AutoCanada Inc.

Thank you for joining AutoCanada's conference call to discuss the financial results for the second quarter of 2026. 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 this risk as well as the second quarter news release, financial statements, and MD&A. All lights have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. I'd now like to turn the call over to Mr. Samuel Cochrane, Chief Executive Officer of Auto Canada Inc. Good evening, everyone, and thank you for joining us.

Before getting into the quarter, I want to spend a few minutes on the environment and the progress we are making across the business. The Canadian auto market remains soft in Q2. Consumers are still dealing with affordability pressure, higher financing costs, and broader economic challenges facing Canada. Looking ahead, we expect a challenging market through the balance of the year. Against this backdrop, the financial results for the quarter were as expected. but more importantly, we focused on what was in our control and made progress in priorities we made this year. Used vehicle volumes and GPUs improved. Inventory moved faster and finance and insurance performance was strong. These are encouraging signs that the changes put in motion earlier this year are starting to take hold. As expected, new vehicle sales and GPUs remained under pressure, reflecting both the softer market and the work still underway to rebuild sales productivity and knowledge across our network. The team is working quickly to implement the new in-house sales training program across our dealerships. This program, combined with getting our new operating team up to full capacity, will begin to move the needle on new vehicle sales and GPUs early in 2027. Parts and service for the quarter performed as expected. Looking ahead, we see a big opportunity to increase our gross profit in parts and service by driving higher customer retention through targeting our customers both after the initial sale of the car and after each service visit. We are also looking to be more proactive in recruiting technicians to ensure we have the right level of staffing to service our customers. Our dealership operations priority for the balance of the year remain unchanged. improving sales productivity and conversion, rebuilding used vehicle margins, increasing fixed operations absorption and service bay utilization, improving inventory discipline and working capital efficiency, and maintaining expense discipline while we grow our top line. Turning to the collision business, this continues to be an important growth platform for AutoCanada. The headline revenue comparison and year-over-year decline in adjusted EBITDA was affected by the reduced tail work and recent new store openings, which need some time to get to capacity. Importantly, growth profit increased and margins improved, reflecting a stronger mix in contribution from acquired collision businesses. During the quarter, we added Contemporary Coachworks North and South in Calgary, Mastern in Thunder Bay, and ACX Stratford in Ontario. These acquisitions expand our capabilities and build density in markets where we can benefit from insurer relationships, OEM certifications, and dealership referrals. Our focus now is on integrating these businesses and improving performance across the platform. That includes expanding certifications and insurer relationships, increasing throughput, strengthening technician development, and growing high-value services such as diagnostics and calibrations. will continue to pursue collision opportunities selectively with a clear focus on returns, integration capacity, and balance sheet discipline. We also made good progress simplifying the portfolio and sharpening our focus. During the quarter, we completed the sale of Hyundai of Lincolnwood and Toyota of Lincolnwood. We have now received approximately $106 million from the U.S. Investiture Program and have agreements in place for the remaining dealerships can still expect proceeds of at least $130 million, subject to customary closing conditions and OEM approvals. After quarter end, we also sold three Canadian dealerships in British Columbia. While we are committed to growing our dealership network across Canada, we will not tolerate assets that do not meet our long-term return objectives. Where we see a path to improved performance, we will act decisively to execute a turnaround. where we do not, we will redeploy capital into opportunities that deliver stronger returns and greater value for our shareholders. Before turning the call over to Mike, I wanted to welcome him down to Canada. Mike joined us as CFO in July and has already focused on strengthening financial discipline, improving decision support for our operating teams, and helping move the company towards its target leverage range. Mike, over to you.

Thank you, Sam, and good evening, everyone. I'm pleased to have joined AutoCanada and look forward to working with SAM, the board, and our operating teams as we improve performance, strengthen the balance sheet, and enhance financial discipline across the organization. Revenue from continuing operations increased 6% year-over-year to $1.4 billion with growth in both new and used vehicle sales and continued strength in finance and insurance. Tame Store Revenue increased 5.5%. Growth was offset by lower parts and service revenue and lower collision revenue. Gross profit declined 8.1% to $207 million and gross profit percentage declined 220 basis points to 14.6%. The decline reflects continued pressure on vehicle margins and software fixed operations performance Partially offset by strength and collision and finance and insurance. Adjusted EBITDA from continuing operations was 52 million compared with 64 million last year. Adjusted EBITDA margin was 3.7% compared with 4.8% in the prior year. Net income from continuing operations was 12.1 million or 46 cents per diluted share compared with $18.9 million or $0.72 per delivered share in the prior year. In the dealership business, used vehicle revenue increased 13.3% supported by a 10% increase in retail units and a 2.9% increase in average selling price. As Sam noted, gross profit for used vehicles improved sequentially but remained under pressure as we continued to work through aged inventory. The improvement in inventory days of supply is encouraging, but restoring margins while maintaining healthy inventory terms remains a key priority. Finance and insurance continue to be an area of strength. Gross profit increased 4% and average gross profit per retail unit increased to $3,410 from $3,337 in the prior year, reflecting stronger execution at the dealership level and improved product penetration. Operating expenses before depreciation declined 2.7% to $153 million. We've remained focused on controlling costs while continuing to invest in areas that support long-term growth and operational performance. Turning to the balance sheet, the total net funded debt to bank EBITDA ratio was 3.6 times at the end of the quarter. In April, we amended and restated our syndicated credit agreement. The facility provides aggregated bank commitments of $1.38 billion, removes the prior borrowing-based structure, and extends the term to November 2028. The amended facility enhances liquidity and operational flexibility, providing a stronger foundation as we execute our turnaround plan. Reducing leverage remains a top priority, and we intend to direct proceeds from the remaining U.S. divestitures toward debt reduction. In parallel, restoring dealership earnings, improving working capital efficiency, and maintaining disciplined capital allocation will be essential to moving toward our target leverage range of two to three times total net funded debt to bank EBITDA. Our capital allocation priorities for the balance of this year are clear. First, protect liquidity and financial flexibility. Second, invest in high return operational initiatives. Pursue selective, accretive acquisitions where returns and balance sheet capacity support it.