AutoCanada Inc.

Thank you for joining Auto Canada's conference call to discuss financial results for the third quarter of 2024. I'm John, your moderator for today's call. Before we begin, I'd like to remind everyone that today's discussion may include forward-looking statements, which are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. I encourage you to review Auto Canada's filings on CEDAR Plus for a discussion of these risks the third quarter news release, financial statements, and MD&A. 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'd like to ask a question at this time, please press star 1 on your telephone keypad. If you'd like to withdraw your question, please press star followed by the number 2. I'd like to remind everyone that this conference call is being recorded today, Wednesday, November 13, 2024. Now, I'd like to turn the call over to Mr. Paul Anthony, Executive Chairman of Auto Canada Inc. Please go ahead, Mr. Anthony.

Thank you, operator. Hello, everyone, and thank you for joining us. I want to begin by noting that today's call was prerecorded, so while I won't be able to join for the live Q&A, our CFO, Sam Cochran, will be able to, at the end, to take your questions. During the third quarter of 2024, the Canadian automotive industry continued to experience the effects of softer market conditions, affordability, pressures driven by inflation, a softening labor market, and higher interest rates have impacted consumer preferences. We're seeing these dynamics reflected in lower gross profit per unit, as well as reduced demand for finance and insurance products, as consumers focus on more cost-effective personal transportation solutions. While recent rate cuts may offer some relief on affordability, we anticipate that the lingering impact of inflation will continue to shape consumer behavior in the near term. As part of our response to these challenging conditions, we made progress in the strategic review of non-core assets that we launched at the beginning of the quarter. This review has led to several actions that will help us streamline operations and focus resources where they're most impactful. Key steps we've taken this quarter include the divestment of two Stellantis dealerships, allowing us to concentrate on core areas where we see the greatest strategic and financial potential, a restructuring of our right-right operations, which involve closing seven unprofitable locations, We've repositioned the remaining stores to operate with a lighter inventory model, focusing on providing tailored credit solutions for credit-challenged customers seeking used light vehicles. Tightened restrictions on discretionary spending and hiring across the company, ensuring that we're efficiently allocating resources. A pause on all acquisitions and capital return initiatives, allowing us to prioritize our transformation plan and ensure that every dollar we invest supports our key objectives, which are to enhance profitability, reduce leverage, and secure a foundation for sustainable growth. These initiatives, while initially modest in their financial impact, will contribute positively to our profitability as we continue refining and executing our transformation plan. As previously announced, we've partnered with Bain to help guide this process and we expect to fully implement this roadmap during 2025. Subsequent to quarter end, we have formally launched our transformation with four pilot dealerships in Western Canada. While it's early in the process, we expect to achieve at least $100 million in run rate OpEx savings exiting 2025. I want to emphasize that our review of non-core and unprofitable assets which is a separate initiative from the Bain Transformation Project, remains ongoing. We are committed to making the necessary changes to position Auto Canada for long-term success. Before I turn the call over to Sam, I'd like to express my gratitude to our employees and OEM partners for their support and resilience as we continue to navigate this challenging period. Your commitment has been instrumental, and I look forward to seeing us build on this momentum together. With that, I'm going to hand the call over to Sam for his prepared remarks. Sam?

Thank you, Paul, and good evening, everyone. During the third quarter, we recorded total sales of $1.6 billion, down 1.8% year over year. Adjusted EBITDA of $53.2 million, down 20% from Q3 last year, and a diluted earnings per share of 25 cents. Our business performed as expected during the quarter, with adjusted EBITDA down due to a softening used vehicle market, industry-wide new GPU decline, and continued losses in the U.S. operations driven by structural issues. Canadian operations reported flat revenue at $1.4 billion for Q3, with gross profit down 4.7% to $240.7 million and adjusted EBITDA down 5.6% to $61.2 million. New vehicle sales grew 4.5%, while used sales fell 5.5% due to inventory challenges. New vehicle and F&I gross profit per unit dropped 20% and 2.1%, respectively, offsetting a 24.5% rise in collision and modest growth in parts and service. Operating expenses as a percentage of gross profit increased 2.2%, but higher flooring costs contributed to the Canadian adjusted EBITDA decline versus Q3 last year. Structural issues in our U.S. operations caused the third quarter revenue to drop 13.2% year-over-year to $188.2 million, with growth profit down 35.4% to $24.3 million, and adjusted EBITDA loss of $8 million versus a $1.9 million gain in Q3 2023. The decline was driven by lower new, used, and F&I GPU, which outweighed a 4.8% rise in parts and service gross profit. On September 27th, we received an amendment to our senior credit facility that gives us additional covered headroom for the period from September 30th, 2024 to September 30th, 2025. This covenant amendment gives us ample financial flexibility to execute our transformation plan with Bain next year. As of September 30th, 2024, we had $184 million outstanding on our $375 million revolving credit facility, with a total net funded debt to bank EBITDA covenant ratio of 4.53. As Paul highlighted in his opening remarks, our outlook is for the market conditions to remain somewhat challenging in the near term. While recent rate cuts may help somewhat with affordability, the Canadian consumer is still feeling the effect of inflation from the past few years. We anticipate that upcoming fourth quarter sales and gross profit will reflect these dynamics, as well as the usual fourth quarter seasonality. As we navigate these challenging business dynamics, we will remain highly focused on expense control and will continue to prioritize the strategic realignment of our business in partnership with Bain. Through disciplined execution, we aim to build resilience, reduce leverage, enhance profitability, and secure a foundation for sustainable growth. That concludes our prepared remarks. At this time, I'd like to turn the call over to the operator to open the lineup for Q&A.