AutoCanada Inc.

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoCanada fourth quarter 2023 earnings call. The 2023 fourth quarter results were released this morning before markets opened, and you can access the news release as well as the complete financial statements and management discussion and analysis on the website at autocanada.com. The news release financial statements and DNA have also been filed on CDAR. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star followed by the one on your telephone keypad. If you would 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 asked and could constitute forward-looking statements. which are subject to risks and uncertainties related to AutoCanada's future financial or business performance. Actual results could differ materially from those anticipated of these forward-looking statements. The risk factors that may affect results are detailed in AutoCanada's annual information form and other periodic filings and registration statements, and you can access these documents at the CDAR's database found at cdarplus.ca. I would like to remind everyone that this conference call is being recorded today. Thursday, March 7th, 2024. I would now like to introduce Mr. Paul Antony, Executive Chairman of Auto Canada, Inc. Please go ahead, Mr. Antony.

Thanks, Operator. Good morning and welcome to our fourth quarter and full year earnings call. During Q4, total revenue increased by 6.9% on solid new vehicle sales and robust demand for parts, service, and collision repair, which more than offset softer used vehicle sales, primarily in the U.S. market. For the full year, Auto Canada achieved $6.4 billion in sales and $1.1 billion in gross profit, both of which are new records for the company. That said, higher interest rates were a headwind during the fourth quarter and last year, resulting in greater floor plan and finance costs and impacting consumer affordability and financing preferences. For context, our floor plan interest expense increased from $33.6 million in 2022 to $68.6 million in 2023, and that was an increase of $35 million. However, despite mixed economic indicators and affordability concerns, our fourth quarter and 2023 annual results speak to consumer demand for our products and services. The breadth of our offering and the hard work and dedication of our team who are doing an excellent job navigating challenging market conditions. During the fourth quarter and so far in 2024, we've made considerable progress against Project Elevate initiatives. As a reminder, Project Elevate is our five-year strategic plan, which was launched at the end of last summer and aims to narrow the gap to normalize peer profitability through productivity enhancements, cost efficiencies, and revenue maximization strategies across our full-service omnichannel ecosystem. In 2023, we made some key management changes and additions in support of Project Elevate, including appointing Jeffrey Thorpe as President of North American Operations, Brian Feldman as Chief Operating Officer, and adding Drew Forret as Chief Administrative and Transformation Officer, and Michael Farah as Vice President, Financial Planning and Analysis. In January, we restructured our U.S. operations and implemented new operating standards, including sales practices, inventory procurement, and management processes, F&I certification and training, and parts service collision repair best practices. These changes are expected to result in immediate cost savings and gradually bring the U.S. segment to sustainable profitability over the course of this year. We've also made considerable headway in project elevate initiatives in our Canadian operations. Projects to modernize corporate infrastructure are underway in finance, HR, and information technology, and best practice playbooks have been launched across several functions. We're supporting our employees in training to achieve optimal outcomes through new Auto Canada universities, and we are in the early days of implementing standard operating expense targets by brand across our Canadian stores. These efforts are foundational to our five-year project to elevate objectives to maximize gross profit, optimize our cost structure, and modernize our corporate infrastructure, which will improve our full-cycle profitability and create a platform for growth. None of our accomplishments would be achievable without our OEM partners, and I'd like to take this opportunity to thank them for their continued support. With that, I'll turn the line over to Azeem to discuss Q4 results in greater detail.

Thank you, Paul, and good morning, everyone. During the fourth quarter, we recorded sales of $1.5 billion, adjusted EBITDA of $46.4 million, and diluted loss per share of 81 cents. Sales increased by 6.9% when compared to the same period of 2022, including the contribution from 28 acquisitions completed over the past two years. Our same-store revenue increased by 2.8% in the fourth quarter. Canadian same-store new retail vehicle unit sales growth was 8.6% during Q4, reflecting replenishing new light vehicle supply as compared to last year. Our Canadian same-store used retail vehicle units sold decreased by 6.3% in the quarter, with a ratio of same-store Canadian sales used-to-new retail units sold decreasing to 1.53 from 1.77 last year. During the last 12 months, Auto Canada's used-to-new ratio was 1.57. As new light vehicle supply replenishes, we foresee our used-to-new ratio moderating and eventually stabilizing. Auto Canada was among the top 10 used car retailers by volume in North America last year. we continue to focus on used vehicle acquisition and efficiency plans to outperform the broader used car market. Being a strong used car retailer gives us more high-margin sales opportunities, leveraging our top-tier F&I department and our parts and service footprint through vehicle reconditioning. The U.S. Division retailed 1,419 new units during the quarter and new gross margins increased 3.8% versus the fourth quarter of 2022. As expected, we are seeing year-over-year GPUs in our U.S. division gradually normalize with the replenishment of new vehicle supply in the U.S. market. Consolidated parts service and collision repair experienced strong demand, with same-store sales increasing by 10.2%, and same-store parts, service, and collision repair gross profits increasing by 2.8%. Same-store F&I revenue decreased by 5.6%, and gross profit decreased by 7.2%. These results reflected a growing proportion of retail vehicle sales being purchased without dealer financing, resulting in fewer opportunities to sell warranty and insurance products. Normalized operating expenses before depreciation were $194 million or 75.2% of gross profit compared to $179 million or 73.7% of gross profit in Q4 2022. The increase in operating expenses resulted primarily from recent acquisitions. Adjusted EBITDA was $46.4 million, a decrease of 9% over the same period of 2022. Fully diluted earnings per share was a loss of 81 cents, including a $1.50 per share impact from consolidation of our used digital division. Excluding this one time item, earnings per share for the fourth quarter would have been 69 cents versus 52 cents in Q4 last year. As of December 31, 2023, we had $187 million outstanding. on our $375 million revolving credit facility. Excluding our floor plan facilities and our lease liabilities, our total net funded debt to bank EBITDA covenant ratio was 2.39 as compared to 2.08 at the end of Q3 and well below our 4.0 maximum. We have access to approximately $291 million of liquidity under our revolving credit facilities and cash on hand as of the end of December 31, 2023. During the quarter, we entered into a $25 million forward interest rate swap with the fixed one month CEDAW rate of 4.53%. Subsequent to the quarter, we entered into a $75 million interest rate swap with a fixed one month CEDAW rate of 3.77%. Our effective fixed rate portion of total debt, including swaps, is approximately 37%. Our basic weighted average number of shares outstanding was 23.6 million shares, which is a 6% decrease compared to the approximately 25.1 million shares as of the end of the fourth quarter last year. We recently renewed our NCIB and will use share buyback strategically when appropriate while maintaining a solid balance sheet and considering growth opportunities and long-term shareholder returns.