AutoCanada Inc.

Thank you, Marcella. Good morning, everyone.

And thank you for joining us on today’s fourth quarter results conference call. For today’s call, I am joined by Paul Antony, our Executive Chair; Mike Borys, Chief Financial Officer; 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 Q4 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 our Canadian and U.S.

segments. With that, I’d like to turn it over to Paul.

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

Before we get started, I’d like to say two things in light of the recent global volatility and an effort to address what’s probably top of mind for everyone listening today. First and most importantly to our employees, partners and customers, I’d like to reassure you that we have taken all the appropriate steps to carefully consider how to responsibly handle this pandemic.

Your safety is our highest priority and we will continue to focus on how to best support you as things develop. Secondly, to our shareholders, as you know, over the last 18 months, we have worked diligently to rebuild the foundation of AutoCanada, including our operational philosophy, team and balance sheet.

You will hear more of those highlights on what I believe was an extremely successful 2019 on the call today. While we would hoped and continue to hope that this allows us to play offense this year, it’s also served to strengthen our platform in a way that makes me now feel comfortable we will succeed in 2020 regardless of what the future brings.

Said differently, while the markets are going to do what they are going to do, we remain highly confident that what we built has in no way shaken our collective resolve. I am pleased to report that Q4 marked our third consecutive quarter of strong performance, marked by a number of key wins and accomplishments.

I will preface all of that by restating our top three priorities for 2019, a year that we knew would be a heavy lift and a working transition into 2020. Number one, in Canada, our priority was to prove out the go-forward plan and how we can build out a more complete, stable and growth-oriented business model for any economic environment.

Our results clearly indicate that we have done just that. Michael and his team have done an excellent job in driving both new and used retail vehicles sold.

For the quarter, same-store new retail unit growth of positive 1.3%, compared to 1.2% for the market. For the year, we are positive 1.8%, as compared to a market decline of 5.2%.

Also for the year, our same-store used retail growth was positive 22.5%, as compared to a market average of 9.1%. On a pre-IFRS 16 basis, apples-to-apples with the prior year, adjusted EBITDA was up 12.5% for the quarter and 23.5% for the year.

If we are to normalize for increased lease costs absorbed due to the sale leaseback transaction, we completed in the preceding four quarters, our adjusted EBITDA would be up 38% for the quarter and 48% for the year, reflecting the true operational gains made by the team. Number two, in the U.S., our priority was to stop the fire and stabilize the operations to get ourselves into a better than breakeven position by the end of the year.

Our results clearly indicate we have done just that. In the U.S., we continue to see progress in stabilizing the business and Tammy’s go-forward plan initiatives are beginning to lay the foundation for future profitability.

On a pre-IFRS 16 basis, Q4 results reflected an adjusted of positive $1.8 million excluding the impact of the year-end write-down. This compares to an adjusted EBITDA loss in Q4 of the prior year of $5 million.

We are that much better positioned to move beyond breakeven for the year in 2020 as Tammy and her team continue to gain traction and execute. We also want to be done with further write-downs and impairments.

Mike is going to speak to it. But we wanted to be sure that we weren’t carrying any issues into 2020 and that we would see the last of these charges if we can achieve our budget in 2020.

Number three, our priority was to fix the balance sheet, drive our debt down and improve upon financial flexibility. Our results clearly indicate we have done just that.

We reduced our net indebtedness by $147 million in the year. We took our net leverage from 6 times at the end of 2018 to 2.6 times at the end of 2019.

And most importantly, that performance allowed us to refinance our soon to be maturing debentures and renew our credit facility, giving us an average tenure of four years on our long-term debt. This is a hard fought but extremely successful year.

I really want to thank all our employees in Canada and the U.S. who made this possible.

We now entered 2020 on a solid footing, ready to face any economic uncertainty in North America. We are confident that our strengthened business model will be able to weather any coming storm.

I will address the potential impact of the Coronavirus on our business later in my concluding remarks. But again, I want to emphasize that the health and safety of the entire AutoCanada team, our customers and partners is the most paramount importance.

As we have instituted a ban on business travel and the management team is taking this call from different locations, I want to apologize in advance for any miscues during the call. I am going to now turn it over to Mike.

Thanks, Paul, and good morning to everyone on the call. I will build on the third priority that Paul just spoke to namely fixing the balance sheet.

In the quarter, we continue to fine tune our management of working capital. Building up the gains in Q3, we added approximately $50 million in the quarter and helped drive a reduction in our net indebtedness of $44.5 million from the end of Q3.

Again, we worked to leverage our used vehicle floor plan capacity to drive the majority of the gains in the quarter and then continue to exercise discipline over our cash conversion cycle over receivables and payables. The improve policy disciplines and the management of our working capital are systemic and sustainable actions.

We will continue to refine our actions and holder gains in the quarters ahead. For the year, we reduced our net debt from $304 million to $158 million, taking our net debt leverage from 6.0 times to 2.6 times.

In our MD&A liquidity section, I think, we do a pretty good job of summarizing the various levers we pulled in the year to drive that improvement. Coming out of 2019, we announced the success of our efforts to refinance our credit facility and our $150 million debentures.

Both their facility and debentures would be going current in early Q2 and we wanted to get ahead of that for sure. We are very happy with how everything turned out.

We have a new credit facility with a three-year term. We retained all existing lenders and added Bank of Montreal.

We took down the size of the revolver from $250 million to $175 million and made sure to allocate a greater amount of floor plan capacity to support our used vehicle initiative. The overall size of the facility including new and used floor plan is $950 million.

Our new senior unsecured debentures at the maturity date of February 11, 2025, reflecting the five-year term. Issued at slight discount, our debentures carry an 8.75% coupon.

We have improved our overall credit profile moving from an average term of 16 months to four years. Concurrent with the refinancing, S&P issued a research update whereby it revised the company’s outlook to stable, affirmed its B issuer credit rating and assigned a B- rating into our new senior unsecured notes.

We are in a much healthier financial position today with these actions completed. I also want to spend the last piece of my time discussing some of the noise associated with the quarter.

In the U.S. and as we had announced with the financing, we took a write-down of $3.7 million to adjust the carrying value of certain receivables and inventory accounts and cleanup related to a number of small items that had accumulated under the radar over time and needed to be dealt with.

In the normal course, we completed our year-end impairment testing using forecasts developed on the recent experience of the current management team, recording an impairment charge of $18 million. If we achieve our target results in 2020, we should not see any more impairment for the U.S.

We also reviewed our reporting on a notional basis, when we speak to pre-IFRS 16 results, so as to drive comparability to 2018 and saw that we had not been capturing the impact of the onerous lease charge we took in December 2018 for our off-market lease obligations in the U.S., that had the impact of increasing our notional pre-IFRS 16 adjusted EBITDA by $1.1 million per quarter. We will continue to see this order of magnitude impact when looking at pre-IFRS 16 results on U.S.

and consolidated results in 2020. Our Q4 results stated on a pre-IFRS 16 basis reflect only the quarter’s impact and we will adjust previous quarters for comparison purposes.

The last adjustment was also announced as a refinancing and related to a fair market value adjustment to our non-core asset portfolio and that was in the amount of $6 million. These adjustments, while noisy, take nothing away from the substantive gains made in Canada and in the U.S.

by the respective operations teams. The impairment and write-downs have no impact whatsoever on our go forward run rate.

Combined with a much stronger balance sheet, we have an operations platform that is primed to deliver strong results in 2020. And with that, I will turn it over to Kevin to discuss our results.

Thanks, Mike. At the consolidated level we saw improvements on many metrics.

On both the revenue and gross profit standpoint, we had a good quarter with positive performance over prior year. In Q4 2019, revenue was $809 million, an increase of $26 million or 3.4%.

We grew our gross profit to $139.7 million, an increase of $11.5 million or 8.9%. Total vehicles sold were 16,593 in the quarter, an increase of 317 units.

Used retail vehicles are a continued focus area for both our Canadian and U.S. segments in Q4.

Used retail vehicles sold increased by 17% totaling 6,957 units for Q4 2019. Adjusted EBITDA for the quarter increased to $21.1 million, an increase of $14.8 million.

Adjusting for the impact of IFRS 16, adjusted EBITDA was $10.9 million, an increase of 74% over the prior year. In order to understand what has driven the operational improvement, I will speak to the results on a segmented basis.

For the fourth quarter, the Canadian segment generated higher revenues and gross profits against Q4 2018. Revenue was $698 million, up 6.9% over the prior year.

Gross profits grew to $122.8 million, an increase of $10.7 million or 9.5% over 2018. Adjusted EBITDA increased $22.1 million, an increase of $10.7 million.

Adjusting for the impact of IFRS 16 in 2019, adjusted EBITDA was $12.9 million, an increase of 12.5% over the prior year. Total retail vehicles sold for Canada also increased to 13,211, 8.4% higher than the previous year.

The Canadian used to new retail ratio increased to 0.84% from 0.69% in the prior year. In our U.S.

segment, revenue was $110.8 million, which did decrease from Q4 2018 by 14.6%. However, total gross profit showed positive gains coming in at $16.8 million, an increase of 5% over Q4 of 2018.

The U.S. used to new retail ratio also increased to 0.58 from 0.47 in the prior year.

US operating expenses continue to be a focus, but when looking at employee and administrative costs combined were $17.2 million in Q4 2019 versus $21.4 million in the fourth quarter of 2018, a decrease of 19.5%. Lastly, we declared a quarterly eligible dividend on February 21 of $0.10 per common share on our outstanding common shares, which is payable on March 16, 2020, to shareholders who were on record at the close of business on March 2, 2020.

I will now turn the call over to Michael Rawluk to discuss our Canadian operations.

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

We are very proud of everyone for the performance we have produced this quarter and for the year as a whole as we look back. We would also like to take our OEM partners, our strategic partners and everybody that is helping this full team effort to improve operations.

This is truly a team effort. We thank everyone.

We continue to see positive traction and performance from our Canadian operation. Whatever metric you choose, we are materially better than the prior year.

Some performance highlights include on a same-store basis as compared to our results in Q4 2018 revenue increased 8.7%. Same-store new and used retail units increased by 10.5% and we outperformed the market for both new and used retail growth.

Same-store used to new retail units ratio increased from 0.7 to 0.86, an increase of 20.6%. Same-store gross profit increased by 11.8% and our gross profit percentage improved from 17.2% to 17.6%.

Same-store F&I gross profit increased by 28%. Same-store parts, service and collision repair gross profit increased by 4.4% off from the increase we showed in Q3, but still double the increase we saw in the first half of the year.

On an apples-to-apples basis with prior year, adjusted EBITDA was up 12.4 -- 12.5% for the quarter and 23.5% for the year. But if we normalize for the increased lease cost absorbed due to the sale leaseback transaction we completing it in the preceding four quarters, our adjusted EBITDA was actually up 38% for the quarter and 48% for the year, reflecting the true operational gains made by the team.

Again, whatever metric you choose, we are materially better than the prior year. As we have highlighted in the past, our strategy is focused on the complete business model including all segments of the business.

With regard to the vehicle -- to vehicle sold, our focus is on total vehicle sold. Canadians continue to buy more vehicles each and every year with the nuance being that sometimes they buy new and sometimes they buy used.

If we can get really good at selling both new and used, we will always sell more cars each year. Outside of selling more used vehicles to help counter the cyclicality of new vehicle sales, we are focused on the stable recurring high margin revenues in finance and insurance, parts, service and collision repair.

While these areas of the business are more difficult to scale and may take longer to develop, they provide stability throughout the economic cycle and support long-term growth and the generation of cash in any economic environment. The results we are showing combined with what we are seeing over the last two quarters demonstrate the traction we are seeing with the various initiatives.

In January of this year, for the first time in AutoCanada’s history, we sold more used vehicles than new, finishing the month with a used to new ratio of approximately 1.13. Dealership profits for the month similarly were the highest January on record for the company with fewer dealerships than we have had in the past.

If I speak to February, I doubt that we were over 1.1 used to new as well. We continue to have lots of work still to do and we must remain focused on driving consistency of performance.

But we believe that we are well-positioned to demonstrate what our complete business model is capable of in 2020. Tammy, over to you.

Thank you, Michael. Good morning.

I am pleased to report that we have made good progress in the fourth quarter in the U.S. I will begin by speaking directly to the results in the quarter.

On an apples-to-apples basis with the prior year, on a pre-IFRS 16 basis, we recorded negative $2.0 million adjusted EBITDA in the quarter as compared to negative $5.2 million in the prior year. Those results were impacted by the $3.7 million write-down we applied in the quarter primarily to receivable and inventory balances in our U.S.

segment. Adjusting for the write-down, our normalized adjusted EBITDA would be a positive $1.8 million for the quarter, representing a better view of how far we have come over the last 12 months.

Beyond looking at earnings and adjusted EBITDA, comparisons to prior year are not entirely useful given to the change in focus to driving bottomline profitability with the new management team as opposed to simply driving unit sales. We also closed and ceased operations at two of our franchises in the quarter further distorting those comparisons.

Our core operational focus remains as it has been in the past number of quarters with focus on the onboarding and upgrading of key personnel in our dealership general manager contingent, implementation of better training and related processes particularly in our used vehicles and finance and insurance segments, a shift in culture towards a focus on the customer versus focus on the unit sale continued strict discipline over all operational expenses, and finally, a focus on the optimization of fixed operations where we have implemented new systems as well and thoughtful cost rationalization where appropriate. With Q4 results, we are beginning to show the operating leverage we have been building towards.

We are now where AutoCanada is with the progress they have shown over the last 18 months. This team has only been at it for the last nine months, but we are making really good progress showing traction and laying the foundation for continued momentum headed into 2020.

I too would like to express my deep appreciation for our dedicated team members, our value business partners and our OEMs who continue to be the key to us for delivering on our U.S. go-forward plan and I am really honored to be able to continue to lead our team forward.

Now back to you Paul.

Thanks, Tammy. Again, I would like to thank our team of more than 4,000 hardworking AutoCanada team members, who are truly the key to helping us deliver in both Canada and the U.S.

And I’d like to say thank you for all the support from our strategic partners, financial institutions, OEM partners, as Michael and Tammy have as well. I am extremely proud of the progress we have made against the priorities we would set out for ourselves at the start of 2019.

We have validated the complete business model for our go-forward plan in the way it was designed. We have good traction, extremely strong momentum in Canada and we are building a better business case in the U.S.

We have reset our balance sheet, debt leverage and credit profile. We have applied a prudent and disciplined approach to improving and optimizing our financial flexibility.

I’d like to talk -- touch on the topic of the day, the Coronavirus and what impact it may have on our business. Most importantly, we are focused on the health and safety of our employees, customers and partners, and are taking all necessary precautions to ensure their well-being.

Thankfully, we have got a business in Canada that’s performing very well and a business in the U.S. that’s moving beyond breakeven into profitability and one of the healthiest balance sheets this company has seen in quite some time.

We are well-poised to operate in this environment and as we have been over the past year, we will be that much more prudent and disciplined in managing the business in the future. The complete business model that we have been building positions us well to deal with any economic slowdowns.

Our used, finance and insurance, parts and service, collision repair businesses provide us with the stability during any economic slowdown and allows us to continue to generate cash regardless of the economic environment. Our business model is very much biased to variable expenses, which allow the model to self-adjust and we have a number of levers we can pull to ensure that our balance sheet remains strong and that liquidity is preserved.

We will remain nimble. To-date, we see no impact to our business in this first quarter.

We clearly don’t have a crystal ball to understand how this is going to play out over the coming weeks and months. We will be ready either way.

We do not want to downplay the human impact of the COVID-19 pandemic, but while changes in people’s behavior may negatively impact future business patterns. For example, if there is much more nesting in homes, there is the alternative view that travel and transportation will be affected as a result of this crisis.

Many people won’t want to take the chance of getting on a plane, bus, taxi, Uber or subway, when the thought of Coronavirus is out there. Besides canceling large gatherings, sporting events and conferences, I am hearing of people canceling their summer flights and considering driving for summer vacation.

In the shorter term, people have moved to public and shared transport and parked their cars could drive an uptick in our business along with increased service and repair for people that left their cars in the garage. The point here is that there’s multiple scenarios as to how this could play out.

We are prepared to work in however that environment involves evolves. In the meantime, we have to prioritize the health and safety of our people, and -- of our customers.

They are paramount. In time and subject to how the year’s events play out, we will re-establish AutoCanada as a platform for market consolidation and an acquirer of choice in the category.

In the meantime, we continue to see strong growth potential by simply executing against our many go-forward initiatives. Now, we are going to turn it over to the operator for any questions.

Thanks.

Yeah. Good morning, folks.

How are you doing?

Thanks. Great.

Maybe, Tammy, we will start with you and if anyone else wants to chime in on this. So the U.S.

operations, so I think, the comment was made that you have moved four of the dealerships that were previously held for sale back to, I guess, an operating status. And in your script you sort of described the fact that you are a little bit behind where the folks in Canada maybe, but making progress.

So help us understand kind of some of the key milestones as we go through 2020 that maybe we should be thinking about and are we going to be looking for things kind of step jumps as the way to think about it or will this be a gradual improvement? And if we can get some more color from you maybe on why you have made the ultimately the decision not to sell those four dealerships, that would be helpful?

So -- this is Paul. I am happy to maybe start backwards.

The decision to not sell the four dealerships, we started seeing the dealerships turning in a profitable way and we actually saw a path to profitability there. And beyond that, I think we mentioned on the last call that we felt that there were onerous leases and it just made it kind of prohibitive for us to actually run a process.

So we started a process and we felt that, all things being equal, if you put enough time and energy after something, we felt that we could actually bring those dealerships into profitability and so with everything in front of us, we made the decision to pull them back.

Okay. And as to the U.S.

operations and what we should expect in 2020?

So, with that, I mean, I -- we are encouraged with what we are seeing in the U.S. and I think Tammy even spoke to this and what she was saying that she’s kind of nine months behind Michael, and obviously, we have a fraction of the dealership in the U.S.

that we do in Canada, but we are very optimistic that we are going to see those dealerships turning into profitability.

All right. And at similar to Canada or more in line with what we would typically expect for kind of a U.S.

dealership average?

At this point, I don’t want to necessarily comment on that. I think that I am just going to leave it that we are going to see those dealerships moving into profitability.

All right. Fair enough.

It’s very difficult, I mean, obviously, the environment -- I am just cautious of everything we say right now. We don’t want to overlay the template of -- we have got this unknown that I don’t think the world has ever seen before with this pandemic and so we don’t know what we don’t know.

Okay. Fair enough.

And then, Paul, just thinking about where you are sitting today, it feels like the operational folks have their plan kind of locked and loaded and then now the question really becomes strategically where to from here. I mean it feels like the balance sheet is in an, okay, place except in the fact that there may need to be some delay in timing.

But can you talk a little bit about your strategy around acquisition growth and not only just maybe even acquiring but are -- do you start looking into things like open points at this particular junction? And how do you think about growing the business now that you have kind of got it on a path where the existing business is kind of stable?

So, look, that’s a great question, and I think, if we were talking two months ago, I would probably have a different answer. What I can say now is, and I think, I mentioned this, when I was -- in my remarks, there’s so much uncertainty going forward right now that I can’t comment as to when we are going to turn on the acquisition engine.

We -- the number one thing we can do is continue to operationalize the business to be able to receive dealerships when and as they become available and they fit the structure for what we want to purchase. Right now with the uncertainty in the markets, it’s just -- it’s very difficult to say when we should turn them on and I feel uncomfortable actually having that conversation right now.

All right. Fair enough.

And then, Mike, my last question just for you. The adjustments that were made, some of the onetime items, as you said, probably the last of them, were there any tax impacts that we should be thinking about as part of those items or were they just basically just straight up non-cash items?

Yeah. For the most part, they were non -- you had called write-off non-cash items because you had write-offs but these were non-cash items.

So there will be tax impacts later.

So, okay. All right.

Thanks, guys. That’s all of my questions.

Thank you.

Thanks.

Hi. Good afternoon.

I am wondering if you have closed any stores or contemplating closing any stores and how are you thinking about that?

So, Meny, I am not sure what you are referring to. We would closed previously and we…

No. No.

Sorry. Just to clarify, I am talking about related to Coronavirus.

That’s what I am talking about. Sorry for the confusion.

I see.

Yeah.

At this point, we have no stores closed. We are in full operation.

We are keenly aware of everything that’s going on and monitoring on a daily basis.

Okay.

But at this point in time there’s been no effect to our business.

Got it. And then, I am just wondering about how evolving events are changing the way you are thinking about your strategy, the go-forward plan.

Are there some parts of it that are likely to be accelerated if we end up in a recession some parts that are slowed or even stopped, how are you thinking about that and what would you have to see in order to go there?

I think we have -- we are -- these are different flavors of kind of the same question. But listen, as I said before, we have -- our goal has been to strengthen the balance sheet and build a foundation for this company that can perform whether the economy is strong or the economy slips.

And so, you would think that based on everything you are hearing and seeing in the markets, it looks like the economy is going to slip and therefore we still feel comfortable that we can operate and have a successful business. We have got our hedges, the used car business, the F&I, the service and repair.

We feel that we are well, well-positioned for that. Alongside of that, to the previous question, there are a lot of opportunities to buy dealerships and I am sure that they are going to come harder and faster over the course of the next six months if the economy starts taking a downturn.

And we will be in a position as long as we preserve our cash. We work prudently and operate in a measured approach to take advantage of wherever the market takes us.

So does that answer your question? We are just going to be measured.

We kind of have to take this on a day by day basis. We have a strong business with a strong business model and that’s kind of -- we have no crystal ball and necessarily can’t be a fortune teller here.

Does that make sense?

It makes sense. I guess just to maybe go a little deeper, I am just wondering, for instance, the Project 50 initiative, is that something that can be accelerated over a short time, if you see the opportunity there, if the economy is turning and you feel that there’s an opportunity or is it constrained and the timeline you set out is just the timeline that is going to be?

I wondered how much flexibility you have with different components…

So…

…on that?

Yeah. So to earlier comments, our feeling is that -- and we don’t want to again predict the future.

With that said, if it’s me and just thinking about what I would do, I mean, I am less likely to hop in public transit now or an Uber. And if you kind of think about that, I got to imagine that other people would feel the same way and there’s going to be this kind of weird period of even if there is a vaccine for COVID-19 and that people are going to be nervous about not social distancing themselves, which could potentially drive an uptick in new car sales, used car sales and service and repair.

And so, we feel that we are poised to take advantage of anything that comes our way with regard to the market. So if we need to pull the lever of more used cars, we are absolutely set up to accelerate that.

Thank you. Got it.

Thanks. Good morning, everyone.

Just a quick one off the top, I know it was discussed last quarter, but I was just wondering for the absorption rate. Is there any chance we are going to see that being disclosed going forward?

It’s Mike here. We -- I guess, we pulled that for various reasons.

We will -- we come back to the better metric in terms of looking at OpEx as a percentage of gross profit. So we don’t anticipate coming back to an absorption rate reporting.

Got it. Okay.

So I appreciate the color on the -- talking about those higher margin areas of the business. But I noticed in the MD&A it also mentioned -- I think it was mentioned in the prepared remarks as well, how it’s more difficult to scale those higher margin areas of the business.

Do you mind just giving additional color on why exactly that is?

Yeah. For sure.

It’s Michael here. So when you are scaling the higher margin businesses, you are not looking at just the tran -- the one-time transaction with customers, you are looking at changing consumer’s behavior, you are focusing on customer loyalty, it’s repeatable revenue and so it’s much more difficult to change consumer’s behavior.

And at the same time, it has a cascade effect through our entire organization. So if you focus on selling one car, that’s just one transaction base.

But if you are considering growing your service and parts business, you first of all have to take that customer and improve their loyalty, get them back into your service department then that has a cascade effect on your scaling of your service advisors then you have got to hire technicians because you have increased business and you have got to increase your parts capacity and change your process of how you order and stock your parts to handle the whole business. So it’s this multifaceted scaling up of the entire operation.

But the benefit of doing that is that it’s repeatable revenue. It’s stable revenue and a lot of cases not only is it stable, but in some cases, it’s countercyclical because as consumers hold onto their cars longer, the result of that also is that they will tend to invest more into repairs and maintenance of their existing vehicle.

So it’s worth the effort. It’s just quite difficult.

Understood. That’s helpful.

One last one for me, I know, on M&A, you guys are sort of uncertain on the timing right now. But as far as any synergies you would expect to get from any acquisitions.

Is there anything that’s top of mind for you I guess in terms of what would be low-hanging fruit where it’s very visible, very tangible, something that you would be able to realize relatively quickly?

Yeah. This is Paul.

And look, there’s a lot of opportunity, I mean, we just had a strategy session a month and a half ago on acquisition and what we need to look at and how we need to think about it. And our business now in Canada is set to receive all sorts of different permutations of dealerships and in different geographies and so on and so forth.

The F&I business, we think that we do kind of top-of-class, top decile. We think we are -- obviously, if you heard Michael talking about our used to new ratio, in January, February, we think we do that better than most of the industry.

If you look at what we have done with the two most recent acquisitions that we have made last year both Heritage Valley and our Ford store, Rose City, those stores are running like they have never run before and so we think there’s a lot to layer over top of any acquisition. The question then becomes price and we need to be measured in our approach and just very thoughtful about how we are going out and buying stories, and so, until price and multiples come into line we are going to be disciplined.

Understood. Thanks.

I will pass the line.

Thanks. I appreciate the comments on Coronavirus and understanding it’s pretty hard to predict sort of another shock is oil prices and you guys obviously have a lot of exposure to Alberta.

So I am not sure how much you can say, but I am wondering how you are thinking through that, what you are seeing in your Alberta stores, I know it would be quite recent and just how you think about that cascading through 2020?

I can tell you that for a second and then I will pass it over to Michael. But Alberta it still continues to be one of AutoCanada’s strongest markets, even prior to the recent price war, the economy had prolonged the kind of economic challenges.

But AutoCanada saw a revenue growth in Alberta of 11% in Q4 and actually 17% in 2019 as compared to the rest the period in prior years. So, Michael or Mike if you guys want to add to that.

Yeah. No.

I am just going to say this we do have a strong portfolio of dealerships in Alberta. You quoted the growth that we have seen.

As we divested some of our underperforming dealerships over in the last 18 months, so for those weaker performing stores were in Alberta. So we do have that much more of a stronger portfolio of dealerships remaining and those are the right fit for Alberta.

So, again, I think, we are well-suited for where we are in the market and I think we are well-positioned for it. And again, I think, the other comment I made is that we continue to make gains on the go-forward plan and building up used to new and F&I and our business development center strategy with parts and service, that all builds stability into the business model.

And regardless of the province, that’s going to help support that overall stability and cash generation. So, again, I think, regardless of whatever the factor -- whatever that factor may be, we will -- we are certainly better suited right now in terms of absorbing any kind of impact and to Michael’s point earlier, we haven’t seen any impact so far in the first quarter.

Okay. Thanks.

And I know you are not giving any specific 2020 sales or margin targets or anything like that. But are there any high level or directional goals you want to share just to frame the way you are thinking about 2020 in the base case?

Yeah. I will provide my comment and Paul may add on to it.

But I think what you have seen in Q2 and Q3. We are ramping up the business.

So, again, we are beginning to -- we are coming off a transition piece from the end of 2018 and as we came into 2019. So we take a look at Q2 results, our adjusted EBITDA were approximately 30% ahead of prior year.

Our Q3 was approximately 35% ahead of prior year. When you take a look at our results in Q4, we are about, I am just looking for it right now, yeah, we were higher in Q4 when you begin to adjust for -- when you begin to adjust -- if you take a look at the $10.9 million ahead of prior year, we were 74% ahead of Q4.

If we added in the write-down adjustment of $3.7 million as something that’s not going to be obviously recurring, we would have been ahead of the prior year by 132%. So we are not putting out guidance.

We want to continue to get more traction on our results. But clearly, we are indicating that we are showing very, very strong double-digit growth over those quarters as the plans ramp up.

And you got to be looking at Q1, because Q1 -- when we take a look at prior year numbers, it will be closer to $3 million of adjusted EBITDA. So, again, it was our lowest sort of one of the lowest quarters we have had.

So you know that we are going to be well outperforming that quarter. So we are optimistic.

We know where the analysts have us in terms of overall consensus closer to $93 million. We will stay away from guidance right now.

But I think we are doing all the things that we were looking to do in order to show the kind of improvement that we think we can put to the business. So wild card right now is going to be COVID-19.

So we will have to -- to Paul’s earlier comments, we are probably -- we are that much more mindful of the impacts to the business, preserving cash. And while we want to be on the offense, you got to be smart about it right now and we have got to be protecting that balance sheet to understand how those impacts actually flow to the business even though they haven’t happen to this point.

So we are going to have to be that much more mindful. So I think we are doing all the things we need to be doing at and we are entering this point in time with the balance sheet that we wanted to have.

So you have got good leverage. We are at that 2.6 and the business is beginning to or has been moving actually for three quarters in a row in the right direction.

Thank you.

Hey. Good morning, guys.

Hi. Good morning.

Just as first question for Michael Rawluk. So as you really see the ratios you provided for used to new, I believe it was 1.1 roughly for Feb and January.

Mike, is it fair to presume, given industry sales were largely flat for those two months, does those ratios are where they are purely on the growth of used?

So we had a great January and new and used and parts and service and collision and finance and insurance, and everything is just moving forward. And the whole strategy was to increase our used vehicle business to provide stability.

That’s basically what we are executing on. I don’t know if that answers your question, but it’s definitely -- again, our new was up and our used up that much more.

That’s what we wanted to do.

Okay.

That’s what we did.

I just want to clarify that and look that’s pretty impressive given the comp and even, I guess, year-over-year or even sequentially. I mean, look, even if I were to assume new or flat new retail sales, that ratio would imply that you have effectively kind of hit your project 50 in Q1, which is a seasonally weak quarter.

So I guess the question, look, if my math is wrong, it’s wrong, but I don’t think it is, so outside the obvious sort of considerations for COVID-19, like, what is the real ceiling for used, right, given you are sort of already there?

It’s -- like Paul said, we don’t really know what to expect with COVID-19, but we are pulling on our past most similar experiences. And so for myself and many of our dealers, we have lived through 2003 the SARS epidemic.

We have lived through 2009 H1N1 swine flu pandemic. And if you look at both those years, for SARS, for example, new vehicle sales dropped about 6.5%, while the increase in used made up almost that entire deficit.

If you look at 2009, our new vehicle sales dropped 10% and again used vehicle sales made up almost that entire deficit. That’s the data for Canada.

That’s factual. And so we have lived through that.

This feels similar. This is a leadership exercise.

We don’t know what to expect with COVID-19. But we have lived through parallel events and in both those events, used cars supplemented the decrease in new -- the temporary decrease in new and based on our focus on building up our skill set and platform on being able to scale up used cars, we think this is timely and we are well-positioned -- at least better positioned to handle this type of event than in the past.

Yeah. No.

I couldn’t agree more on that last remark. But just sort of taking into step further, as we think about F&I in particular and as we sort of combine that thought with the mix change from annuity used, like, what are the differentials on the F&I four years versus new?

Yeah. It’s a great question.

It depends on the on the segment and I don’t want to be elusive, but if you are selling an older car at $10,000, your F&I profile is a lot different than if you are selling a one year old car or an off rental car. The way we are looking at the used business is, we are not as obsessed about the front-end gross profit, but we are looking at the total gross profit from the sales plus the F&I and we have specific targets in that regard.

And really it -- I know people say they used businesses as if it’s one business, but we look at it as four distinct businesses and each one of those segments within the used has a different gross profit margin profile.

Okay. And maybe I don’t know if you can take it further, but on a combined basis is there much of an impact for switching when new to when used?

I would say that -- again, it’s a more complex question, because when we look at the sale of a used car versus new we also look at the economic impact to our parts and service gross profit which has a higher financial throughput right to our bottomline. And where new impact certain factor in bonus money, but I would say, if you combine it all and you include the impact to the parts and service, it is definitely comparable.

Okay. No.

That’s helpful. Look, hopefully, I am last on the call, but I wanted to sort of take this a little bit further to a couple of other questions.

So just moving to your operating costs, that was flat sequentially. So I want to make sure that I am thinking about it correctly and I understand there are additional sort of lease expenses in there.

But generally, was flat because you added costs sort of continue to build organic momentum or should we expect relatively flattish operating expenses from quarter-to-quarter, so there isn’t that much seasonality, I guess, in Q1 and Q4?

Yeah. And that’s a good question and what needs to be washed out and will become apparent in 2020 and beyond is that, a lot of the businesses that we were building up included onetime costs that were that were in operating cost.

And so over time those ratios will start to look better and better. But it -- like, for example, if you take vary -- there’s various segments that we are building, I will focus on special finance for a minute is, that was really a greenfield coast-to-coast build-up of a brand new business segment within our network and there were lots of upfront operating costs and investment that went into that and the profit and the revenue will trail over time.

So the ratios are difficult to look at for Q4. But what I expect going forward is more of a stability or a decrease in the overall kind of absolute quantum of operating result or operating cost and then, but you will start to see the investment in revenue and gross profit start to wash through over time.

And again, we were really optimistic in January and February, which were very clean operating results for us and so we hope -- hopefully, that carries through. But no doubt the current situation will become a test of our culture and our leadership resiliency and overall business model.

Okay. One last one, I apologize.

But for those of us that are, I guess, a little bit more concerned as we sort of model Q2, particularly as it relates to OpEx, like, how should we think about that line in terms of fixed costs versus variable costs? And maybe just as a range here and I know you were at 86% of gross margins, like, what range is a reasonable range to expect?

It’s difficult to say because of the uncertainty that we have and we are modeling the potential shifts in our business. This is a difficult call, because again, we are in such a volatile state.

But we are -- I would say this is that, we benchmark against the U.S. peers.

We are driving towards that and we feel confident in our ability to reach that under normal situation.

Any comments in terms of fixed versus variable generally?

Mike, any thoughts on that if you want?

No. I mean, I think, I’d repeat what Michael was getting at in terms of you are going to continue to see improvement.

We built that into our into our budget expectations in terms of our overall cost structure simply because we would have incurred those setup costs, the implementation costs, the ramp-up costs in 2019. And you are beginning to see that impact in, certainly, a little bit in Q2 than you saw it in Q3 and you are seeing it in Q4.

Again, Q4 had that noise, so I will keep coming back to when you actually compare operational results to operational results so you take out that onetime item, our results were actually quite impressive for the quarter.

Okay. Well, look, I appreciate you taking all the questions.

It’s a fantastic 2019 and good luck for 2020.

Okay. Thank you.

Thank you.

Hi. Good morning.

Good morning.

Good morning.

Is it possible to talk a little bit about how we should be thinking about non-cash working capital in 2020, especially in relation to the floor plan and whether we should expect an unwind there given the positive contribution in 2019?

Yeah. I will take this.

No. I mean, everything that we have done, we were very, very conscious of ensuring that it wouldn’t be undone.

It’s just -- it’s discipline, it’s keeping our eyes on ensuring that whatever we have specifically on used vehicles that we are floor planning it and not using a revolver, so a lot of the gains. If you think about the $50 million of improvement in Q4, easily half of that would have been driven by using our floor plan for and freeing up floor plan capacity on the used vehicle.

So all that we have to do is ensure that we continue to optimize our used vehicle floor plan, we have built in more room with respect to our new credit facility, so we took advantage of all the discussions that we having to ensure that we were going to have that incremental room for the business. We also built up our inventory of used vehicles to help us hit our targets in the first quarter because we were driving to increase used to new in the first quarter.

So we are certainly working together with operations in terms of ensuring they have the capacity to do it. All the other stuff that we have done in terms of working capital are repeatable.

It’s sustainable. It’s taking a look at receivable.

It’s taking a look at payables. We take a look at our own metrics and we are trying to get into that right range so that we can spot for off little bit, but right now everything that we have done we don’t anticipate having to unwind.

And again, we are going to -- some of the gains that we have taken in Canada will certainly going to be looking a little bit harder at the U.S. Now that they are in profitability mode we will be taking it a bit of a harder look working with Tammy in terms of any additional opportunities or incremental opportunities on working capital in the U.S.

So cash is keen. I mean, I think, 2019 was the year where a lot of confusion over IFRS 16 and all these different adjustments and so on.

And I think the bias we have taken in the last half of the year and going in 2020 is follow the cash and it’s absolutely served us well as we ended the year and we went out for the refinancing and that really, really came across and so our eyes are going to remain on managing that working capital.

But -- so when I look at the cash flow from operations, so non-cash working capital contribution was positive $40 million for 2019. Do you think you can keep this above zero for 2020?

We should be. Yeah.

For sure. We should be able to.

Okay. Can you provide an update please also on your CapEx both kind of maintenance and growth for 2020.

So, we haven’t provided any specific guidance other than, I think, when -- obviously when we are speaking about the refinancing, we look back for the last two years and the last two years would have been in that $25 million to $30 million. I actually think the average was about $28 million over the last two years.

About $9 million of that would be what we call sustaining or maintenance capital and then the balance of that would be growth capital. So I probably -- I’d be using that more as guidance with the only -- with the caveat being that we would -- as part of our preparation, obviously, we are stress testing the balance sheet.

We are stress testing how business might be impacted as part of that work. Good business would dictate.

We are going to be identifying discretionary spending that can be held off and that includes capital. And so we will be identifying capital if we see material impacts on the business and we will begin holding off on some of the capital spending.

So we are being smart about it. So again, I’d primarily point you to last two-year average at $28 million, but, again, we will be mindful as we move forward how we spend that money going into 2020.

Again, we have been taking a look at the impacts of COVID-19.

Okay. All right.

Thank you. That’s it for me.

Okay. Thanks.

Listen, we really appreciate everybody’s time today and hope that on the next call we have just a better thing to talk about other than the business and COVID-19. So, with that, we will close the day.

Thanks, everybody, for their time.