Within the second quarter of 2024, AutoCanada (TSX:ACQ) confronted vital headwinds, together with a CDK outage, rising OEM stock ranges, significantly from Stellantis (NYSE:), and a fancy market setting marked by financial uncertainty. The corporate’s monetary efficiency mirrored these challenges, with whole gross sales falling 8.8% year-over-year to $1.6 billion.
Adjusted EBITDA plummeted to $27 million, a pointy decline from the earlier yr’s quarter, and the corporate reported a diluted loss per share of $1.47. AutoCanada has taken corrective measures by partaking Bain & Firm to expedite key initiatives, freezing discretionary spending, halting mergers and acquisitions (M&A), and halting the return of capital initiatives. The corporate can be evaluating strategic choices for non-core and underperforming belongings.
Key Takeaways
AutoCanada’s whole gross sales dropped to $1.6 billion, an 8.8% lower year-over-year.Adjusted EBITDA noticed a big decline to $27 million, down from $67.1 million in Q2 2023.The corporate reported a diluted loss per share of $1.47.AutoCanada is specializing in enhancing core dealership profitability and decreasing leverage.Strategic alternate options for non-core belongings are being explored, with potential restructuring or gross sales.
Firm Outlook
AutoCanada is engaged on enhancing profitability at core dealerships and adapting to market modifications.The corporate anticipates a lot of the strategic execution to unfold over the following 12 months.AutoCanada is collaborating with insurance coverage companions to debate protection for cyber and enterprise interruption following the CDK outage.A complete overview and price enchancment plan is underway with Bain’s help.
Bearish Highlights
Canadian Operations noticed a decline in income, gross revenue, and adjusted EBITDA.U.S. operations additionally skilled declines in key monetary metrics.The corporate recorded a $12.7 million stock write-down on used stock in each Canada and the usEconomic uncertainty and difficult market dynamics have affected the corporate’s efficiency.
Bullish Highlights
The corporate has obtained covenant aid from lenders amidst the CDK outage.Strategic overview of non-profitable and non-core operations may result in improved future efficiency.AutoCanada is cautiously managing stock ranges to mitigate dangers.
Misses
The corporate missed the earlier yr’s monetary efficiency metrics by vital margins.Venture Elevate has been placed on maintain indefinitely as the corporate prioritizes fast value construction enhancements.
Q&A Highlights
The excellent overview with Bain, together with the standing of Venture Elevate, is geared toward enhancing value construction and can contain some one-time prices.It’s too early to evaluate the impression of current charge cuts and the return of CDK performance on the enterprise.The corporate expressed hope for improved ends in the approaching quarter and acknowledged that sure strategic actions had been delayed.
AutoCanada’s earnings name revealed an organization within the midst of a difficult interval, in search of to stabilize and strengthen its operations by means of strategic opinions and cost-saving measures. With a deal with enhancing dealership profitability and decreasing leverage, AutoCanada is navigating a fancy market panorama whereas addressing the aftermath of the CDK outage and stock write-downs. The corporate’s engagement with Bain & Firm signifies a dedication to a complete overview and enchancment plan, even because it stays cautious concerning the fast impression of current charge cuts and cybersecurity incidents. As AutoCanada works to revitalize its enterprise, the market can be watching intently for indicators of restoration within the quarters forward.
Full transcript – None (AOCIF) Q2 2024:
Operator: Thanks for becoming a member of AutoCanada’s Convention Name to debate monetary outcomes for the Second Quarter of 2024. I am John, your moderator for as we speak’s name. Earlier than we start, I would wish to remind everybody that as we speak’s dialogue might embody forward-looking statements, that are topic to dangers and uncertainties. Precise outcomes may differ materially from these anticipated in these forward-looking statements. I encourage you to overview AutoCanada’s filings on SEDAR+ for a dialogue of those dangers, the second quarter information launch, monetary statements, and MD&A. All strains have been positioned on mute to forestall any background noise. After the audio system’ remarks, there can be a question-and-answer session. [Operator Instructions]. I would wish to remind everybody that this convention name is being recorded as we speak, Tuesday, August 13, 2024. Now I would like to show the convention name over to Mr. Paul Antony, Govt Chairman of AutoCanada, Inc. Please go forward, Mr. Antony.
Paul Antony: Thanks, and good night, everybody. In the course of the second quarter, AutoCanada confronted a mix of things that considerably impacted our efficiency. These embody the CDK outage, which resulted in misplaced gross sales and revenue throughout Q2, mounting OEM stock and extra particularly Stellantis, resulting in greater days’ provide and ground plan prices, financial uncertainty marked by rising unemployment and falling GDP in a nonetheless elevated charge setting. As these components developed, we had been unable to implement our strategic initiatives swiftly sufficient to adequately counter more and more difficult market dynamics. Our current efficiency has not met our personal expectations and it has turn out to be clear to me that we have to additional deepen our deal with each deleveraging and the profitability of our core dealership operations. With that mentioned, through the second quarter we engaged Bain & Firm to speed up key Venture Elevate initiatives. We’re additionally instantly halting all M&A and return of capital initiatives, have applied a freeze on discretionary spending, and are actively reviewing strategic alternate options for all non-core and underperforming belongings. Within the coming months, we are going to focus with precision on enhancing the construction and effectivity of our core dealership operations. We’re dedicated to creating the mandatory modifications to stabilize the corporate and finally put us again on the trail to worthwhile development. I need to take this time to acknowledge our workers and OEM companions and thank them for his or her dedication and assist throughout what was a difficult second quarter. I additionally need to welcome Sam Cochrane to the group. Sam is a seasoned government and joins us as a CFO. He brings a wealth of expertise navigating and main corporations by means of transformational change. With that mentioned, I would wish to cross the road over to Sam to debate the second quarter monetary outcomes.
Sam Cochrane: Thanks, Paul, and good night, everybody. In the course of the second quarter, we recorded whole gross sales of $1.6 billion, down 8.8% year-over-year, adjusted EBITDA of $27 million, down $67.1 million from Q2 final yr, and a diluted loss per share of $1.47. There have been various issues that impacted our second quarter adjusted EBITDA, together with the CDK outage, a $4.7 million administration transition cost, $4.5 million in elevated ground plan value, a $6.8 million loss in our U.S. operations, a $1.3 million loss from RightRide, and a $12.7 million internet used stock provision, which negatively impacted used GPU in each Canada and the U.S. Our diluted earnings per share additionally displays these things in addition to an $11.3 million impairment of intangible belongings and a $13.2 million write-off of deferred tax belongings associated to the U.S. operations. Canadian Operations second quarter income fell 9% year-over-year to $1.4 billion, with same-store gross sales declining 10.5%. Canadian gross revenue declined 19.9% to $223.8 million, with same-store gross revenue falling 20.6%. Adjusted EBITDA was $32.4 million, down 63.7% from Q2 2023. In the course of the second quarter, our Canadian Operations had been negatively impacted by the CDK outage, an erosion in client buying energy, lack of demand for sure manufacturers, lowered service restore orders, and a softening used automobile market. These components resulted in year-over-year declines in our new automobile, used automobile, and F&I GPUs and pressured our elements and repair and collision operations. Additional, rising ground plan expense as a consequence of greater charges and elevated days stock greater than offset a single-digit decline in Canadian working bills earlier than depreciation versus the prior yr, ensuing within the drop in Canadian adjusted EBITDA skilled through the second quarter. U.S. second quarter income fell 7.9% year-over-year to $191.2 million. U.S. gross revenue declined 34.2% to $25.8 million and adjusted EBITDA was a lack of $5.4 million, in comparison with a constructive $4.9 million within the second quarter of 2023. This was pushed by a decline in new utilized in F&I GPU, which offset the rise in new gentle autos items bought. The U.S. restructuring achieved earlier this yr resulted in a 12.5% decline in U.S. working bills earlier than depreciation. Nonetheless, this was outpaced by the headwinds introduced by the CDK outage and hard market circumstances through the quarter, leading to working expense outstripping gross revenue and resulting in the second quarter U.S. adjusted EBITDA loss. In gentle of the CDK outage, throughout Q2, we obtained covenant aid from our lenders, amending our whole internet funded debt to financial institution EBITDA ratio covenant to 4.5 from 4 from June 28, 2024 to September 29, 2024. As of June 30, 2024, we had $185 million excellent on our $375 million revolving credit score facility with a complete internet funded debt to financial institution EBITDA covenant ratio of 4.09. We are going to proceed to work intently with our banking companions as we navigate the following few quarters. I’ll now flip the road again over to Paul to debate the outlook.
Paul Antony: Thanks, Sam. With the CDK outage that has now been resolved, the difficult financial and working circumstances that we skilled through the second quarter haven’t. Going ahead, our sole goal can be to efficiently execute initiatives that can structurally enhance our core dealership profitability, cut back leverage, and permit us to adapt to the evolving market panorama. We anticipate that these efforts might result in some uncertainty as we realign our operations and assets. Nonetheless, this restructuring is critical to place us for best-in-class efficiency over the following decade. We recognize the assist of our shareholders, workers and OEM companions as we work by means of this transformative part. A dedication to transparency can be a cornerstone of our strategy and we are going to present updates to our stakeholders on our progress and any changes to our technique within the coming quarters. That concludes our ready remarks. At the moment, I need to flip the decision over to our operator to open up the strains for Q&A. Thanks.
Operator: Women and gents, we are going to now conduct a question-and-answer session. [Operator Instructions]. Your first query comes from the road of Luke Hannan from Canaccord Genuity. Your line is now open.
Luke Hannan: Thanks, and good afternoon, everybody. Paul, perhaps should you can simply give us a 30,000 foot view on like, what precisely has led to the enterprise being within the form that it is in as we speak? And I notice there’s quite a bit occurring from a macro perspective, however we have now additionally had a number of of the U.S. friends come out and be aware, sure, there are some headwinds that they are seeing on the shoppers — on their client, however not fairly as unhealthy because it looks like what you may have laid out earlier as we speak. So perhaps simply, I do not know one other greater degree view or perhaps a little bit bit extra element on what precisely is happening right here.
Paul Antony: I imply, I believe we talked about it, however you in all probability have not sufficient time, Luke, to digest. However only a excessive degree bridge, there was roughly, I believe, EBITDA pre-IFRS was $11.3 million or $11.2 million. There’s roughly $20 million in stock write-down and severance. There’s roughly $5 million year-over-year curiosity expense differential this yr versus final. And I do not need to throw an actual greenback out, however I’ll say, we do not know the precise impression of the CDK, however 15% to twenty% of the EBITDA discount might be attributed to that. After which we have now some companies that did not carry out this yr versus final, however RightRide is admittedly off versus final yr. And our U.S. enterprise is manner off. And should you add all that up, you are approaching $60 million of EBITDA, versus $80 million final yr, which was one of the best within the firm’s historical past. However in earlier years, 2022 and 2021 yr round that 65-ish, 69 mark. And so we all know what to do. CDK actually did not assist and it is as much as us to go execute, however that is roughly the bridge. Is that useful, Luke?
Luke Hannan: Sure. No, that’s useful. And perhaps simply on RightRide for a second, as a result of I keep in mind the thesis for that enterprise, if I keep in mind appropriately, was that it ought to carry out a little bit bit higher, even throughout extra harsh financial backdrops. It needs to be a little bit bit countercyclical since you’ll have type of a high grading of the credit score portfolio there, if you’ll. You’ve some perhaps people whose credit score scores are on the precipice or the sting of shifting into subprime. It is best to get extra volumes or inflows into that enterprise. So I imply, what’s driving the underperformance there?
Paul Antony: Sure. That is — so a pair issues. Rates of interest clearly going up makes credit score worthy folks more durable and more durable to search out. And so we’re having much less folks accepted. Second factor that we did as an organization, and that is on me, we principally began opening up RightRide shops when COVID hit and it was the proper factor to do, proper. We had been promoting loads of vehicles and taking orders for autos. And we began getting extra into the prime, close to prime area and misplaced focus within the subprime area and admittedly, subprime is quite a bit more durable. It is quite a bit more durable to do. It takes a distinct gross sales particular person. It is a totally different gross sales course of. And so for us, we centered on the decrease hanging fruit, which is simply promoting autos as a result of it was a scarcity. And so what we’re doing proper now could be all of our non-profitable and non-core belongings are underneath strategic opinions. And we have sort of drawn a line within the sand as a company that if a retailer just isn’t assembly our expectation, we have to discover a extra everlasting resolution. So we’re not going to proceed to allocate administration time and monetary assets to issues that are not assembly our expectations.
Luke Hannan: Acquired it. Okay. Thanks. Final query for me, I imply, you probably did contact on the strategic alternate options or trying to maximize worth with these non-core belongings. I imply, why not additionally broaden that to only search for one of the best strategic various for the enterprise as an entire, moderately than the non-core belongings alone?
Paul Antony: Proper now, I believe from our perspective, we have got a reasonably vital plan to go and execute in opposition to. And I believe it is as much as us to truly go display. And through the demonstration part, the folks will reward us by shopping for our inventory. And if they do not reward us by shopping for our inventory, someone will seemingly determine a manner to purchase the corporate if it is undervalued could be my expectation.
Luke Hannan: Okay. I am going to go away it there. Thanks.
Operator: Your subsequent query comes from the road of Chris Murray from ATB Capital Markets. Your line is now open.
Chris Murray: Sure. Thanks, people. Good afternoon. I assume, perhaps turning again a pair items of the IT factor. So to begin with, the CDK, simply questioning, is there any chance of any type of insurance coverage protection, both in your behalf or theirs, in any type of restoration? After which alongside that, you additionally put a separate press launch tonight about one other cybersecurity incident, questioning if we are able to get perhaps a little bit extra coloration about what which means and if that was tied to the sooner CDK incident.
Paul Antony: So I might say that at this time limit, on insurance coverage, we do. We’re working with our insurance coverage companions to debate what protection we do have for cyber and enterprise interruption. So that is what I might say on the insurance coverage facet and that is TBD. On the — was our most present launch a results of CDK, I might say, we do not have sufficient data to say at this time limit. And so too quickly to say.
Chris Murray: Okay. And I assume, the opposite piece of that, I imply, simply to attempt to determine it out, like, how impacted is that this new cybersecurity incident? Are we going to be taking a look at one thing related, like, your operations are impaired at this level or any coloration on that?
Paul Antony: So it looks like, and I do not understand how a lot I ought to say, nevertheless it looks like we had been, on account of what occurred with CDK, our BI group went forward and began locking down issues preemptively to guard the corporate. And my guess is, on account of locking issues down preemptively, it triggered one other occasion. And we predict that it is pretty sectioned off and doubtless not as impactful to the group, however once more too quickly to inform, however at first look, it looks like it is fairly contained.
Chris Murray: Okay. All proper. I am going to go away that one for now. Possibly turning again to consider the stock write-down, Sam, I am undecided should you can simply perhaps repeat what the write-down was, however the — simply taking a look at it, are you able to perhaps speak a little bit bit concerning the breakdown of the write-down? You probably did point out that Stellantis stock is a little bit bit excessive. Was this a brand new autos? Was this in used autos which we have seen beforehand? Any coloration on the rationale for the write-down and what you are seeing thus far in Q3 when it comes to stock turns.
Paul Antony: I imply, I am going to take that and I can cross it over to Sam from there, nevertheless it was roughly $12.7 million in stock write-down. It was on used stock in each Canada and america. And we’re persevering with to observe the stock in opposition to market circumstances to make sure that we’re appropriately offered. Ensuring that we get off this used stock on this method was an enormous contributor to the decline within the — in our GPU and used vehicles reported through the quarter. I do not know if that is useful for you.
Chris Murray: Sure. No, and principally, was it the sort of factor that the impacted stock principally needed to low cost the promote? Is that the proper manner to consider it?
Paul Antony: It is a number of issues. Clearly, with CDK being down, I do not need to blame every little thing on CDK, however with CDK being down, there was only a ton of autos not bought. And so if they don’t seem to be being bought, they’re sort of depreciating. And we have got knowledge to say that we have to promote stock within the first 60 to 90 days, in any other case they really turn out to be fairly much less worthwhile. I might say the dearth of recent gentle automobile gross sales that occurred through the pandemic meant that there is fewer good high quality used vehicles accessible as we speak. And in addition Stellantis represents roughly 25% of our supplier community in Canada. And the buyer demand for Stellantis has been smooth. This administration group has actually moved our reliance on Stellantis away from being a big Stellantis consolidator. Now we have now all manufacturers. However once more 25% of our community is fairly vital. And when Stellantis is smooth at 25%, it sort of impacts our used enterprise, as a result of if we’re not promoting new vehicles, we’re not getting trade-ins, and due to this fact, it is tougher for us to truly go and purchase good used stock for good gross margins. However we’re simply going to observe the market dynamics because it pertains to stock and provisions. And in addition, I might say, simply as a facet be aware, that is one thing we’re hyper centered on with Bain that we have been spending time doing proper now, ensuring that we’re managing correct stock degree so as to be sure that our flooring bills are a part of the larger plan.
Chris Murray: Okay. My final query perhaps is simply on the strategic overview course of. It feels just like the underlying enterprise ex-CDK in Canada was — we’ll name CDK a serious contributor to what you had been seeing right here. Collision enterprise appears to be going okay. You already known as out RightRide as perhaps an space for alternative. However I assume, the opposite query is concerning the U.S. enterprise and simply ideas round that. I do know we have had this dialogue for, I believe, a number of quarters now we’ll go. Are you able to flip it round, what you are able to do with it? However is this type of your mind-set that, or expressing that perhaps the U.S. companies needs to be bought or checked out with a distinct possession construction?
Paul Antony: Pay attention, I believe I mentioned this, however the entire non-profitable and non-core operations are underneath strategic overview. And we have actually drawn sort of a line within the sand now that if a retailer just isn’t assembly our expectations, it is essential for us to search out one thing that we are able to really extra completely execute on. As a result of simply throwing assets at markets and areas that we do not appear to have the ability to have the flexibility to show in a extra everlasting vogue. And if they don’t seem to be assembly our expectations, we have to really act otherwise.
Chris Murray: Okay. I am going to go away it there. Thanks.
Paul Antony: Thanks.
Operator: Your subsequent query comes from the road of David Ocampo from Cormark Securities. Your line is now open.
David Ocampo: Nicely, I simply need to keep on with the strategic overview. I imply once we take into consideration the non-core underperforming belongings, are you able to perhaps converse to the urge for food within the market for these belongings? As a result of, I imply, should you’re producing detrimental profitability, I imply, it in all probability be laborious to fetch an applicable valuation for these companies, so simply curious in your ideas there.
Paul Antony: Look, I believe what I might let you know is that for this administration group working in Canada, regardless that they’ve a ton of expertise in america, it is a totally different market, it is a totally different elevate. And so spending time and vitality to correctly flip these shops, I do not suppose is sensible given the present circumstances. With that mentioned, loads of the shops that we bought, proper, we had been in a position to purchase and sort of excessive grade and like high grade, and I might with fairly a little bit of confidence consider that there is lots of people, that these are manufacturers which are extremely fascinating. And I might suppose that there are consumers that might really go and execute the place we do not have the competency or the persistence to truly do in a market like this.
David Ocampo: Sure, that makes some sense. After which simply going again to the write-down, I imply, if I take a look at your stock ranges and simply your commentary on the breakdown, it does appear to be the write-down is just 3% of your used automobile stock. Simply curious if there’s any threat of additional write-downs if the market continues to deteriorate right here and simply perhaps some commentary on the way you’re altering your sourcing, simply given the choice for decrease priced autos.
Paul Antony: There’s threat. Sure, I believe the chance is macro, however we have now positively been beginning to supply autos, cheaper autos. They’re harder to purchase. However I believe the chance is extra on the macro degree. And sure, I do not know what extra I can add that I have not already mentioned. I believe that we’re being extraordinarily cautious on all used autos, given the buildup on the brand new vehicles. And recall that I discussed, we’re working alongside Bain, and one of many key initiatives with us is — and dealing collectively is ensuring that our stock degree and flooring is high of thoughts and paramount to this group.
David Ocampo: Sure. That is useful there, Paul. Then perhaps only a fast one for Sam. I do know you guys acquired aid out of your lenders on a few of your covenants, however after I check out your adjusted EBITDA numbers, it would not appear to be it backs out any of these one-time associated prices, a minimum of on this quarter. How are the lenders trying on the adjusted EBITDA numbers? Are they excluding all these numbers simply so we have now some higher visibility on how you can mannequin out the leverage as we transfer all year long?
Sam Cochrane: Sure, good query. So there’s a totally different bucket of add backs that the lenders take a look at than what you may see there. For instance, within the quarter, the numerous one is we had $4.5 million of severance associated to some senior leaders. In order that wasn’t added again to the $11.2 million, however that can be added again to the financial institution EBITDA. In order that’s in all probability the numerous name out in your modeling. Is that useful?
David Ocampo: Sure. That is useful. We may take it offline later as we speak too, if I’ve any.
Sam Cochrane: Sure, completely. Sure, sure. And pay attention, we will must work with them clearly going ahead and recognize their assist.
David Ocampo: Okay. Thanks quite a bit, Sam. Thanks, Paul.
Paul Antony: Thanks, David.
Operator: Your subsequent query comes from the road of Krista Friesen from CIBC. Your line is now open.
Krista Friesen: Hello, thanks for taking my query. So simply on the excellent overview of Bain, it sounds such as you’ve been working with them for a minimum of a month or two now. At this time limit, is there something that is sort of began or any initiatives which were began underneath their route or is it nonetheless sort of simply in a holding sample proper now to see how you can transfer ahead? And I would additionally simply assume at this level that Venture Elevate, that is just about been placed on maintain indefinitely.
Paul Antony: Sure. So let me simply unpack that. The Bain initiative and Venture Elevate are each included collectively to a sure extent. And I might say the view from Bain is it validates the chance for enchancment in our enterprise and to deliver our value construction extra in keeping with our friends. And so I might simply return to our — the associated fee construction of our friends and sort of use that for BASE CAMP. I might let you know that a lot of the execution goes to occur over the following 12 months. It is not going to be simple, however we’re going to do it. There are going to be one-time prices related to these items and we’re not going to present steerage on it. However we do know the sort of work that we have to do may have some prices and among the fast issues that we will do is halt M&A, share buyback, restrict discretionary spending and development CapEx and take a look at all of the strategic alternate options for issues that do not have enough profitability. However I might say that that is all stuff that we have needed to do for a very long time. I do not know. I would not say needed to do this the businesses wanted to do for a very long time, however you sort of look the opposite manner typically if you’re taking orders for vehicles versus promoting them, and it is a totally different world. And so now could be the time.
Krista Friesen: Thanks. Nice. And I assume, I imply, clearly there’s been quite a bit that is gone on this previous quarter with the CDK hack and whatnot. Have you ever seen any type of underlying enchancment? Possibly even only recently with the current charge cuts? Like is there any type of silver lining you possibly can level to both within the quarter or so far into Q3?
Paul Antony: Sorry. I am sorry. May you repeat that?
Krista Friesen: Simply any type of silver lining you could level to perhaps you are beginning to see a little bit little bit of enchancment in visitors simply given the speed cuts we have had right here in Canada or is every little thing nonetheless, sure, fairly detrimental.
Paul Antony: I do not need to say it is detrimental, however I might simply say, look, CDK got here again on-line the start of July, however we nonetheless did not have it totally useful till in direction of the top of July. We’re sort of 1.5 weeks in August. It is too quickly to inform is what I might share with you, however I might say that it is simply one thing we will not forecast proper now. From my perspective, let’s — I believe that we’ll have extra perception in all probability within the subsequent month or so. However I believe given every little thing that is been occurring from two hacks and simply in a poor quarter, I believe proper now we simply must deal with the enterprise.
Krista Friesen: Okay. Thanks. I am going to soar again within the queue.
Operator: There are not any additional questions at the moment. I’ll now flip the decision again to Mr. Paul Antony. Please proceed.
Paul Antony: Actually recognize everyone assist right here and we acknowledge our must do higher and are optimistic for the following quarter and hopeful that we’ll be delivering much better outcomes. So thanks everyone in your time and I am positive lots of you’ll converse to over the course of the quarter. Thanks.
Operator: Women and gents, this concludes as we speak’s convention name. Thanks in your participation. You could now disconnect.
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