AutoCanada Inc.

Good morning, everyone, and thank you for joining us on today's second quarter results conference call. For today's call, I am joined by Paul Antony, our Executive Chair; Michael Rawluk, President of our Canadian Operations; Tamara Darvish, President of our U.S.

Operations; and Peter Hong, our Chief Strategy Officer. We released our Q2 results after market close 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 the Canadian and U.S.

Go Forward Plan. With that, I'd like to turn the call over to Paul.

Thanks, Kevin, and good morning, everyone. Thanks for joining us on today's conference call.

I'm pleased to report that Q2 represented a significant step forward in our continued efforts to drive operational performance at AutoCanada. This includes our Canadian operations where I feel we've finally been able to start playing offense in the quarter as well as the U.S.

where we've seen continued progress in stabilizing the business. Specifically in Canada, we saw momentum across almost all geographies and lines of business.

This includes same store gross profit growth of 6.8% a metric I'm particularly proud of and represented clear outperformance versus the entire Canadian market. The Go Forward Plan also drove performance as Michael will explain in his remarks.

This resulted in the strongest adjusted EBITDA quarter in Canada since the current management team started. I'm also pleased to report this momentum continued into July.

We've also continued to look closely at the Canadian dealership portfolio, which led to the divestiture of two dealerships during the quarter. We have no plans to divest any additional Canadian dealerships this time.

U.S. performance continued to be a different story.

Although we've seen meaningful progress in the geography and remain committed to our publicly stated goal of optimizing our U.S. dealership portfolio in the near term, we've taken several steps towards achieving this led by our U.S.

President Tamara Darvish, who has now been in the role for five months and is actively implementing the U.S. Go Forward Plan.

As an example, our Q1 normalized operating loss of $6.9 million was reduced to $1.8 million in Q2. Tammy has also continued to upgrade talent across the dealership network, in addition to leading our rebranding initiative to Leader Automotive Group.

We've also made the decision to explore the sale of four U.S. dealerships which fall below our performance expectations with those efforts actively ongoing.

I remain highly confident in Tammy and I'm encouraged by what I've seen in Q2. I'd also like to comment on our balance sheet and our continued efforts to position the company for long-term success through appropriate capitalization.

This has been and remains a high priority focus for the company and I'm happy to report that over the last four quarters we've reduced total debt excluding floor plan by $127.1 million corresponding to a decline in total debt on the business from $417.2 million to $290.2 million over the same period. This not only reduces cash debt service significantly but better positions us for effective management of our cap structure going forward.

We've also received incredible support from our banking relationships, including the recently announced extension of our increased debt to EBITDA covenant. While we remain closer to the four times leverage, than we would like and we'll consider asset sales to improve this metric the team is primarily focused on continued execution and meaningfully improve this metric over time.

Last but not least. I'm pleased to report that Mike Borys will be joining the AutoCanada team as CFO, effective August 12, 2019.

Mike is a chartered account with over 20 years of experience as CFO for both public and private enterprises. Mike’s proven track record and extensive finance and management experience will be instrumental in driving execution in both Canada and the U.S.

On a related note, I continue to view our ability to attract top talent to the AutoCanada team as a huge validation of our franchise and long-term vision. I'll now turn the call over to Kevin to discuss our financial results.

Thanks, Paul. Before I discuss our Q2 highlights, I wanted to ensure that everyone is aware of the changes that have occurred with the adoption of IFRS 16, that has been in effect from January 1, 2019.

The adoption of the new accounting standards have resulted in both changes to the balance sheet and the income statement. We have provided enhanced disclosures as part of MD&A in order to help clearly articulate the impacts on our operating metrics for 2019.

Our intent is to provide the highest quality reporting and transparency results to all users of our financial information. As such, I'd like to point out that we have updated our definition and the use of non-GAAP measures as presented for the current period.

Adjusted EBITDA a non-GAAP measure has been redefined and is now calculated on the basis of which represents the recurring operating results. Specifically, we have adjusted our gains and losses that are not part of our core dealership operations.

Please note that the comparative periods have been presented under the new definitions within our Q2 2019. At the consolidated level, we saw improvement on many significant metrics, both the revenue and gross profit standpoint we had a good quarter with positive performance over prior year.

In Q2 2019 revenue was $945.8 million, an increase of $116 million or 7.4%. Gross profit grew to $153.4 million increase of $12.8 million or 9.1%.

Adjusted EBITDA increased 91% to $32.1 million, an increase of $15 million. Please note that the adoption of IFRS 16 contributed $10.4 million to this increase and operational improvements contributing the balance.

In order to fully understand the numbers as a result of the different operating economic environments we've broken out the results between the Canadian and U.S. operations.

For the second quarter, the Canadian group generated higher revenues and gross profit against Q2 2018. Revenue was the $829.7 million up 6.4%, gross profit grew to $138.1 million an increase of $11.5 million or 9%.

In addition, adjusted EBITDA increased 101% to $32.3 million, an increase of $16.3 million. IFRS 16 contributed $8.4 million to those increase with operational improvements contributing to the balance.

Total vehicles sold also increased to 16,983, 5.3% higher than the previous year. For our U.S.

operations revenue was $116 million, 15.6% higher than Q2 2018. Gross profit increased to $15.3 million, an improvement of $1.3 million or 9.6% over 2018.

We are continuing to work on our operational efficiencies in both groups specifically the Canadian operating segments did see an improvement in operating expenses, coming in at 81% of gross profits which compares to 89.6% in Q2 2018. The adoption of IFRS 16 resulted in reduction to operating expense of $2.5 million or 2.3%.

AutoCanada continues to dispose of unproductive real estate assets, which resulted in the sale of $4.4 million of vacant land in the 2019 second quarter. We also are actively marketing $23 million of unproductive.

In June, we completed the sale and leaseback of three dealership properties for a purchase price of $30.4 million. Funds from this sale were used to pay down our revolving credit facilities.

On July 29, we announced our credit facility amendment that extended the permitted total funded debt to bank EBITDA ratio to 4.50:1.00 that's for the period of July 1, 2019 to March 31, 2020. We also declared a quarterly eligible dividend of $0.10 per common share on our outstanding common shares, payable on September 15, 2019 shareholders of record at the close of business on August 31, 2019.

With that, I will turn the call over to Michael.

Good morning everyone. We'd like to start with a big thank you to all of our team members, our dealers and head office support team.

We're very proud of everyone for the performance they produced this quarter. We'd also like to thank our OEM partners, strategic partners and everybody that's helping this full team effort to improve operations.

This is truly a group effort and we thank everyone. We started the Canadian recovery process a year ago beginning with a full operational review followed by the creation of the Go-Forward Plan.

Implementation started in the fall and we then spent the winter building up new profit centers and getting comfortable with an adjusted operating methodology. While the early part of this year was soft for the overall market, momentum really built into the spring and we saw the momentum on full display in Q2.

As a result, we're seeing positive performance from our Canadian operations and the Go-Forward Plan. Vehicle sales are growing in a downmarket on a same-store basis.

In fact, total vehicles sold increased to 13,651, 8.3% higher than the period a year ago. This includes 1.4% decline in new vehicle units for AutoCanada on a same-store basis versus a market decline of 7.8% but also includes a 24.5% same-store increase in used vehicle sales, a great example of our Go-Forward Plan efforts.

This performance translated to same-store revenue growth of 4.7% and same-store gross profit growth of 6.8%. All the same-store metrics aside, our Canadian operations also grew total vehicle sales by 9.4%, revenue by 6.4% and gross profit by 9.1% and adjusted EBITDA grew by 101.4%.

This increased profitability reflects decreased costs on an absolute basis and decreased costs on a percentage of gross basis. In addition to vehicle sales, service or in addition to vehicle sales, service, parts and collision are also growing and we're meaningful contributors to this performance.

Our business development initiatives with strategic partners like Kijiji and DealerMine are producing double-digit growth in the respective areas and the new profit centers are just starting to make strong contributions. New Initiatives include a special finance division, which has recently started marketing online to credit challenged customers through rightright.ca [ph], a new wholesale division that is capitalizing on arbitrage opportunities for used cars, the long-term initiatives to sell more used cars and a new strategy for collision centers and increasing our occupancy and our service space.

While we have lots of work to do, I'm very pleased with the progress we've made in the first six months of 2019. And we're all very enthused about the second half of the year.

Tamara, over to you.

Good morning. Since joining the company in March, the last five months have been focused on evaluating our U.S.

operations and starting to implement our U.S. Go-Forward Plan.

These efforts are focused on expense management; dealership level initiatives and department focused gross profit initiatives. While preliminary, we started to see a turn in that relatively short period of time.

This includes a meaningful reduction in our operating loss for Q2, as compared to Q1 when normalized for impairment charges. Specifically, operating profit loss for the second quarter of 2019 improved $1.8 million versus $6.9 million for the first quarter of 2019.

Importantly, operating expenses also decreased to 113.6% in the second quarter of 2019 from 152.7% in the first quarter of 2019. Strategically, we have also rebranded our U.S.

dealerships to Leader Automotive Group and the reaction has been very positive. I have also been very pleased with our ability to recruit talented dealership professionals as we continue to further reinforce best practice processes within the businesses that should drive further benefits in the third quarter.

I too would like to thank all of our hardworking team members and partners who are the key to helping us deliver on our U.S. Go-Forward Plan.

And I look forward to working with everyone in the coming months. Now back to Paul.

Thanks Tammy. Before we finish, I'd like to thank our team of more than 4,000 hardworking AutoCanada team members for the key to helping us deliver on a Go- Forward Plan in both Canada and the U.S.

I'd also like to thank all the support from our strategic partners, financial institutions and OEM partners, as Michael and Tammy have as well. Without everyone's support and devotion to the Go-Forward Plan, this opportunity to turn this company around would not exist and we would not be on the trajectory we're on today.

As we continue down this bold path, we believe that we have the right team and the right culture in place to deliver continued improvement in results as we can continue to move forward into Q3. We appreciate everyone's patience and continued confidence putting all of our long-term investors who share our vision for the success of this company.

Thank you, operator?

Thanks folks. Good morning.

Maybe if we could return to talking about the U.S. operations for a second.

Tammy, I appreciate you've only been there a few months, but one of the things, I know we talked about maybe more extensively was some of the more granular moving parts around the Canadian go-forward strategy. But do you mind giving us some additional color on exactly, maybe some of the more key levers that you see it in the U.S.

operation. And the other piece of that is, you know your thoughts around the path to profitability for the stores that you're going to keep and thoughts around why you are divesting the four stores and the timing of that as well would be appreciated.

This is Paul. As far as the divestiture of the four stores, we'll just say we're in process and we're not at liberty to discuss anything more than that.

But we are currently managing a process. I'll let Tammy take over the questions.

I mean, with regards to the expense reduction and increased revenue.

Good morning. And thank you for your questions.

I think that some of the key initiatives that have made the most meaningful difference for us in our expense structure begins first with a lot of vendor contracts that 100% of them were renegotiated, some consolidation broader operation on the accounting side of our business. A lot of restructuring of compensation to be more performance based rather than a fixed compensation.

And most importantly ensuring and making great effort and ensuring that we have the right people in the right place.

Okay. So aiming back to the path, I mean, I guess what we're trying to understand, I mean there is certainly a different profile of dealerships in the U.S.

versus Canada, but at what point or maybe a different way to frame it is x the four stores that you're thinking of divesting, what's your thinking around kind of when you think you get back to a normalized level of profitability comparable to what you would see in typical U.S. dealerships?

So what we're aiming for right now is, on previous months we – when we discussed at the previous quarter meetings was, we're just trying to figure out what we have. We now know what we have there.

Implementing on the Go-Forward Plan in the U.S. which involves selling more used cars, more finance and insurance, more service, more fixed ops.

Our goal is over the next six months to make those stores at minimum break-even and then start turning the corner to actual profitability. And that's our…

All right. That's helpful.

Thank you. And then just for clarity, I don't know who wants to take this, the impairment charge that you're taking from or you’re going to sell, is that a goodwill impairment or that has something more to do with the leasing profile?

No. It's Kevin here.

And you have that correct. It is associated with the goodwill so the more or less the valuations…

Okay. And that's just your expectation on what you're going to go.

And you did mention, I think in the note that there could be some further impairment depending on the final purchase price.

Yes. So as I said, those stores are in process right now and as a result of our learning from the process we've come to realize the actual market value of those stores.

Okay. Thank you.

And then just a quick question for you, just maybe looking at some of the parts of the Canada, I mean certainly the sales numbers pretty impressive. But just one of the things that we kind of noticed that you guys didn't report on was your absorption rate.

And I know that's been a bit of a discussion around your utilization of your base. And you had talked about bringing in some CRM product and some call center product to try to help improve that.

I'm just kind of curious on how that's been trending in terms of service and any reason why you've stopped reporting the absorption rate?

Yes, that's a good question. We could report the absorption rate in future quarters.

We'll take that as a takeaway. For right now we're obsessing about service bay occupancy.

We have one maximize, all the other things – real estate that we have right now. We think that absorption is a byproduct of that.

And so we're just focusing on the measurements that we feel that really control – that we can control and we'll take care of them. That's a takeaway.

Okay.

Michael, you might want to talk about that?

Yes.

And I don't know that we really talked about this, but what we have is when we took – when Michael started, the service bay occupancy was – Michael, I think…

43%.

43%. And now because of our relationship with DealerMine and actually selling service bay occupancy, I think we’re…

North of 60.

So north of 60 and in fact, we're actually actively retaining talent. It's actually going manage the inflow of service work that we're getting in the bay.

So we're actually having to hire more mechanics actually take care of the volume that we have.

Okay. So all right, we're just trying to, I mean, again back to – I'll just make the comment about trying to understand the path towards it.

I know that getting that number up has been something you've talked about as a key component so I’m just curious about the changes. And then finally, Paul, you talked about Canada seems to be somewhat stabilizing the EBITDA best of the last couple of stores as you've seen.

As we move into the back half of the year, just thinking about as the leverage metrics improve, part of that you would assume would be rolling into a better EBITDA pattern as you roll off some weaker quarters. How should we be thinking about longer term, your thoughts around acquisition strategy?

I know you really haven't been adding anything as of late but any additional thoughts on that both from a geographic and brand perspective, if you wouldn't mind.

Yes. Listen, this is probably the most exciting thing that I have to talk about because if you look at what Michael and our team in Canada have done, we're actually outperforming the market by a big margin.

And so I think we're outperforming the entire market by 6%. But if you look at just the brand that we have, I think we're almost 9.1% outperforming the market.

And if you think about that, that overlay on acquisitions is actually really exciting. It means that when we take over a store, which we've demonstrated with both Rose City and Heritage Valley since we purchased them.

We are able to get operational efficiency out of them. And so that actually that whole notion of being an acquisition engine in Canada puts us in a great spot.

And so building up this kind of machinery that we have and that Michael has done in Canada and Tammy's endeavoring to – out of the U.S., it’s going to be exciting as we kind of trend into the future. We're getting calls all the time on stores.

But building out that capability in the muscle to deliver on operational excellence it's been job number one, we talked about selling off real estate, paying down debt, but the real test is going to be operating, right. And so as we continue to operate over and above the market, every acquisition that we make becomes accretive to our company and we're very excited about that.

All right. And any thoughts about what we should be looking for in terms of leverage levels before you start getting comfortable to get back into the acquisition space?

Again, we still have a lot of wood to chop when it comes to operating the business. And so our key focus right now as Mike is going to take the chair as CFO.

What we're very concerned about and what we focus on every day is getting our balance sheet square. Once we do that and continue to operate our way into a good financial position, we're looking forward to making acquisitions.

All right. Thank you.

That's helpful.

Hey, good morning guys.

Hey Michael.

That was a great quarter. So I'll start with Canada.

I'll just see a strong improvement sequentially more than can be explained by normal seasonality. So nice to see the initiatives kick into year.

Two questions, can you discuss maybe on a month-to-month basis how the Canadian business perform, I'm just trying to get a sense for the trajectory of the improvements through the quarter and into Q3? And then second, can you discuss in some depth the initiatives and how they ramped through the quarter?

Just to get a sense for how the initiatives are tracking starting Q3 versus where they started Q2?

Hi, it's Michael here. So just to give you a flavor, I would say that in the winter we were just retooling, reorganizing, like we're going through material – a material change in the business and also building brand new profit centers.

We started going January and February. We had a little bit of a false start and in March, we felt the first impact of a new operating methodology and some of the impact of the new profit centers that continued into April and May into June.

The performance and improvement is felt across all business lines, which is something that we’re all very proud of is that you can see it everywhere. And in addition to that, you can see it in all the brands and in all of our geography, like from coast-to-coast, there's improvement, absolutely everywhere.

And so I will say that at end of Q2, we felt very, very good about the talent that we had, the new profit center performance, the contribution across all of our business lines. And we felt a great sense of momentum going forward.

To put it, I guess anecdotally, we are just getting started. And Q2 was just a little bit of a glimpse into the impact of some of the changes that have been made over the last number of months.

So we had a lot of – we can't really talk about July, but let's just say that it was quite a bit of celebrating going on as well. And we feel confident, I just have to say too that, when you back up and you look like 10,000 feet and you back up from all of these temporary problems that there's a lot of smart people fixing right now.

And everybody's aware of the problems and everybody's fixing them. But if you back up and look at the organization as an auto group, we have a world-class operating platform.

We have the best people in the business. We've got BMW stores, Mercedes stores, Audi stores, VW, Nissan and we have a lot of FCA stores in the right spot like we're not selling Ram Trucks in downtown Montreal or Toronto.

We're selling Ram Trucks in Alberta and Edmonton. And these are very strong and profitable stores.

So it's hard to reconcile what's going on. But I'll tell you from an operating standpoint is this is a world-class organization.

And once we get through this little bit of rough patch, we will be the consolidator in the country.

There's actually one more thing to add to that and just quickly and as a shout out to all of our stores, but we had the number one and number three BMW stores for one month and we're very excited about that. We're very, very excited about seeing these stores kind of turning the corner and really, really operating at maximum efficiency.

So, I mean, that's just one of many anecdotes.

Yes, I can go to – I could spend 20 minutes going through all the number ones and new records set and everything else like that. It's strong operation.

Yes, I know, maybe we could take that off the call, but it look in the same vein in terms of what's being realized and what has yet to be realized. I think at some point it was discussed that the company could generate, I think it was $30 million of EBITDA beyond 2019.

I think service was quoted as a driver used cars, sales driver. So without necessarily pinning you down to a number here, can you give us a sense for the magnitude or maybe the opportunity of growth beyond call it 2019 or maybe even next quarter?

Well, what I will – like, what I will say, and hopefully this can provide some value is that we're keenly aware of the EBITDA margins for our peer group and we don't see any reason why we can’t hit – the only variable is time.

Okay. And for that EBITDA margin, would you say that it's a matter of getting more gross profit with sort of the same base here?

Or is it a cost issue?

Well, like I would say some of – if you talk about the largest quantum drivers, it's used cars and it's service and parts and that's a gross generation.

And that's just starting, correct?

Just starting.

Okay. Look, I'll leave it there guys.

That was a great quarter. Thanks a lot.

Thank you.

Hey Derek.

Yes, hi guys. I just want to follow-up sort of on that last comment.

Are you guys, I mean, I'm assuming a big part of the plan with the used vehicles is to convert some of those used vehicle buyers into your parts and service business. So have you started to see any of that customer conversion happening in the early stages of what's been some strong used vehicle growth?

Well, we're tracking – well, the impact of the strong used vehicle growth is initially felt in the reconditioning of those cars. And but we are tracking used car customer retention.

And we have a bunch of programs within our finance insurance operations like products, like extended warranty and prepaid maintenance, which we have a huge focus on to make sure that we bring these customers back.

And then what would be sort of the margin – is there a margin differential between a used car using your – the used car buyer using your parts and service collision versus a new car buyer?

Yes, service retention is much higher for a new car customer but if you focus on it from a used, again really pushing products like extended warranty and prepaid maintenance, you can close the gap, you can get close, but typically your new car retention is a lot higher.

Okay. I meant just on a percentage basis, is there, do you see a delta in the margin percentage for parts, service and collision between those two buckets?

Yes, the margin is much higher for used cars from a reconditioning standpoint and also customer because it's an older car. Yes, more repair work rather than maintenance.

Okay. That's helpful.

Just in terms of some of the brands – I appreciate you guys still have a sizable exposure to FCA, which I suspect will increase a little bit now with the divestiture of 100 dealerships. Have you – can you just talk a little bit about some of the trends you're seeing in terms of OEM incentives and maybe if you could specify for the FCA brand that'd be helpful, but just overall as well.

Well, are you talking dealer incentives or customer incentives?

On the dealer side?

Yes, on the dealer side, I would say, there hasn't been much change in that regard we’re a lot more focused on aligning our efforts with the OEM so that we can maximize the dealer incentive money. It's not as simple as just selling cars, but its how you sell cars in your customer service index scores and market share and everything.

So we're lot more aligned with the OEM, which we have seen an improvement. A lot of the gross profit improvement on the new car side has come from better alignment with the OEMs and maximizing that incentive money as opposed to getting those additional dollars from the customer.

Okay. And then just more generally speaking, we saw the July sales numbers in Canada come out and Chrysler was exceptionally strong.

Is there any reason for that or can you point to any color there?

The Jeep brand is strong. The Ram truck is starting to catch on.

It’s like FCA and I know that we've heard we have too much FCA, from my standpoint, we're very happy with the FCA we have because we have the right stores in the right locations. They're very profitable dealerships and the Ram brand and especially the Jeep brand have a huge loyal following.

So I like that portfolio.

Okay. Thank you very much.

Thank you.

Thanks. My first question is can you share how you expect your debt levels to evolve through the back half of this year both from a free cash flow perspective, which I presume will be stronger in the second half.

And then any timing you can give in terms of the more lumpy stuff like the divestitures?

Yes, thanks. It's Kevin here.

So we've taken a lot of strides over the last year in regards to paying down our debt. So we're definitely focused on that.

We've been pulling the levers that are available to us through sales of our kind of redundant land pieces, some of the sale leaseback transactions. So we work with our lending partners in regards to getting covenant release to the extension into March.

So kind of with all of that going forward, the improvement in the operations, we're seeing a really good trend in where we think we're going into this – going into the latter half of the year.

And just to add to that, listen, we've been very disciplined about paying down that debt, by the sales of real estate and just doing whatever we can to make sure that we're within our covenants, but getting that extra boost from our lenders who also have a high degree of confidence in us, along with operating, it is going to be the true solution to long-term writing of the balance sheet.

Okay. And then I wanted to ask on operating expenses.

So, wondering that, that the $129 million number in the quarter, was there any noise or one-time costs in that number? And then as we think about the gross profit was quite strong in the quarter, but OpEx seemed a little bit higher as well.

So just wondering, in terms of the improvement in the OpEx, is that really based around the U.S. or is there also scope in Canada?

There would be scope in both places. And so within the MD&A we do split it out.

So you can see it on a per segment basis. So, some significant improvement in the U.S.

when we were looking at a Q1 versus Q2, backed with some big strides there that Tammy has made towards rightsizing those expenses. And on the Canadian side, there was also some appropriate expenses that are associated with the Go Forward Plan, but those are driving growth.

So, any added expenses at this point are driving profits.

Thanks very much.

Hi there. I wanted to just revisit the restatement of EBITDA that was done in the quarter just for clarification.

Are there still costs in the prior year, quarters related to management transition, the strategic review, legal fees, consulting, et cetera, that are not going to repeat this year and so are one-time and perhaps inflate the OpEx in 2018.

Hi, Maggie. Yes.

So, the adjustment was really made to pull out both the gains and losses that we consider during or part of our core operations.

Okay. What are those gains?

Are those real estate sale related gains and losses or are they pertain to other costs that – as in 2018 that I just described.

So the dealership sales, the land sales are pulling out, whether it's a gain or loss, help normalize that adjusted EBITDA figure. But there were also kind of one time costs.

There's nothing new that's been added in there in terms of a pullout or an add back. We've kept that at the same.

It is just for free it's kind of to our MD&A we've added the very detailed tables in the back to give you line-by-line what we're adding back. Need any more color definitely willing to reach out to you after this.

Sure. I’m just trying to figure out if the management transition costs from last year and all that stuff is still in the OpEx for 2018.

The management transition costs, yes for 2018, yes.

Okay. And then, so when I look at the used car operations, understand it's really early in your Go Forward Plan to improve the sales there.

But I also noticed that the gross margin is down and the price per used vehicle sold is down. And so is that because previously the cars were being sold too extensively, which was limiting volume or is it the nature of the inventory you have?

Can you just maybe extrapolate a little bit on the reasons for that and then what the strategy is to sort of get that initiative going?

Hi Maggie, Michael here. So the quick answer to that is that you'll notice in the numbers that our wholesale unit sales have decreased and our retail sales have increased.

And that explains a lot of this story, as the older cars that were previously being sent to the auction, are being held now by our dealerships. And so we're retailing them, so instead of looking for a $100 or $200 profit at the auction, we're keeping them and turning it into, if you look at front and back margins from F&I, we're turning that into a transaction that's worth north of $4,000 a car from $100 a car.

And so you'll see a steady decline of gross profit on a per unit basis, but the margin should hold because the sale price of the car will come down. And ultimately what we're looking for is the total gross profit pool.

As we get into what we call deeper segments of used cars to grow the business. So, rather than just sticking to the traditional, newer premium trade-ins, we're keeping the five year old car, the six year old car, seven year old car, and attracting a whole different customer that has typically gone to independence and we're bringing them to our operation.

We're also benefiting from the additional mechanical reconditioning, that type of transaction.

Okay. Does that tie into your near prime strategy in order, to provide a way to get people into a car where maybe you wouldn't have been able to in the past?

Yes, that's part of it. And a big part of it is just trying to transition from being just new car dealers and premium trades to being new car dealers and true full service used car dealers.

Okay. Switching gears on F&I, I recall that this is one area from your original buckets for EBITDA growth that was expected to contribute to improve the EBITDA this year.

And there hasn't been a whole lot of change in the F& I sales or gross profit, contribution, wondering, what the back-story there is and what sort of reasonable timeframe should I think of to expect some contribution from that effort to materialize.

It was two parts to that one. One, if you look at the new vehicle, gross profit per unit, contribution is we are up over $200 a car.

And big part of that is due to the F&I contribution. On the youth side, it's when you sell older cars, there's less opportunity to sell, F&I products.

And so some of that is a bit of a drag on when you look at it as a gross per unit, but we're really focused on total gross pool. So, if you look at the F&I growth, the growth of the total F&I gross profit contribution is we're up, I think it's around 9% on a same store basis.

And so lot of that is from the F&I plan. That being said, like a couple initiatives that, well, a good handful of initiatives, they're going a bit slower than we would like.

We still fully expect to get to where we originally thought we would land. The variable is time.

Okay. And then one final question for me.

And it's on the U.S. business.

Do you think that your goal of breakeven let's say by the end of the year or maybe a little few months into the new year is possible without selling the four dealerships that are earmarked for disposal?

I think it definitely becomes more difficult.

Okay. All right, great.

Thanks for your time. Appreciate it.

Thanks, Maggie.

Hi Stephen.

Hi gentlemen, congratulations. Just wanted to follow-up on that last point, is it fair to say that the four dealerships that you are selling in the U.S.

are the weakest four dealerships from a financial performance perspective?

I would say yes.

Okay. And just wanted to switch back to the balance sheet question.

I think you had a 4.01 times total debt to EBITDA was the covenant calculation. And then, we can't really duplicate those covenant calculations, but I'm just wondering if you think that Q2 was the peak in that number and is it the likely to improve as the year goes on or is the peak still ahead of us?

It's Kevin here. So what we're seeing is, with the operational improvement it is going to help bring level of that ratio, it did peak to that four level, which is why we sat with our lenders and banks and beat that extension about that really great.

But we continue to look at it on a daily, weekly, monthly and both [indiscernible] We also have, we also recognize we still have more levers if we need to pull. But as I said before, the most important thing is for us to operate and make sure we can get on the right side of those covenants in a meaningful way, in the quickest amount of time.

Okay. And in terms of your thought process about where you'd like to have the business, what is, is there anything changed there?

Sorry what, what's your?

What's your target basically?

High two, three like that, that's where we'd like to be for our covenant.

Okay, perfect. And, most of my questions are answered, but I have just me one other follow-up, one on the dealerships that were sold.

Is this anything, with the decisions to sell those dealerships mostly around location or some other factor or was it more brand driven?

Well, I would say that, and I'll let Michael chime in as well, but I would say those dealerships were suited in better hands that could maximize the profits there than for us. We have a better use of funds than in those stores in those jurisdictions.

And we weren't able to operate them in a meaning – in the right way to optimize the profits. And I think that they're better suited with the owners today.

Is that a scale question?

Yes, it was really just a time issue. We know that there is a high-sense of urgency to get going and so we just evaluated on what stores we could maximize based on timing.

Okay. Okay.

Are they small dealerships, scale-wise?

Yeah, absolutely. And, and the impact to net is

Perfect. Okay.

Thanks very much.

Hi, Roland.

Hey, how are you guys doing? Just wanted to focus – I got a number of questions, but maybe if we circle back to the U.S.

I noticed again in this particular quarter and your segmented results, if I compare the gross profit margins in the U.S. compared to Canada for used parts and service and F&I, although those business units have higher gross profit margins in the United States than in Canada, for example, if I consolidate those three business units, in the U.S.

it's roughly 33% gross profit margin and it's 29.5% in Canada. The key difference is the new gross profit margin Canada was 7.3 in this quarter.

It was 2.0 in the U.S. it was a slightly negative last quarter in the U.S.

so this gross profit margin compares unfavorably with your Canadian experience. It also compares unfavorably with – it was 5.6% in Q2 others were higher in Q2 on new.

And if I pro forma your $74 million Canadian of new sales in the U.S. for that margin difference go from 2 to 7.3 it's $4 million in the quarter.

It appears to be all of the difference in profitability between Canada and the U.S. this is this and I'm wondering if there's a cost allocation issue that leads to higher gross profit margins on used parts, F&I in the U.S.

and some costs are allocated to new that otherwise there's a cost allocation that differs from your accounting practices internally between Canada, U.S. And if not, if you can shed some light, what gives, why is this margin so low?

Hey Roland, I'm going to – I'll answer the question as best I can right now. If you want to answer more offline, I'm happy to.

But let's just put it this way and I think Tammy alluded to this when she was talking about it. The biggest issue that we have in the U.S.

is our cost structure, there were many contracts that we took over, that were off market and therefore affecting our gross profit in the United States. And so as part of Tammy's go forward strategy, she's re-interviewed all vendors, realigned all contracts going forward and starting with the bigger ones and we'll finish with the smaller ones.

And so while you might see something today, I don't think it's fair to actually say that's going to be the future. I don't think you can pro forma that because she's in the midst of realigning everything.

So you're just seeing like early, early, early days.

Okay. So to the extent that she got there in March and there were actions taken in Q1 or Q2 to reduce costs that affect gross profit margin in addition to costs below the gross profit margin line, what would be the difference between the actual you experienced in Q2 and a run rate, the exit run rate of these management actions and initiatives?

So Roland Q1, Tammy wasn't there. So Q2 she got there and as I said before, it was, it's basically a learning experience and so a lot of those contracts have been re-adjusted probably in the last two months, maybe even a month.

And so, again, anything talking about pro forma run rate, et cetera, et cetera, I don't think is probably helpful in this call for most people. And I'm happy to take that offline with you.

Okay. I'll move on from that.

The impact, I assume that all assets held for sale are run through the income statement and reflected in your adjusted numbers. Is my assumption correct, Kevin?

That's correct Roland. Yes.

Okay. So that the Ford dealers that are planned to be sold, I see there's no – you typically, if you get conditional agreements in place, you announced the date of that and when you expected to close that, that's been your past disclosure practice, I assume you don't have any conditional agreements in place for one…

Nothing has been signed as yet.

Right. Got it.

So what's the EBITDA contribution, negative contribution of those four dealers in totality?

Yes, so at this point in time, while we're in process, we don't think it'd be appropriate to actually discuss that.

Okay, good. Fine.

A question of fact, Kevin, I've asked you before about these covenants and that's a challenge because of pro forma adjustments for sales, it's customary to perform adjustments for sales, for divestitures for dealers in the bank EBITDA covenant, we can't calculate it. Can you just give us the last 12-months bank EBITDA amount and the total funded debt amount as defined under the bank agreements at the end of the quarter.

Yes Roland that's one of those ones where – getting into some pretty discreet information. So I think it'd be best where we take that offline.

I understand the challenges it is a bank EBITDA metric, which is both put together from the stuff that you wouldn’t be able to pull apart. So.

Alright. And just circling back to what Maggie had asked about, there were some, last year there was $11.3 million higher – of higher variable expenses and it was, and I either can't remember it was in the Q&A in the quarter or offline with Raj afterwards.

But my understanding was substantially all of those costs were one time. In the MD&A it said that there was a special – they prefer to special committee and legal expenses.

You have not gone back in your restatement Q2 for your change in EBITDA methodology to back out a special committee and legal expense. Can you confirm those numbers?

That's correct, Roland. So we have not added additional reductions in the adjusted EBITDA, those are just part of it – the core operating expense but did not add any new.

But I would think special committee and these legal expenses for that pro – we're not changing the board again. Are we?

Like these are non-recurring things?

Yes, it's correct to state that would be considered non-recurring.

Can you identify those amounts?

The specific dollar I don't want to get into.

That's it. Okay.

It's just because people are comparing this quarter versus last and before what's happening economically. And without that it's, we're guessing a little bit as you can understand.

Yes.

Last question, Paul, this is for you. This is not to be difficult, but you know, the sensitivity of related party issues.

Here you're taking an action against former management about lost opportunities amongst other related party activity. And then we've noticed some new disclosure about related party, disclosures with respect to your own activities.

Was there some cost that was experienced last year in the second half and in the first quarter. And so, which try not to – I think it's more important if we understand are these temporary things or it's going to be an ongoing related party costs and what the nature of those things are.

I don't really think that there's a, so I just – full disclosure to the board said anything that my family office might or might not be doing, but I don't think it's actually even material to be honest

Not material, but it is putting out there because we're following the letter of the rule and ensuring that we're being absolutely transparent. So it's there.

So of that $900,000 in Q, that’s first half was any part of that from in Q1?

There was, there were certain components of it from within Q1 and it's not all Paul, if you read through the note there

Very little of it.

It speaks to three components.

Yes, I don't think that there was very much of it that had to do with me to be frank.

Okay. All right.

Cool. Thank you.

Thank you. There are no more questions at this time.

Okay. Thanks everyone.

And again, we appreciate everybody's patience. This is definitely a journey.

We talk about it every time. Our goal is to continue to under promise and over deliver.

So, hopefully we can do it again next quarter. Thanks everyone and we'll chat with you next quarter.