AutoCanada Inc. (ACQ) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Annual Meeting of Shareholders of AutoCanada. My name is Paul Antony. I'm the Chairman of the company, and I'll be chairing the meeting of shareholders today. This meeting is being held virtually via live webcast, and we have established the following rules to have an orderly meeting. Number one, questions in respect of a motion can be submitted by any registered shareholder or duly appointed proxy holder using the instant messaging service of the virtual interface. Please note, there's going to be a slight delay in the publication of the communications received. Number two, when asking a question, please indicate your name; which entity you represent, if any; and confirm that you're a registered shareholder or a duly appointed proxy holder. Number three, questions will generally appear shorter after they are submitted but will only be addressed during the question period at the end of the meeting, provided the questions regarding procedural matters are directly related to the motions before the meeting, may be addressed during the meeting. Number four, for the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of all business items. Number five, when you're asked to vote, you'll receive a message on the virtual interface requesting you to register your votes. You will only have a certain amount of time to do so when the polls are open. We'll now proceed with the formal portion of today's meeting. To expedite the formal part of the meeting, I'll move and second all motions. I now ask the Annual Meeting of the Shareholders of the company come to order. I appoint Peter Hong, Chief Strategy Officer and General Counsel of the company, as Secretary of the meeting. For the purposes of this meeting, I appoint Computershare Trust Company of Canada, through its representatives, as scrutineers to compute the votes of any polls taken at this meeting and report thereon to me. The purposes of today's meeting are set out in the management information circular of the company dated March 23, 2021. The notice calling this meeting, the management information circular; and the form of proxy were mailed to shareholders on April 6, 2021. Unless there is any objection, I will dispense with the reading of the notice of meeting. Copies of the management information circular and other meeting materials are available under the company's profile on the SEDAR website. Our transfer agent, Computershare Trust Company of Canada, has attested to the proper mailing of the notice calling this meeting. There has been, filed with me, proof of service of such mailing provided by Computershare. I direct that a copy of such proof of service be attached to the minutes of this meeting as a schedule. I have been advised there are more than 2 persons representing more than 5% of the outstanding voting shares of the company present, and therefore, a quorum of shareholders of the company is present, and the meeting is properly called and duly constituted for the transaction of business. I have received the scrutineers' report, and I direct their formal report be attached to the minutes of this meeting as a schedule. As the first item of business on the agenda for today's meeting, I present to the meeting the audited consolidated financial statements of the company for the fiscal period ended December 31, 2020, together with the auditor's report to the shareholders thereon. Copies of such documents are available on our website and on SEDAR, and it is not proposed to read them to the meeting. The next item of business is the election of directors. The 8 directors to be elected by the shareholders of the company will hold office until the close of business, the first Annual Meeting of Shareholders of the company following election or until their successors are elected or appointed. Dennis DesRosiers; Stephen Green; Barry James; Maryann Keller; Lee Matheson; Elias Olmeta; Michael Rawluk; and I, Paul Antony, have been nominated as directors for the ensuing year or until their successors are elected or appointed. Each of the persons nominated has confirmed that he or she is prepared to serve as a director. I move and second the motion to elect the directors. The next item of business is the appointment of auditors of the company for the ensuing year and to authorize the directors of the company to fix the remuneration of the auditors. The Audit Committee of the Board of Directors has approved, subject to shareholder confirmation, the appointment of PricewaterhouseCoopers LLC as the auditors of the company. I move and second that PricewaterhouseCoopers LLC be appointed auditors of the company until the next Annual Meeting of Shareholders and the Board of Directors be authorized to fix their remuneration. Voting today will be conducted by electronic ballot. I ask that Computershare now open the balloting to registered holders and duly appointed proxy holders. The polls are open, and at this point, all registered holders and duly appointed proxy holders who have properly logged in with their control numbers or user name and wish to vote will be able to see on the screen all motions being brought forth at this meeting. Please register your votes by accessing the voting page and selecting the For or Withhold button next to the name of each proposed Director and the For or Against button next to the resolution with respect to the appointment of PricewaterhouseCoopers as the company's auditors. We will provide registered shareholders and duly appointed proxy holders approximately 1 minute to complete the electronic ballots. [Voting]

Electronic balloting is now closed. I would ask that the scrutineer compile the reporting the results of voting on all matters. I have been advised by the scrutineers that the ballots and proxies deposited for the meeting have been voted in favor of the resolutions. One, each of 8 nominees have been elected as directors of the company to serve until the next Annual Meeting of Shareholders until their successors are elected or appointed. Number's two, the appointment of PricewaterhouseCoopers LLC as the auditor of the company has been approved, and the Board of Directors of the company has been authorized to fix their remuneration. I direct the results of the poll be included with the minutes of this meeting, and the results of the voting will be announced in the press release in accordance with the policies of the TSX and filed on SEDAR. The formal items of business, as set out in the notice of the meeting, have now been dealt with. I move and second that this meeting now terminate. As there is no further business to come before the meeting, I declare the formal part of the meeting to be concluded. I'll now turn the meeting over to Mike Borys, the Chief Financial Officer of the company, for a brief presentation and a question-and-answer period.

Thank you, Paul, and good afternoon, everyone. I'll now review the presentation slide that you can see on the right-hand side of your screen if you are on our Lumi webcast. I'll indicate which slides I'm speaking to as we go through the presentation, and you can move through the slide by clicking on the forward arrow on the slide. Before we begin, I'll direct you to the disclaimer on Slide 2 about our forward-looking information. Today's presentation will discuss forward-looking information, amongst other matters, and should be considered in connection with this slide. Moving to the next slide. We made impressive gains in 2020, significantly advancing our Go Forward Plan in Canada and in the U.S., driving strong year-over-year increases in adjusted EBITDA and achieved record improvements in the second half of the year. The actions and measures taken to strengthen the business model and position the company for top-tier operating performance were evidenced in these results. We are particularly pleased with our pre-IFRS 16 adjusted EBITDA margin improvement in 2020, which, on a normalized basis, was 2.5% versus 1.7% in 2019 and 1.6% in 2018. This was an even greater achievement considering the challenges we faced from the COVID-19 pandemic. Our focus on execution, along with a strong recovery in vehicle sales across North America in the second half of the year, provided the opportunity for our complete business model to produce strong results across all operational segments. The foundational work that has been accomplished since the current management team took the reins, along with the strategic initiatives we took early in the second quarter of 2020 in response to the pandemic focused on mitigating losses, managing inventory, reducing costs and preserving liquidity, allowed our organization to deliver exceptional operating performance in 2020. Slide 4 shows our comparable performance to the market for new retail sales. Despite the challenges posed by COVID-19, our team outperformed the market throughout 2020 and for 8 consecutive quarters, a key performance indicator for our business. For the year, our same-store new retail units outperformed the Canadian new vehicle market by 10.3 percentage points. For the year, our same-store used retail growth was positive 8.9% as compared to a market decline of 5.3%, an outperformance of 14.2 percentage points. The outperformance we've delivered is largely due to increased experience of general managers across our dealerships, the continued focus on operational excellence and the strength of our OEM relationships. As you can see here on Slide 5, our balance sheet continues to strengthen. We have applied strong, disciplined management through COVID-19, and we'll continue to do so. Looking back to the start of 2020, we refinanced our debentures in February 2020, just ahead of the onset of COVID-19, setting ourselves up well with liquidity and improved financial flexibility through 2020 with the strongest balance sheet in the company's history. We continue to successfully manage cash with a focus on preserving liquidity and our financial flexibility, ending the year with net debt of $89.5 million. At year-end, our net debt leverage was 1.3x. This compares to 2.6x at the end of 2019 and 6.6x at our peak in Q1 2019, well below our target leverage range of 2.5x to 3.0x. On a lease-adjusted basis, we set our target at 4 to 4.5x. At year-end, our lease-adjusted net debt leverage was 4.3x. Moving on to Slide 6 and on to free cash flow. We generated strong free cash flow of $131 million in 2020 compared to $100 million last year. We've continued to maintain strong discipline in converting our earnings into cash. Between 2019 and 2020 combined, we generated approximately $230 million of positive free cash flow. Turning to Slide 7. In response to COVID-19, we took immediate and proactive steps to ensure the well-being and safety of our employees and customers and the continuity of our operations. We were able to improve upon our operating cost structure, identify at least $10 million in permanent cost efficiencies, pull back on capital spending, suspend the dividend, sell off our noncore assets and worked with our lenders to give us the headroom we might have needed depending on how the pandemic might have impacted us. We also had the benefit of the Canadian emergency wage subsidy of $35 million in 2020 and approximately $7 million in the U.S. with SBA loans. We proved ourselves able to manage all levers of the business, both operationally as well as from a balance sheet perspective. Our aim was to come out of the pandemic crisis on the other side in good form. Our results show that we've emerged in an even stronger position given the actions taken. Moving to Slide 8. As for Q1 2021 results, we just announced these results yesterday, and we're pleased to report yet another record quarter. The continued execution of our complete business model positions us to sustain top-tier operating performance and support our next leg of growth. Starting with revenue, we recorded an all-time record first quarter figure of $969.8 million. Adjusted EBITDA of $47.2 million was 723% better as compared to Q1 2020, and we improved year-over-year performance across almost every metric. Our adjusted EBITDA margin improvement in Q1 was also impressive. On a normalized basis, it was 4.0% versus 0.8% last year, an increase of 3.2 percentage points. Equally impressive, our team outperformed the market for the ninth consecutive quarter with same-store new retail unit sales increasing 29.8% compared to the Canadian market increase of 15.2%. Our Canadian used-to-new retail unit ratio increased to 1.29 from 1.08 last year, and the TTM over the trailing 12-month ratio improved to 1.01 at Q1 2021. We also continued to strengthen our balance sheet. And at the end of this first quarter, our debt leverage improved to 0.7x. As I mentioned earlier, this is a significant improvement to where we were at in Q1 2019 at 6.6x. In mid-April, we amended and extended our credit facility for 3 years to 2024. It will always be our intent to maintain a 3-year tenor to our credit facility. At the same time, we completed an add-on offering to our existing 8.75% senior unsecured notes due 2025. We are very pleased with the outcome of the offering, which ended up being upsized from $100 million to $125 million at a yield towards rate of 5.595%. The successful financing activates our dry powder of $250 million. That is to say we can deploy capital of that amount at some return and remain within our stated net debt leverage target. This dry powder supports our ability to finance any potential transactions responsibly while ensuring that we maintain the company's strong balance sheet and overall financial flexibility. With these successful financing actions in place and the overall strength of our balance sheet and operations, we are primed to move forward on our business strategy. On Slide 9, we've laid out the 9 quarters of outperformance on the market on new retail unit growth. Michael and the Canadian operations team have done an excellent job of working with and building alignment with our OEMs while also proactively managing inventory levels for new and used vehicles. Slide 10. So this next slide highlights that our focus on increasing used retail volume is translating to continued improvements in our same-store used-to-new retail unit ratio, which increased to 1.19 for Q1 2021 as compared to 1.08 in the prior year. Our target remains to improve used-to-new ratio to better than 1.0, and we're continuing to trend above that level. On a trailing 12-month basis, Canadian used-to-new retail unit ratio for the year improved to 1.01 at Q1 2021 as compared to 0.81 at Q1 2020. And finally, turning to Slide 11. We're very proud of a number of accomplishments in 2020, including the many awards our dealerships achieved, as you can see on this slide. We're extremely grateful to all of our team members, our dealers and head office support team who made these achievements possible. I'll now turn it over to Paul to wrap up our presentation on the final slide.

Thanks, Mike. In summary, in the face of the pandemic over the past 1.5 years, I'm extremely pleased with the continued momentum this company has exhibited through 2020 and into 2021, which has set us up to take advantage of growth and build on the scaffolding that we had in place over the last 2 years. Our performance reflects the fundamental strength of our business model, teeing us up for our next leg of growth. The strength of our operating platform and balance sheet has enabled us to continue to develop organically as well as to focus on an acquisition and innovation strategy. Given our strong business position and available market opportunities, we see significant potential to grow as an industry consolidator in both the short term and long term. We're excited about the many opportunities, and we are continuing to make excellent progress with a number of them, including our pipeline of strategic acquisitions and our used digital retail strategy. I'm very proud of the progress we've made to make our company stronger, and we're committed to continuing to exceed our previous performance standards on behalf of our customers and shareholders. Our employees in Canada and the U.S. have worked tirelessly and delivered excellent performance under challenging conditions. We're entering 2021 on a very solid footing, and we remain well prepared to face any challenges in our current environment. We're very well positioned with strong growth potential by simply executing against our many go-forward initiatives. At this time, I want to thank our employees for their extraordinary efforts and dedication through a very busy and successful year in 2020 and all they do and have already done in 2021. I also want to thank our Board of Directors and senior management team for their engagement and leadership and to our fellow shareholders for your continued support. We are truly grateful and appreciative for the support, and like all of you, I'm excited to see our next chapter unfold as we take advantage of the disruption and consolidation in the industry and blaze a new path forward in the evolution of the company. Thank you for your time, and I'd be happy to take any questions through the chat. And I ask all attendees who would like to ask a question use the instant messaging feature of the virtual interface to do so. We'll answer as many questions as time permits. When asking your question, please state your name; the entity you represent, if any; and confirm you're a registered shareholder or a duly appointed proxy holder. We'll now give attendees a moment to type in their questions. For each question we answer, we'll summarize the question; read out loud the name of the person who asked such a question; and if applicable, the entity such person represents. As there are no further questions, that concludes the Q&A period. Thank you for joining the Annual Meeting today.