed in today's conference call are answers that may be given to questions and ask and could constitute forward-looking statements, which are subject to risk and uncertainties related to auto candidates' future financial or business performance. Actual results could differ materially from those anticipated of the forward-looking statements. The risk factors that may affect results are detailed in Auto Canada's information form and other periodic filings and registration statements, and you can access these documents at cdar.com. I'd like to remind everyone that this call is being recorded today, Thursday, May 4, 2023. I'd like to introduce Mr. Paul Anthony, Executive Chairman of Auto Canada Inc. Please go ahead, Mr. Anthony.

Thanks for that, and good morning, everyone, and thanks for joining on today's call. On the call today, we have Azeem Lalani, our new Chief Financial Officer. I'd like to begin by welcoming Azeem, who joined us March 27th, following Mike Boris's retirement. Azeem is a seasoned executive, and we're very pleased to have him as part of our management team. We released our 2023 first quarter results last night after market closed, and you can access the news release, as well as our complete financial statements and management discussion and analysis on our website at autocanada.com. Our news release financial statements MD&A have also been filed on CDAR. Today's call, we're going to discuss results for the period ended for March 31st, 2023. and provide a general business update, and then we'll open up the call for questions. Throughout the first quarter, demand for AutoCanada's products and services remained strong, with our company achieving another revenue record and strong same-store sales growth. At the same time, new vehicle supplies remain constrained for most brands, and consumers' preferences have shifted to lower price point vehicles, which cause both new and used gross profit margins to decline relative to historically record levels in the first quarter of last year. But despite these headwinds, we saw significant used car volumes continue. We've been building out our subprime and near-prime muscle for the last five years, and as consumers trade down, we're flexing this muscle, which helped us to grow our used car sales despite shifting consumer behavior. Additionally, demand for F&I parts and service and collision repair was strong. with these divisions benefiting from higher used car sales. During the first quarter, we recorded sales of $1.5 billion. That's a Q1 historical record. Adjusted EBITDA of $45 million and net earnings of $8.4 million. Sales grew 15% when compared to the same period of 2022, including a $226 million increase contribution from 27 acquisitions completed over the past two years. Our same-store sales, which does not include acquired revenue and excludes foreign currency exchange, increased by 11.7% in the first quarter. Notably, Canadian same-store new vehicle unit sales growth was 4.3% during Q1, and that's the first meaningfully positive growth in a quarter in almost two years. This is, again, a positive confirmation that new vehicle supply continues to come online. Our Canadian same-store used vehicle units sold increased by 3% in the quarter, with the ratio of Canadian used to new retail units sold increasing to 1.72 from 1.5 to 1 last year. During the last 12 months, Auto Canada sold 31,171 new retail vehicles and 53,809 used retail vehicles in Canada. That's a ratio of 1.73 to 1. As you'll recall, when this management team came on board in 2018, this metric was 0.62 to 1 on an annual basis in Canada. We're pleased with the trajectory of this ratio over the five years as this is a key focus metric for us given the used market's unconstrained nature, which gives us a wide open runway to continue to grow our share of the used vehicle market in the future. Increasing used retail volumes also gives us more opportunities to generate higher margin parts and service growth through vehicle reconditioning and to utilize our best-in-class F&I department, all of which saw continued strength in the quarter. The U.S. division retailed 1,168 new units during the quarter. However, new gross margins declined 53.5% versus the first quarter of 2022. Recall that last year the shortage of new vehicles resulted in U.S. dealers selling new vehicles for prices above suggested retail price, a practice that is not allowed in Canada, and created outsized profitability in the U.S. new vehicle sales across the industry. This year, we have had a more typical start to the year for Chicago dealerships, with sales expected to pick up in Q2. Used-to-new ratio increased slightly to 1.87 from 1.83. Parts service and collision repair experienced good demand, with same-store sales growth of 3.1%. This translated into healthy profitability in the segment, as customers hold onto their vehicles longer, requiring more service needs, Parts service and collision repair gross profit increased by 7%, and gross profit percentage increased to 54%. F&I also had a very strong quarter against the backdrop of Q1 2022, being one of the best quarters ever in the industry of the car business. Same-store F&I revenues increased by 5%, gross profit increased by 4.8%, and gross profit percentage increasing to 93.7%. These results reflected our selling more product per deal. Consolidated gross profit percentage was 16.6% down from 18.4% in the first quarter of 2022. The decline in gross margin was a result of a shift in consumer preference to lower price point vehicles compared to our inventory mix, which was leaning towards higher price vehicles. The decline in gross profit margin due to this dynamic was partially offset by healthy profitability in both parts, service, and collision, and repair and F&I divisions. Operating expenses before depreciation for the first quarter were $212 million, or 77.6% of gross profit, compared to $194 million of 73.4% of gross profit in 22. The increase in the percentage of gross profit resulted from lower gross margins, as discussed, as well as an increase at $12.4 million in floor plan financing costs due to higher interest rates on these facilities and the inclusion of recently acquired businesses to our platform, which will be optimized in the coming quarters. Adjusted EBITDA was $45 million, a decrease of 27.6% over the same period in 22. However, adjusted EBITDA per diluted share decreased by only 14.5% to $1.83 from $2.14, reflecting the 4.7 million shares repurchased during 2022, which has benefited our per share performance in this more challenging environment. I'm now going to turn the call over to Azeem to discuss our financial position. Azeem.

Thank you, Paul. Good morning, everyone. As of March 31, 2023, we had $185 million outstanding on our $375 million revolving credit facility. Other debt also consisted of $350 million in seven-year senior notes and $32 million in non-recourse mortgages on three dealership properties, as well as $1 billion in floor plan, which supports our inventory. We also have unrestricted cash on hand of approximately $115 million. Excluding our floor plan facilities and our lease liabilities, our total net funded debt as of the end of Q1 was $465 million compared to $460 million at December 31st. Our total net funded debt to EBITDA covenant ratio of approximately 2.25 is below our 4.0 covenant limit. This compares to our total net funded debt ratio of 2.0 at December 31, 2022. During the trailing 12 months ended, March 31, 2023, we generated $181 million in free cash flow compared to $94 million for the same period in 2022. During the quarter, our B-plus credit rating was affirmed by our rating agency S&P. We continue to have access to over $300 million of liquidity under our revolving facilities and cash on hand as at the end of March. As we move through the coming quarters and continue to allocate capital, we expect the leverage ratio to remain consistent. Our effective fixed rate portion of total debt including swaps is approximately 40%. We'll be focusing on opportunities to materially increase that portion from current levels over the coming quarters to add greater stability to the business given the current rate environment. Our basic weighted average shares outstanding were 23.5 million shares as of March 31, 2023, which is a 13% decline compared to 27.1 million shares as of the end of the first quarter last year. For the trailing 12-month period ending March 31, 2023, Auto Canada purchased and cancelled approximately 3.8 million shares for total cash consideration of $108 million under its NCIB and SIB at an average price of approximately $28 per share. We will continue to use share buyback strategically when appropriate while maintaining a solid balance sheet and prioritizing high-value growth objectives. I will now turn the line back over to Paul to discuss the outlook.