AutoCanada Inc.

Thank you for joining AutoCanada's conference call to discuss the financial results for the first quarter of 2025. 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 AutoCanada's filings on CEDAR Plus for a discussion of these risks The first quarter news release, financial statements, and NDNA. 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 during that time, please press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the number two. I'd like to remind everyone that this call is being recorded today, Wednesday, May 14, 2025. Now, I'd like to turn the call over to Mr. Paul Anthony, Executive Chairman of Auto Canada, Inc. Please go ahead, Mr. Paul Anthony.

Good evening, everyone, and thank you for joining us.

Our strategy in 2025 is clear. Simplify the business, execute with discipline, achieve our cost transformation, and reduce leverage. The first quarter reflects early progress on that front. We've taken deliberate steps over the past several months to streamline our operations, exiting underperforming stores, sharpening our focus on higher margin opportunities, and embedding efficiency through the ACX operating method. These efforts are already improving cost structure and operational focus. We also reclassified our U.S. business as a discontinued operation at the end of 2024. This decision reflects our intent to fully divest those assets and concentrate capital and leadership on our Canadian dealership and collision platform. Until that process is complete, we expect leverage to remain above our target range, and we pause all acquisitions and share repurchases to preserve flexibility during this transition. Despite some encouraging demand trends early in the year, particularly in new vehicles, there are significant uncertainties ahead. Tariff risk, weakening consumer sentiment, and a broader macro pressure could temper momentum. That's why we remain cautious in the near term, outlook and focus highly on what we can control, which is improving our cost structure, reducing leverage, and divesting or closing any non-core or unprofitable operations. With that in context, I'll turn it over to Sam to walk through the financials. Stan?

Thanks, Paul, and good evening, everyone. Our Q1 results reflected business in transition with underlying operational stability, early cost wins, and a heightened liquidity risk as we move through the restructuring and U.S. divestiture process this year. Revenue grew 2.3% year-over-year during Q1, supported by gains in new vehicle sales and collision, this offset weaker performance in used vehicles and parts and services. Importantly, considering significant restructuring activities in Q1, same-store results were stable, excluding the impact of recent Canadian divestitures. Gross profit was flat versus Q1 2024, supported by strength in use wholesale and collision offsetting lower retail GPUs. Normalized operating expenses before depreciation declined by $12.8 million, reflecting restructuring savings from our cost reduction initiatives. More planned financing costs also improved, driven by tighter inventory management and rate tailwinds. Adjusted EBITDA margin expanded by 130 basis points, benefiting from early improvements in operating leverage due to cost reduction initiatives, despite flat gross profit. As noted, the U.S. business has been reclassified to discontinued operations as we pursue a divestiture. Until that process is complete, leverage will remain above our target range. Reducing debt remains a priority, and any divestiture proceeds will be directed towards debt repayment. As of March 31, 2025, we had access to $218.2 million under our revolving credit facility. Recent amendments have provided covenant relief, including a temporary increase in our total net funded debt to bank EBITDA ratio to 6.0 times until the end of June. These steps combined with lender support ensure we have sufficient flexibility to complete the transformation and reposition the business for long-term value creation. With that, I'll turn the call back to Paul to discuss the outlook. Paul?

Thanks, Sam. Looking ahead, we remain focused on execution. While the Canadian auto market showed strength in March and April, we are closely monitoring the impact of new U.S. tariffs, which could disrupt supply chains and put pressure on both the Canadian and economy, and affordability. We're not counting on a linear trajectory this year. Instead, we're managing risk, preserving cash, and staying laser-focused on our transformation plan. In Q1 alone, we added $48.1 million in annualized run rate cost savings, bringing the total to $57.1 million since the launch of the ACX operating method in September. Given the acceleration of the transformation plan during Q1 in response to rising trade uncertainty, we've updated our guidance to reflect the timing of future savings and associated restructuring costs. We remain firmly on track to achieve $100 million in cost savings by the end of this year. The remaining initiatives are more complex and require careful sequencing to avoid operational disruption, but we're confident in our path. I want to thank our team for their relentless focus and commitment as we execute an ambitious transformation agenda and our OEM partners for their continued support and collaboration during this pivotal period. Thanks again.

And with that, we'll open the lineup for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speakerphone, Please lift the handset before pressing any keys. Your first question comes from the line of Luke Cannon from Canaccord. Your line is now open.

Thanks. Good evening, everybody. I want to stick with the ACX operating method. Paul, you mentioned you pushed a little bit harder in Q1, just given the nature of tariffs. I know that you provide the four different buckets as far as where you expect to get the $100 million in annualized cost savings. But within... biggest bucket, I get the store archetype. Where is it specifically that you're able to push harder versus plan in order to get some of those savings?

Yeah, I'm happy to take it, or Sam, if you want to. I mean, you know, we talked about the different buckets, inventory, pay plans, admin centralization.

Yeah, Luke, this one's really simple. Yeah, Luke, this one's really simple. We were just able to do more stores with the archetype. faster than we initially anticipated. Those stores that we had scheduled for April or even May got pulled into March.

So we were just the dealerships on. Thanks for that.

Sorry, I'm not sure. My line seems to be a bit choppy, but if you guys can still hear me, I'm also asking about the collision business. Yeah, okay, perfect. So the collision business as well, I mean, when it comes to new and used and F&I parts and service, there's puts and takes across all of them. Pretty consistently positive across the board was your collision business. So, I mean, what's driving that? And then also, if I think back, Paul, I think there has always been this,

they're contending with with higher insurance premiums as well but then also more used should be better for the business so can you just frame up the outlook I suppose for the collision business yeah I mean our collision business has been hitting it on all cylinders right now art and his team have done a just a fantastic job of with OEM certifications insurance volumes They've done a great job integrating the business. And so from our perspective, I think we've talked about this before, but we think that the industry is tilting towards OEM certification. And this is something that Art and the team indexed towards when we first got here. And he's continuing to build that playbook out across the country. And it's paying dividends.

What was the other question, Luke? Used vehicles? Well, it's more an extension of that question.

There's been, based on the press that we've been seeing, there's been this uptick in used vehicles, or at least interest in used vehicles and used vehicle prices, certainly more so, I think, in the U.S. than in Canada. But, I mean, in practice, that should be better overall for your collision business going forward, I would expect.

Yeah, I think that's right. I mean, look, the truth is we've just been – But regardless of frequency of accidents being down, there are more consumers who are actually going to OEM certified shops, which bodes well for us. And so I think that's been a big player for us, and we're optimizing all the stores that we have. And as I said, I think Art and the team have done a fantastic job of that.

I wanted to shift over to,

it was mentioned in, you divested North Toronto auction. I know that that was one entity of many that you had within used digital, you know, I think of Haldeman's, Mark Wilson's, et cetera. And I know that in the past you've mentioned maybe talking about reducing, not just the used inventory that you have on hand, but maybe your overall exposure there. I mean, what, what should we expect with anything when it comes to perhaps further Or do you use retail businesses?

Yeah, so North Toronto, great brand, great... It was a great business. The issue for us is we just didn't have the strength to do this cost takeout and optimize our dealerships the way we had envisioned. And instead, we ended up outsourcing a lot of the... the dealer-to-dealer sales that we were actually going for. In fact, we just held one last week where all of our dealers transact with all of our stores. It's a longer story, but if we decide to sell a vehicle and take a loss on it internally, we'd rather take a loss on it with one of our sister stores so they have the opportunity to then earn profit on that vehicle and earn F&I. The thought was when we first bought North Toronto, that we would use them to facilitate the whole transaction. And I would say that if it were that in a vacuum, we would still be doing that and we would be racing towards that. But given the opportunity for us with this cost takeout and our bloated structure, it just made sense. We needed to focus and simplify our business, and that's what we're doing. We're just simplifying our business. I would say on Haldeman and Mark Wilson's, those guys are kicking rear end and taking names. and there's no interest whatsoever in divesting those stores.

Okay, thanks. Last one, and then I'll pass the line here just on the topic of divestitures. I mean, what can you share about the interest thus far in the U.S. assets?

Sam, I better let you talk because I'll probably say too much.

Yeah, listen, there's really not much to, you know, It's got there. It's an active process. We're targeting completion by the end of the year, as we previously said. And it's a really constructive market. Like there's a lot of interest. But really, you know, it's active. It's going well. And we plan for it to be done by the end of the year. And Luke, I heard my earlier answer might have cut off. So on the cost of why we're ahead of schedule on the store archetype, we had stores that we were scheduled or dealerships we were scheduled to do in April. and even in May that we pulled forward into March. So that's why we were ahead of schedule there. Got it.

Okay. Appreciate it. Thank you very much. Yeah.

Your next question comes from the line of David Ocampo from Cormark Securities. Your line is now open.

Thanks. Good evening, everyone.

Hey, David.

Yeah, my line's also choppy, similar to Luke's. So if I break up, we can just take things offline. I guess the first one on new ASPs, average selling prices, they're up close to 10% on the quarter. Just curious if that was a function of what you guys have available in the lots and what the OEMs are providing to you guys, or has that been a strategic shift to procuring more expensive vehicles?

I would say it's not a strategic shift. It's what we have, and that's the way things have been going. We haven't necessarily indexed towards selling more expensive vehicles.

I know you guys don't like to provide any guidance as it relates to new GPUs and where you guys think it's going for 2025, but your US peers tend to do that. I respect that no one has a crystal ball, but maybe you can walk us through what you guys are seeing, at least early trends into Q2, that may cause GPUs to either stay flat at current levels, or do you think they can drop, call it 10% similar to what the U S peers are saying?

Paul, do you want me to grab that one?

I mean, I can, I can, I can take it.

It's okay.

It's really difficult to say David. And the reason is I feel like we're having groundhog day for COVID who, who knows with these tariffs, um, where we're going to end up and what cars are going to be produced, where they're going to be produced and what inventory we're going to have. And I think it's a function of demand and then supply. And on the supply side, you know, everything is kind of in flux right now. And on the demand side, as long as we don't hit the rocks with a recession, then cars probably are going to be more scarce over the short term. And you could see gross profits going up. if there's a recession and greater supply because tariffs get lifted, the growth profits could go down. But our estimation is that we're not as affected as the U.S. Canada seems to get served second. for vehicles. And so, as you know, the U.S. market gets served first and then Canada. And so I think at this point, it seems like we'll likely have a little bit more stability than the U.S. market.

That sounds good. And then just the last one for me, you guys called it out in your MD&A and it's all over the press about the pull forward of demand. I know it's hard to kind of piece out how much of the strength in Q1 was from a pull forward of demand, but when you speak to your GMs, how much of that 10% lift in March was attributable to a pull forward, or was it just a more resilient Canadian economy?

I don't know. I actually can't answer that. I don't know that it was from the pull forward, and I don't know that it was from the Canadian economy. I think it might have been a bit of both, and I think that that plus our... I mean, I think that plus we're operating a lot better. I don't know is the answer. I don't think anybody knows.

Okay, I could respect that. I'll hop back in the queue. Thanks a lot, everyone. Thanks.

Your next question comes from the line of Chris Murray from ATB. Your line is now open.

Yeah, thanks, folks. Good evening. Just going back to maybe some commentary around... the ACX savings. You did mention that while you're kind of working on the store archetypes, you are talking about like it's going to be a little tougher on a go-forward basis to get some of these gains. Just wondering, Sam, you alluded to the fact that you're just able to get the store archetype to more stores, which has been kind of what's happened in Q1. What's What are kind of the issues around the rest of the plan that would be so disruptive?

I'm just trying to understand that a little bit. Sam, you might be on mute.

No, no, you want me to take this one?

Sure.

So, Chris, I think there's a couple pieces. One is the next step to doing common elements So in the past, we would have dealership, and then even within dealerships, we might have different pay plans. Doing the work to get all those pay plans in a centralized way, when you have over 5,000, 6,000 staff, it can take quite a while to get that done. It's not quite as easy as... Not that it was easy to do the archetype, but not quite as easy as going in there and saying, here are the productivity metrics that we're going to operate on, operate within this framework, is more straightforward. I think another piece of it, like shared services, the services and administration happening at the dealership, kind of going through and building processes and bringing technology and rigor and people to centralize those processes and keep the service levels high. It just takes, you know, measure twice, cut once. type of situation. And then you look towards centralized procurement and looking at sort of procuring things in a more centralized fashion. For example, again, you might have dealerships doing their own janitorial or license plate frames and these things in the past, small individually, but they add up when he times it by 64 in Canada. And then if you have the 29 collision centers as well, you know, you start to to get you get you get advantage of the scale um coaching those contracts getting the right cadence looking at different regions and understanding the differences whether culturally or whatever happening in different regions or coast to coast it's just not quite as simple as here are the productivity metrics and work towards them so hopefully that gives you yeah that's helpful thank you um and just a couple things just on on your thoughts around leverage so right now you've got a waiver for

a couple quarters. Is your expectation that you'll either get the U.S. division sold before this becomes a further issue, or is it more of a trailing EBITDA comes up? Like, there's lots of ways to think about the moving parts in terms of leverage, and I'm just wondering, you know, how you were thinking about where you're going in the model.

Yeah, no, good question. So on leverage, you'll see that we've sort of stabilized now. It's been ticking up a few quarters. We've kind of hit a stabilization point. And you're correct. With the divestiture of the U.S. dealerships, that will be a step change improvement in our leverage. But also, if we keep operating, we will at this level, and we're operating better, like Paul alluded to earlier, we're going to see improvements from the cost out and running the dealerships and the businesses a bit better. So you'll see both, but the big step change is definitely divested of the U.S. dealerships.

Okay. One last one for me, just on floor plan. Floor plan had a pretty big step down in the quarter. You know, if you had to bucket it, how much of that is just lower inventories or is there also maybe some incentive payments in there or anything like that? So any commentary around floor plan and where that's heading would be useful.

Yeah, it's a bit of both. I would say $64.5 is not really material to sort of look at splitting it, but our inventory is down. You'll see on the U side, we're down to 56 days at quarter end. So there's less flooring costs with less cars, and then interest rates have come down. Looking forward with the uncertainty around tariffs, I think we have less certainty around the interest rate path a few months ago, but we expect to continue to manage

right now, and if we get further rate cuts, we'll obviously take advantage of that. Okay. I'll leave it there. Thanks, folks. Thanks, Chris.

Your next question comes from the line of Jonathan Musajin from CIBC. Your line is now open.

Hi. Thank you for taking my question. Given your ability to successfully accelerate your cost-saving initiative, Is there an opportunity to achieve higher annual run rate cost savings than $100 million by the end of 2025?

I'll let Sam take that.

Yeah, I think, you know, I would say let's focus on the $100 million. That's a big task for us, and let's get there. And we have clear visibility getting there. But, you know, we think about it as continuous improvement. And things like the shared service and other things that take time, like I was talking about with Chris, we'll see some of that improvement in 2026 as well. So I don't want people to think it's the 100 million and we're done. We have the continuous improvement mindset and we plan on bringing that into 2026. So will some savings drip into 2026 above the 100? Maybe, right? But for now, let's focus on the 100 million and we're well on that path.

Okay, thank you. And then one more question. So you mentioned a tariff-related surge. in March and April, but also emerging signs of consumer fatigue. So how should we look at demand for Q2, and specifically what's demand looking like right now?

I mean, I can share with you that so far April was showing fairly strong, and I think things are softening up a bit in May. I've read probably a lot of the same articles that you have in the U.S., that our U.S. peers are experiencing more of a slowdown in May. We haven't seen quite that yet, but usually what happens to the U.S. eventually happens to Canada. But it's not quite at that level yet, but things are slowing down.

Okay, thank you. That's all.

Your next question comes from the line of Maxim Sichev from National Bank Financial. Your line is now open. Hi, good afternoon.

Hey, Max. I had a first question around F&I because, correct me if I'm wrong, so new vehicle revenue was up fairly nicely. But do you mind maybe talking about the rationale for why F&I declined? Sort of any moving parts there? Thank you.

Yeah, I think the main thing we're seeing on F&I is that there's been more cash buyers and so less opportunity to sell more products per deal. and that's just a function of, again, more people paying cash.

Yeah, and to add to that, I forget who said it, maybe David. ASPs were higher. So if you actually look at new volume, I think there was actually a few less deals, so it's a little bit of both, right? There's just less transactions.

Okay, I see. Yeah. Okay, and then in terms of... you know, it's also been difficult to get sort of a good gauge in terms of what you guys have in the inventory. But, Paul, I guess on the use side of things, are you happy with where you stand right now? Like if, let's say, you know, it's all the policy dynamics kind of, you know, simmer down a little bit, just in terms of the composition, you know, sort of normal price vehicles and the, you know, higher price dynamics. Like, do you have, I guess, you know, enough to service whatever's coming through or there's any obvious kind of white spaces that need to be addressed? I guess that's the question.

That's a great question. And in fact, it's something that we ask ourselves. And so do we have the right number of used vehicles? I would say that we're low relative to the time of year. And it was a decision we made based on the uncertainty of the market and just being prudent. And so while we're doing cost out, and really, really fine-tuning the business, we didn't want to have to think about trying to really, really go after the top-line growth of the business because we're really focused on making sure that we didn't break anything at the store level while we were doing cost-out. And so trying to grow top-line and do cost-out at the same time is a lot of work, and there's a lot of uncertainty. And so I would tell you that Do we have the right number of vehicles? I don't know. And the answer is I don't know because we don't know if there's a shortage of new cars and used cars will continue to go up because of tariffs. And again, that story has yet to be written. If the U.S. gives us relief on the tariffs, then the price of new cars will likely stabilize and you won't be able to hold gross as much and you'll see probably the price of new cars coming down. And so in one case, we could look really, really smart. In the other case, we might look like we missed an opportunity, but I'd rather miss the opportunity versus put ourselves and our balance sheet at risk right now.

Yeah, no, it goes 100% there. And I guess your comment around may sort of slow down. Can you quantify, I guess, what you guys are kind of seeing on the ground and how would we you know, interpret this data point, especially as, you know, the last week has been certainly much more positive, you know, sentiment-wise.

Yeah, I mean, I... Yeah, I was going to say, when I say it's slowed down, we saw slowdowns at the beginning of, Sam, correct me if I'm wrong, February, the beginning of March, and the beginning of April. And we were like, what the heck's going on with the beginning of every one of these months? And then by the end of the month, we were lighting it up. And so I don't know if this is just normal slowdown for what's been going on in the last several months, or this is the beginning of a trend. I was just highlighting that things are slowing down versus April, and we just need to watch.

Okay. No, it makes sense. Thank you so much for your time.

Thanks, Max.

There are no further questions at this time. I will now turn the call over to Mr. Anthony. Please continue.

Yeah, listen, really appreciate everybody joining today's call. And I just want to say a big shout out to our team. Our staff have been doing double the work with half the people, both from head office and in the dealership. And it's amazing. I got to say, it's amazing to see what's happening. When everybody's working together, I've never seen this company operate like it has now, and I'm super impressed, and I'm super hopeful that we're going to have another great quarter to talk to you about next quarter. So thanks, everybody, and we'll talk to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.