AutoCanada Inc. (OTCPK:AOCIF) Q4 2022 Earnings Conference Call March 2, 2023 11:00 AM ET
Casey Charleson – VP, Finance
Paul Antony – Executives Chair
Conference Call Participants
Tamy Chen – BMO Capital Markets
Chris Murray – ATB Capital Markets
Michael Doumet – Scotiabank
David Ocampo – Cormark Securities
Luke Hannan – Canaccord Genuity
Krista Friesen – CIBC Capital Markets
Good morning. My name is Collin, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the AutoCanada Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
I would like to remind everyone that certain statements in this presentation and on our call are forward-looking in nature, including among other things, future performance. These include statements involving known and unknown risks, uncertainties, and other factors outside of management’s control that could cause actual results to differ materially from those expressed in the forward-looking statement.
AutoCanada does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligation to publicly advise these forward-looking statements to reflect subsequent events or circumstances. For additional information about possible risks, please refer to our AIF which is available on SEDAR and on our website within the Investor documentation and filings section.
I would now like to turn the call over to Casey Charleson, Vice President of Finance. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining us on today’s fourth-quarter results conference call. For today’s call, I’m joined by Paul Antony, our Executive Chair; and Peter Hong, our Chief Strategy Officer. We released our Q4 results after the market closed yesterday. A copy of our results is available for download on our website. For today’s call, we will be discussing the current state of the business, discussing the financial results, and providing an update on both our Canadian and US segments.
With that, I’d like to turn it over to Paul.
Thanks a lot, Casey, and good morning, everyone. AutoCanada delivered a strong finish to the year with our highest-ever Q4 revenue figure of $1.4 billion. This reflects an unwavering focus on our strategy objectives, not only in the quarter but over the full year. I’m very proud of the results this team has achieved in support of our complete business model, particularly in F&I, parts, service, and collision repair business operations.
Contribution from acquisitions also supported our performance and has exceeded expectations. This record revenue performance was underpinned by several important highlights in the quarter, which include total retail vehicles sold increased by 12% with used retail vehicles sold increasing by 21%. This more than offset a decline in new retail vehicle sales of 1%, which is important as we continue to navigate unpredictable new vehicle supply.
We also saw strong unit and profitability growth in both our Canadian and US segments, both of which I’m going to come back to. Same-store performance was also strong across the board with the exception of new vehicles. This includes a same-store used retail vehicle increase of 7.6%, a same-store F&I gross profit per retail unit increase of 16%, reaching $3,844 in the quarter, which is a record, which even stated in US dollars, far outpaces our peers.
Our same-store F&I gross profit increase of 15.8%, a same-store parts, service, collision, and repair gross profit increase of 7%, and a same-store gross profit margin increased to 57.7% as compared to 56% just a year ago. All of these improving operating metrics support our confidence that fundamentally, our business model continues to perform and remains inherently durable. Despite this strong performance, however, continued fluctuations in used vehicle pricing led us to take an incremental write-down provision of $12.4 million in the quarter.
I’m going to come back to this later, but we do believe this properly positions us heading into the spring selling season. Unfortunately, we were also impacted by rising interest rates, which while anticipated heading into the quarter resulted in increased floor plan costs of $13.3 million year-over-year. These two hits to profitability impacted what was otherwise a historic quarter for AutoCanada and led to adjusted EBITDA coming in at $50.7 million compared to $65.9 million last year.
The story was much the same on margin with adjusted EBITDA margins in the quarter of 3.6% compared to 5.5% in the prior year. As outlined last quarter, we’re also actively looking for cost opportunities in the business. And continue to be focused on moving in line with our peers to an effective OpEx level as a percentage of growth. These efforts continue, our recent acquisitions are also not yet at a full run rate and we expect to further reduce expenses as a percentage of growth with ongoing integration work.
While we remain disciplined in our approach to capital allocation and cost, we’ll also continue to be opportunistic with M&A as evidenced with the recent acquisitions of Kavia Auto Body, Excellence Auto, Sterling Honda, and DCC Hail. We’re pleased to have added a fourth Honda dealership as part of our objective of increasing our presence in Ontario and further expanding our dealership network and our national collision footprint center, center footprint across Canada.
Consolidated performance aside, let me also spend a few minutes on performance in our Canadian and US geographies. Our Canadian operations delivered strong growth in Q4. Our used segment, which has remained a priority given our new used car supply constraints saw continued strength as used retail units were up 20% over the prior year. The ratio of used to new retail units also increased to 1.64 from 1.45 in the quarter and to 1.67 from 1.43 over the last 12 months. I’ll come back to this point in my remarks at the end of the call.
F&I gross profit increased by $14 million or 28% to $66 million. Parts, service, and collision repair gross profit increased by 23% to $82 million, continuing a trend of growth driven by our collision shop acquisition strategy and the need to service customers’ vehicles, the average age of which has increased due to lack of new vehicle production in recent years. Canada’s adjusted EBITDA of $46 million decreased by 17% from the prior year, adjusted EBITDA of $55 million. These results included the incremental used vehicle write-down provision of $9 million.
Notably, adjusted EBITDA on a full-year basis was $232 million compared to $220 million in the prior period despite the headwinds from rates and the inventory write-down. The US has also shown continued success with total retail unit sales increasing 2% and this includes our increase in used, retail vehicles sold, up 26% over the prior year. This also drove an increased in used to new from 2.76 to 1.46.
F&I gross profit increased by $3 million, 22% to $15 million. Parts, service, and collision repair gross profit increased by 49% to $14 million. We reported fourth-quarter US adjusted EBITDA of $5 million and that’s a decrease of $5.7 million over the prior year. These results include an incremental used vehicle write-down provision of $3 million and the impact of increased floor plan costs. We’ve seen a significant transformation in the US business over the past year, trailing 12 months adjusted EBITDA is now $33 million that compares to a loss in 2019, a breakeven in 2020 and that’s an increase in 2021. The US team led by Jim Douvas continues to perform.
Two last points on the market before I turn it over to Casey. First, the used vehicle market, the markets experiencing continued volatility which has led to margin compression across the industry. While recent data suggest some positive news on inflation, interest rates, and the risk of recession, I’ve never found uncertainty helpful in this industry and this time is no different. However, as stated for the last several quarters, our business model is designed to meet the customer where they are in all markets and our strength in used and F&I for example demonstrates this.
With regards to the write-down, we’ve taken in Q4, this is not unlike the $10 million incremental charge we took in Q2 on our Canadian used vehicle inventory, which allowed us to address mark-to-market issues on older inventory and drive retail sales in Q3, enabling us to generate parts and service work and further utilize our best-in-class F&I department. Going forward, we’ve implemented additional procedures over our used vehicle inventory to reflect the current market environment coming out of the pandemic, which will allow us to proactively address changes in used vehicle pricing.
The used vehicle write-down charge we have taken in Q4 combined with these efforts sets us up well for 2023. We’re also mindful of the impact that interest rate hikes have on inventory carrying costs and are working to right size our inventory in order to minimize costs while maximizing sales. Accordingly, current inventory levels at approximately three month supply. Second, the new vehicle market, while the OEMs still have a ways to go, we now have approximately three month supply in stock as production slowly returns based on recent sales pacing.
For comparison, a year ago, this was two month supply. As always, we continue to work closely with our OEM partners to source inventory for our dealerships. Our employees in Canada and the US have once again delivered excellent performance and we can’t thank them enough for their efforts, which are driving our results. Thanks so much to our whole team, our OEM partners, and our customers.
I’m going to come back to more to speak about our outlook and strategy in my concluding remarks. But for now, I’ll turn it over to Casey.
Thanks, Paul. At the consolidated level, revenue came in at $1.4 billion, an increase of $192 million or 16%, gross profit came in at $242.6 million, an increase of $14.1 million or 6%, net income was $14.8 million versus $69.4 million in the prior year. The decrease in net income is primarily driven by non-cash items including the charge and the change in the recovery of non-financial assets and the unrealized fair value gain on embedded derivative in the prior year which are listed in Section 4 of our MD&As.
Adjusted EBITDA came in at $50.7 million, which was a decrease of $15.2 million, 23% behind adjusted EBITDA in the prior year. In our Canadian operations, total retail vehicles sold came in at 18,801, an increase of 2,354 units or 14%. The Canadian operations generated revenue of $1.2 billion, an increase of 17% versus the prior year. Gross profit was $208.3 million, an increase of 10%, net income was $15 million versus net income of $62.3 million in the prior year.
Adjusted EBITDA was $45.7 million, a decrease of $9.5 million or 17% behind adjusted EBITDA in the prior year. New vehicle gross profit increased by $3.8 million and new vehicle gross profit percentage decreased by 0.4 percentage points to 9.2%. Used vehicle revenue increased by 17% while used vehicle gross profit decreased by 42.4%. The increased volume of used vehicles sold drove our backend grosses, enhancing our overall profitability.
In our US operations, revenue was $215 million, an increase from Q4 2021 of 9%, gross profit was $34.3 million, a decrease of 12%, net loss was $0.2 million, a decrease of $7.4 million, adjusted EBITDA was $5 million, a decrease of $5.7 million from adjusted EBITDA in the prior year. New vehicle gross profit decreased by $6.2 million and new vehicle gross profit percentage decreased by 4.9 percentage points to 11.9%. Used vehicle revenue increased by 33% while used vehicle gross profit decreased by 147%.
So, as much as in Canada, the increased volume of used vehicles sold drove our back-end grosses, enhancing our overall profitability. The number of used retail vehicles sold increased by 26%, 2,729 units, two other items I’ll speak to here. We were pleased to recently announce the amendment to our credit facility, increasing the revolving credit, the revolving facility from $275 million to $375 million. We also maintained a three-year tenure by extending the maturity date to April 15, 2020.
In December 2022, we had exercised a $50 million accordion to increase the revolver from $225 million to $275 million. The amended facility also increases the wholesale floor plan financing facility from $1.06 billion to $1.22 billion and maintained $15 million wholesale leasing facility with total aggregate bank facilities of $1.6 billion. These amendments to our credit facility provide additional flexibility, allowing us to execute on our growth strategies and maintain our balanced approach to capital allocation. Coinciding with the facility amendment and upsizing, S&P, our rating agency issued an update on our issuer rating affirming our B+ rating.
In the fourth quarter, we completed a substantial issuer bid purchasing and canceling 1.85 million shares for an aggregate purchase price of $50 million, which represents approximately 7% of the total issued and outstanding shares of the company before giving effect to the SIB. For the year ended December 31, 2022, a total of 4.7 million common shares were purchasing for total consideration of $139 million representing approximately 17% of our shares outstanding at the start of 2022.
I’ll now turn the call back over to Paul to discuss our outlook and strategy.
Thanks, Casey. Our results continue to demonstrate the ongoing strength of our business model and we remain well-positioned to execute on our strategic pillars to deliver industry-leading performance and enhance shareholder returns. The fundamentals of our business remain strong and our complete business model continues to perform. It is worth reiterating what I’ve said here in the past, this team has been battle-tested over the last four years and we have learnings to ensure that we continue to manage the coming quarters appropriately.
We have also recruited seasoned operators who have spent careers navigating complex and changing markets. It’s with that in mind that I’d like to share some perspective on a metric we’ve consistently focused on since the start. Namely the used-to-new ratio, this metric as you recall was originally a focus of our go-forward plan where among the highest priorities with a goal to move AutoCanada beyond the traditional focus of new vehicle sales toward a variety of complementary sources of revenue across the customer lifecycle positioning the business for resiliency and growth as markets evolve.
One of those priorities was used vehicles. A focus which has been instrumental in driving our success through the pandemic and chip shortage. Our chosen metric to measure ourselves as you know was the used-to-new ratio, which was 0.66 to 1 in 2018 on an annual basis in Canada, that’s when this management team arrived. We believed a 1:1 ratio was more appropriate at that time and through a focus on this initiative achieved 0.78:1 in 2019 and 0.95:1 in 2020. That metric today stands at 1.67:1 for the year.
While we want our franchise dealers focused on selling both used and new, we also see our continued success within the used market outside of franchise dealers including RightRide as an indication that the upside for this metric is fundamentally unconstrained unlike our volumes of allocation for new cars at our new car stores.
I’ll come back to these themes in the coming quarters, but would encourage those following our business to increasingly view used and new as less correlated than they have been in the past in a way that makes me incredibly excited about our future. Not only as a result of our ability to sell more used vehicles but for the F&I, service, and repair revenue that this brings to the AutoCanada ecosystem.
Against the backdrop of our well performing business model and free cash flow generation. We will also continue to evaluate our capital allocation priorities and remain disciplined in the management of our balance sheet and debt levels. In addition to share buybacks which Casey highlighted, this includes opportunistic M&A. As of Q4 2022, we have completed $366 million of acquisitions over the past two years and $179 million in 2022 alone.
The current M&A pipeline we have underway remains strong and we’re well-positioned to continue to execute in the coming quarters with a number of dealerships and collision centers representing in excess of $395 million and annual revenue being evaluated currently. We expect to remain disciplined in our approach here as we have over the past few years and in particular given the broader macro question.
That said, we also think this type of market will lead sellers who may have been reluctant in the last few years or where we couldn’t make the math work to come to the table. We may also have an opportunity in this market environment to pursue strategic assets, which may have been unavailable or unattainable in a different climate.
Finally, we’re pleased to welcome our new CFO, Azim Lalani, who officially joined us later this month, Azim has the extensive financial experience and has held senior management roles in several public and private real estate and operating companies with responsibility for financial reporting, treasury, corporate finance, taxation, investor relations, and risk management.
His expertise and proven track record make him a valuable addition to our team as we continue to optimize our platform and pursue our strategic objectives. I remain incredibly excited about what the future holds for AutoCanada and the opportunity to drive value for our shareholders and stakeholders for our many growth opportunities.
Now, I will turn it over to the operator for any questions. Thank you.
[Operator Instructions] Your first question comes from Tamy Chen from BMO Capital Markets. Please go ahead.
Hi. Good morning. Thanks for the question. Paul, I just wanted to go back to the used vehicle side. So, I’m trying to understand the composition of your used inventory now because when I look on a day’s supply, it is high versus historical and versus US peers. So, begs the question of could there be more provisions. So, could you talk a bit about your inventory now, whether it’s by age or price point? What does that look like versus what consumers want with respect to used vehicles?
There’s a lot to unpack there, Tamy, so thanks for the question. I’ll say, let me take a step back because I think a lot of people are going to be asking questions about used vehicle inventory and pricing and write-downs. And so, I’ll try and be as thorough as I can. When we first got here, as we said it was a real priority for us to increase that use to new and really get the numbers that selling more used cars. So, we can untether from the constraints that we had on new car set sales.
And so in doing that in our drive to 1.67 used cars for every new car we sell, there was a lot of wood to chop, and frankly, but there were a lot of learnings. And I would say one of the learnings that we have since Jeff and his management team have been here is that it took us 42 days roughly to get a car from in the door to available for sale to the front line.
Just for context, in our US stores that takes 13 days to do the same thing, an industry standard is 14 days. And so, while we were selling a lot more used cars, we actually had to have way more in the pipeline, because we were not efficient throughput and actually getting them ready available for sale. That number has gone from 42 into the 30s right now and our drive is to be best-in-class and get it to 14 to 16 days. And we think that efficiency is going to allow us to actually stock far fewer cars but turn them a lot faster.
Does that answer that question, Tamy?
Yeah. That’s helpful there. I guess, does that suggest it’s a work in progress? So does that suggest with respect to provisions, I mean, how can we I guess get a sense of confidence or comfort that the one you took in Q2 and Q4, were it, maybe this question touches a bit more on the trend in used vehicle pricing that’s happening in Canada now.
I mean we all look at the Black Book data, for example, but there seems to be moving parts where it’s obviously normalizing from the last two years of elevated pricing but new vehicle supply is still not recovered and there’s probably a gap of lightly used vehicles now because of the last two years of new shortage. So it suggests that maybe pricing at some point does normalize, which would help you with respect to inventory. So, could you talk a little bit about that dynamic? Thank you.
Yeah. I think you’ve hit it right on the head. Look, so when we went into COVID, prior to going into COVID, we had a — when we first got here, there was really no aging policy or strategy on our used vehicle. And so the first thing that we did as a management team is there was — and previous management, we actually implemented an aging policy or an aging strategy on our used vehicles.
And what that meant was that after a certain number of days in inventory, if those vehicles were unsold, we would start depreciating them which would actually go against the dealerships’ P&L and that would happen on a monthly basis until they sold the car. And so, in other words, after a certain number of days that car would become radioactive and the dealer would then try and sell that vehicle before the price kind of fell to zero.
Now as COVID hit, and I actually remember having these conversations with people, are for the first time in the history that I can remember of used cars, they actually started going up in price because of the shortage of new cars of the shortage of used cars. And so, we ended up with cars that were going up in price. Yeah, we were telling our dealers that they need to depreciate them after a certain number of days in inventory. And so that was just driving behavior that we didn’t want, it was causing dealers to actually get rid of cars that were actually going up in value. And so, we suspended kind of the strategy that we had for our aging policy during the midst of COVID while cars were going up in price.
Now, fast forward to what happened in Q2, when Jeff and the team got here, we had a different lens to look at the way the vehicles were mark-to-market and we looked at the inventory that we had and frankly, a lot of our used vehicles and used vehicles in the market started depreciating again, because the type of new cars started coming on. So, I don’t know if you remember this last summer, no, we started seeing a shift down in the value of used cars. You saw, Carvana getting off of vehicles. You saw a different public selling used vehicles and trying to mark-to-market.
And so we thought in the absence of our aging strategy or policy or call it, whatever you want, we wanted to mark-to-market those vehicles to actually put them for what they were actually worth on our books as of that date. And if you remember also, we took a $10 million write-down roughly for that Q2 and we ended up far exceeding that by out-selling that write-down. We made that up with F&I with gross profit and it turned out to be the right thing to do.
So much so that in Q3, there was no need to do anything but again fast forward to Q4, and you saw, I think what would happen with Tesla marking their new vehicles down everybody was throwing the kitchen sink at the price of new cars and used cars. And so, what we found ourselves was we found ourselves with vehicles that again weren’t mark-to-marketed properly. So, effective January 1, we put on our own — we put on our own aging policy/strategy on our vehicles back again like it was pre-COVID and we said one-time with feeling, let’s mark-to-market these vehicles and let’s put them on the money.
That said, by the way, this all happened before, we just never called it out, right? Like, this would have happened within a dealer’s P&L, these cars would have been depreciated on a monthly basis aged vehicle, and it would have just shown up in the dealer’s profit or loss, it’s just that we’re calling it out. We’re trying to be really forthright about it. So, hopefully, that’s helpful.
Yeah. That’s it. Thank you.
Your next question comes from Chris Murray from ATB Capital Markets. Chris, please go ahead.
Yeah. Thanks, folks. Maybe going back to some of the comments about the level of inventory you guys are going to keep in floor plan. I guess maybe a couple of questions on this one. So, first of all, historically, we’ve seen at least the OEMs on new — be somewhat supportive with incentives around with floor plan credits and other incentives, just wondering — now that you could comment that you’re almost three months of a new inventory.
Just wondering if — how the behavior of the OEMs right now is around supporting you guys, especially in light of some of the comments that we’ve heard about, they want to be basically taking orders to spec at the dealership and not really wanting to have inventory. I know we’ve had some discussion but the behavior, but any thoughts around their support for your inventory would be helpful.
So, Chris, a couple of things. First of all, it’s not all OEMs that are at three month supply. And it’s just some of them and I would tell you that nothing has changed right now, it’s still early days, early innings, there is still pent-up demand for vehicles. We will see what happens when things normalize. I think if you go back and listen to previous earnings calls from last year at this time, we said that there is going to be a shortage of roughly 6 million to 8 million cars total for Canada and the US because the backlog and it takes used — it takes new cars to make used cars, so there is still so much pent-up demand in the system that still needs to be made up for that nothing has really changed at this point in time.
I would say that on the used car side, we are very, very conscious of what it would take for us to go to 2 to 1 or even 2 to 5 to 1 used to new. And so with the benefit of our operators that have joined us in the last year like Jeff and his team, we’ve kind of masked that out against what interest rates are and where we need to be at for proper inventory levels. And that’s where we came to, we had an understanding from them and their experience of what it takes to actually get a card to the front line and available for retail sales. And so, we’re going to focus on those efficiencies in order to drive less of a need for inventory.
Okay. And then the other question, just maybe delving into your M&A pipeline for a couple of seconds. So, it sounds like you’ve got, call it, a conventional pipeline of dealerships, but you also made the comment about wanting to look at some larger strategic opportunities. Would that be more in another adjacent market or are we thinking about multi-store dealers? Or it’s just if you want to elaborate on exactly where your thought process is on that and how the new financing package might help you achieve some of that?
I would just say, I’m not going to say too much about that one. Well, let’s just, I think in time that we’ll kind of reveal itself. We’ve got a ton of opportunities. Our goal is to flip the script a little bit on how we do business. We have a full intention of really driving a lot of long-term shareholder value and I think that we do that with our strategic plan that we have in place. I’m looking at legal shaking their heads saying don’t answer that. So, I’ll just leave it at that and say TBD, we’ve got a lot of exciting stuff on the horizon.
All right. Thanks, folks.
Your next question comes from Michael Doumet from Scotiabank. Michael, please go ahead.
Hey. Good morning. First question, just a clarification, I think it was pretty clear, but I just want to make sure it’s 100%. So, the reinstating of the easing policy that means normal write-downs, at least not the way you guys disclosed and it’s going to be normal course, or it’s going to be a little bit smoother. So, it’s going to be kind of going back to the old days?
Exactly. And with that said, like again I can’t — we’re not — we don’t measure our company on a month-to-month or day-to-day basis. We go to market quarterly, but if we had this conversation now like used car prices are going up. And so, what do you do? It is just I think we’ve talked about this over and over and that is that we’re in unprecedented times, there is a shortage of vehicles. There is really a shortage of — like three, four, five year old vehicles available for sale. And so, it’s really, really challenging. It’s really, really challenging that the market is getting whipsawed. So, yes, to your point, that is the right answer. This is everything should smooth out with the new strategy we have in place, it’s going to be more disciplined and more like the way it was.
All right. No, I totally appreciate the fact that there is a lot more volatility to handle. I guess this goes to some of the growth comments around used. You talked, I think previously about bumping up that ratio used to new to upward of 3 times, and kind of sounds to me at least that you’re strapping on kind of like a Canadian CarMax onto AutoCanada. And if you’re able to kind of build to those numbers obviously lots of upside like you said to F&I parts and service.
If that’s the case, I think today, maybe some investors will think that there is some risks associated with that as you build inventory or at least if you want to build the channel. So, maybe just speak to that a little bit, what do you think are the major drivers to growing that business from where the business is today, the capabilities that you need to kind of improve on, and also manage price risk?
So, look, I think that is exactly, I mean what we talked about at our Board meeting, and I think that I would say that we see ourselves as being a hybrid of call it a lot of the largest auto retailers in the US and CarMax and that’s kind of what we want is we want a bunch of new car dealerships and a bunch of used car dealerships that sell both online and in-store. And frankly, I really appreciate you saying that, Michael, will be frankly the way we think about it, and I’ve said this in my script when we got here, we were 0.6 whatever to one used to new.
And so, when you think about the value of AutoCanada and how much we’re going to make next year, you multiply how many new cars we get which are typically constrained, right? So, if you’re a Honda store or GM store and you sell 1,000 cars a year, we might get 1,050 cars, we might get 912 cars, but it’s going to be rough justice in and around that thousand.
And so, then you — you then multiply that by our ratio 0.66 are currently 1.6 whatever to 1 and you say that something used cars that somebody many new cars you then multiply our front-end grows and then you go and see what we make in F&I, and then you say, okay, you’re going to make this much next year. And so, we continually hear over and over again that you’re going to make this much next year based on these numbers, but what I don’t think anybody has really given us credit and that we actually kind of look around the room and congratulate ourselves as we went from 0.6 whatever to 1 to 1.67 to 1 and frankly, it hasn’t stopped. And we’re not going to stop.
And so, while we’re talking about a constrained number, which is the number of new cars that we’re going to get from our OEM partners which is plus or minus because of our turn and earn is going to be a certain number. The unconstrained portion of that is used cars and we really intend to flip the script on that. And so, we have done is built the muscle internally to do that.
And so, to your question, part of the table stakes of that with the help of this new management team is actually driving the cars through the shop, getting them reconditioned, getting them into the front line, getting them available for sale. So, they actually turn quicker and we do more with less. And frankly, we have a path, and I think I’m excited about talking about this every quarter just as I talked too much. I’m excited to talk about what our used-to-new ratio is and so maybe one day, we will wake up and somebody will say, you know we were basing this on their old used-to-new ratio, and it seems to be unconstrained on the top end.
That’s a great color…
Thanks for letting me get on the soapbox.
No, I enjoyed listening to that. I mean, look, I appreciate the vision and you’ve made progress to it. I mean just maybe just one last quick one to get to that higher ratio, I’m just wondering on the capital intensity, specifically M&A versus organic. If you can comment.
Why don’t we have this conversation next quarter?
All right. Thanks, guys.
Your next question comes from David Ocampo from Cormark Securities. David, please go ahead.
Thanks for taking my questions. Paul, just to circle back on the last comments on the used to new. I know it’s probably a long way away in terms of normalization, but is your expectation that as new cars come back there any cannibalization of your used car volumes.
Our used car volumes are going to go up. They’re not going down.
Great. So, you are not thinking about…
[Multiple Speakers] So, that said, think about that. So, as there is more new cars. Right? We’re going to have to really run to keep up with the new car volume in order to keep that ratio up. But we’re going to do it.
Okay. That makes a lot of sense, especially with RightRide ramping up as well. Going back to Christian’s question on capital allocation. I know you don’t want to talk about any large M&A, but how are you guys balancing that now with repurchasing more stock, just given your valuation and maybe where private dealerships are trading at today?
So, I think that sellers still have this expectation that we’re going back to 2021, [indiscernible] and so I don’t think reality has met expectations. And so, again, as I said before, we’re going to be opportunistic. I think that being prudent capital allocators, I’ve learned it’s actually important for us to really consider buying our own stock back if we feel it’s severely undervalued. And so, as part of capital allocation, we intend to put our capital where it’s best served for the long-term benefit of our shareholders. And if that means that we get a better return for our shareholders by buying our stock back, then we have the mechanism to do that and we also have the firepower to do that.
Got it. And then last one for me and it’s always been surprising every quarter when I take a look at F&I, it keeps grinding higher but as consumer wallets get tighter, is there any concern that starts to fall off or are you not seeing any indication of that debt.
It’s so interesting. We kind of say the same thing. But then you start thinking about it, and as you sell more used cars, the actual age of the used cars are going up. Right? And so, what does that mean? It means people want more warranties. Right? It means people actually in uncertain times need more insurance like gap insurance or accident insurance, there are more things to actually attach to as the economy gets shakier and as the cars get older. And so, every kind of month and quarter, we keep on revisiting it and looking and I will say our hats off to, Mikel Pestrak and his team they are true professionals and are driving value to our customers through this — through that F&I process, it’s unbelievable what they’ve done with our organization.
That’s perfect. Thanks, Paul. I’ll hop back in the queue.
Your next question comes from Luke Hannan from Canaccord Genuity. Luke, please go ahead.
Thanks. Good morning everyone. Paul, I wanted to go back to one thing you said earlier in the call. I think you said it takes 42 days to get a car from in the door to available for sale on the frontline that used to take 42 days, now it takes 30. What have you guys done to close the gap from 42 to 30 and what is it that’s going to take you from 30 to 13 and it’s like, is that just reconditioning or is there other elements to the process of getting that car available for sale?
It’s a lot, right, like there’s a lot of transporting a vehicle, like there’s just a lot of inefficiencies that we didn’t know prior to this management team getting here, where they actually pointed out like there’s all this swap in the system and I didn’t say we’re at 30 days. I said we are in the ’30s. And so, when I tell you there’s opportunity like there is a ton of opportunity. Are we going to get to 14 overnight?
No. But are we going to get to 14 like, yes, for sure, it’s just going to take — it’s going to take work, and by the way, Luke, I know you didn’t ask questions. One of the things I would tell you is that the opportunity in our expense structure is there. This is not as low-hanging the fruit when we got here, but it is fruit, and we will get it. It’s the hard part. This is the hard stuff. And so, just be patient with us and we are going to get to our peers.
Got it. Okay. That’s a nice segue into my next question here. I’m trying to get a sense of what does the distribution look like for your dealerships on an SG&A to gross basis, are they all relatively close to that consolidated average or I’m just curious to know what the disparity looks like there, is there any learnings that you can apply for those more efficient dealerships that you can apply to those that are maybe further away from that target.
Listen, for sure we have some dealerships that perform closer to that number. There is head office expense in there, there’s a lot of expense in there, that we’ve got to just get more efficient on, and again, we got to this group, we basically picked off the low-hanging fruit. We increased our used to new. We drove throughput through the parts and service space. We got collision up and running. We sold more new cars, all those things. Now it’s time for the grinding stuff and again that’s going to take work.
And so there are stores that we have like I will tell you we bought AutoPoint and there are learnings that we can learn from AutoPoint for the rest of our group like I’ve got to say AutoPoint, they are unbelievable in the fixed operations department and there’s a lot of things that we can take from them to the rest of our organization, there are things that we do in F&I that AutoPoint might be able to learn from, there are things all over the Group that we’re able to cross-functional and learn from and I would say we’re just trying to take the best parts of our organization and kind of germinate throughout the whole company.
Got it. Okay. Last one and then I’ll pass the line. We’ve seen some OEMs like Ford — program trying to get dealers on board when it comes to selling EVs, does this decision to get into these programs, is that rest entirely with your GMs or are there other parties involved in that decision and then how onerous are these programs from a capital intensity perspective?
So, we could talk all day about that. But I don’t think we want to, that decision is made at the corporate level. I think — and Luke, you and I have talked about this. Every single OEM wants to sell directly to consumer when you’re an order taker for a car, when you’re just filling orders and you’re not in the car sales business, everybody wants to sell direct-to-consumer and disintermediate the dealership.
The second, that there are too many vehicles in inventory and OEMs need to have a shock absorber to get rid of those cars, they would beg for a dealer network, and you’re seeing the effects of it with Tesla when they needed to sell aged vehicles at the end of the year and there dropping price et cetera. And so, I think what you’re seeing is a reaction to the market being in flux and trying to figure out how to distribute EVs, how to distribute with a network, without a network, and I actually don’t think it’s rational. I think it’s just reactionary and I don’t think that anybody frankly has figured out how did you it properly.
And so, are we going to be in the EV business? For sure. What does it look like? I don’t have an idea. And I don’t think any OEM does either. And I think that we learn as we go and we’ll continue to monitor and watch how every OEM feels about the distribution of their vehicles as inventory builds.
Got it. Makes sense. Thanks, Paul.
Your next question comes from Krista Friesen from CIBC Capital Markets. Krista, please go ahead.
Hi. Thanks for taking my question. I was just wondering what we’re hearing out at a high level there is still a mix issue with new vehicles given OEMs have been prioritizing the higher trim packages or are prioritizing pickups and SUVs. Are you seeing that mix issue in your own new inventory?
So, sorry, just to be clear, are we seeing a mix of higher-valued vehicles in our inventory versus the — because they’re higher value to the OEM? Is that what you’re saying?
Yeah. Just because they’ve been prioritizing those higher merchant vehicles given there’s a shortage.
I would just say, there is still a shortage of used, it’s very, very OEM specific, and I wouldn’t say that there is any OEM that is prioritizing one thing over another. You might have one OEM prioritizing high-end SUVs while you have another one prioritizing a pickup truck, I don’t know if that’s necessary — I’m just trying to be thoughtful about that. I don’t think that there is really the right answer to give you on this other than it’s very OEM specific and some OEMs are prioritizing pickup trucks fully loaded versus full-sized SUVs, fully loaded versus whatever they have the capacity to build.
Okay. Great. And then I was just wondering on the acquisition side, given how well parts and service is performing. Have there been discussions around accelerating more M&A in the collision division versus the used or new for example?
Look, we debate it all the time, we adjusted DCC Hail, which we think is going to be a tremendous opportunity for us as far as returns go. And so, we examine every single acquisition, whether it be new cars, used cars, or collision, we kind of examine every opportunity and it needs to stand on its own and we put that against the backdrop of buying our own shares back as well. And so, any opportunity to outlay capital has to kind of check the box on a number of different fronts. But we — well, I wouldn’t say that one specifically over in other we’re just — we’re here to allocate capital properly.
Okay. Great. Thanks. I’ll jump back in the queue.
That’s all the time we have for questions today. I will turn it back to Paul for closing remarks.
Listen, we really appreciate everybody’s patience. We know that we knew coming into this call that everybody is going to freak out about the big inventory write-down and we wanted to make sure that everybody had an understanding that that is a very, very normal course once we actually implement the aging policy on our vehicles and it’s just that we called it out, where it’s not been called out and I even turn everybody to really question when they are examining stocks by our peers like who else really does mark-to-market their vehicle on a quarterly basis, like this.
This is a real — we’ve really put — we’ve really taken the water out of our inventory and it allows us to go on out earn and make that back. So, thanks everybody for your patience. Thanks for being a shareholder, and thanks for listening. We really appreciate you and we’ll talk to you next quarter. Hopefully, with some good news.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.