Mr. Paul Antony reports

AUTOCANADA REPORTS 2019 THIRD QUARTER RESULTS

AutoCanada Inc. has released its financial results for the three-month period ended Sept. 30, 2019.

"We are very pleased to post another strong quarter, and this accelerating momentum provides continued validation of the effort we started over a year ago. Our same-store metrics in Canada were once again up across the board, while we made significant and continued progress in stabilizing our U.S. operations. We achieved this while reducing our net debt by $69.4-million in the quarter," said Paul Antony, executive chairman.

Third quarter 2019 key highlights (year-over-year comparable basis)

The company posted strong results for a second consecutive quarter. Consolidated revenues of $981.9-million reflected growth of 13.3 per cent over the prior year; same-store new retail unit sales growth was 9.1 per cent as compared with the Canadian market decrease of 3.0 per cent, for brands represented by AutoCanada, as reported by DesRosiers Automotive Consultants. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $32.5-million reflected an increase of 100.7 per cent over the prior year. Adjusting for the impact of IFRS (international financial reporting standards) 16 in 2019, adjusted EBITDA of $21.8-million in the quarter reflected an increase of 34.9 per cent over the prior year. Canadian operations were buoyed by continuing same-store sales growth, combined with increased traction with AutoCanada's finance and insurance (F&I) service line and business development centre (BDC) go-forward initiatives. AutoCanada's U.S. operations continued to show improvement in the quarter, coming in at near breakeven adjusted EBITDA performance at ($400,000). Management will close two U.S. franchises in the fourth quarter, necessitating a non-cash restructuring charge of $13.4-million in this quarter. Notably, the company's net indebtedness (total indebtedness less cash on hand) was reduced by $69.4-million, from $271.7-million to $202.3-million, in the quarter, driven primarily by effective working capital management and a sale-leaseback transaction for two dealership facilities.

Consolidated AutoCanada highlights (year-over-year comparable basis) (1)

Second consecutive strong quarter

The company performed well in the third quarter, building on the momentum from its strong second quarter:

• Revenue was $981.9-million, an increase of $115.0-million or 13.3 per cent.
• Total vehicles sold were 19,652, an increase of 533 units or 2.8 per cent:
  • Same-store (Canadian stores that have been owned for at least two full years since acquisition) new retail unit sales growth was 9.1 per cent as compared with the market decrease of 3.0 per cent, for brands represented by AutoCanada, as reported by DesRosiers Automotive Consultants.
  • Same-store new and used retail unit sales increased 12.7 per cent to 14,226.
• Net loss for the period was $4.1-million (or 15 cents per diluted share) compared with $15.0-million (or 55 cents per diluted share). In the period, restructuring charges of $13.4-million were incurred, as compared with impairment charges of $19.6-million in 2018. The adoption of IFRS 16 resulted in additional total expenses, which negatively affected the company's net loss in the quarter by $1.7-million.
• Adjusted EBITDA increased 100.7 per cent to $32.5-million, an increase of $16.3-million; of the $16.3-million increase, $10.7-million was attributed to the impact of IFRS 16. Adjusting for the impact of IFRS 16, adjusted EBITDA was $21.8-million, an increase of 34.9 per cent over the prior year.
• Implementing working capital initiatives, combined with a sale-leaseback transaction for two dealership facilities and continued improvements in operational performance, allowed the company to reduce its net indebtedness by $69.4-million in the quarter.

Canadian operations highlights (year-over-year comparable basis) (1)

Same-store unit growth of 12.7 per cent

Management continued to focus on implementing and building upon its go-forward initiatives for Canadian operations during the quarter. Earnings performance was driven by a combination of strong unit growth and the impact of more notably the F&I and BDC initiatives. Same-store new retail unit sales growth was 9.1 per cent as compared with the market decrease of 3.0 per cent, for brands represented by AutoCanada. Sales growth and gross profit improvement are supported by AutoCanada's continued focus on OEM (original equipment manufacturer) relationships, which includes achieving sales unit and customer satisfaction targets and a number of other key measures as reflected within the various OEM-balanced scorecards. In line with AutoCanada's initiative to sell more used vehicles through retail sales rather than wholesaling, AutoCanada's used retail units to new retail units ratio increased to 0.72 in the quarter, from 0.67. The F&I initiative helped increase average gross profit per retail unit to $2,456, an increase of 10.1 per cent. Parts and service gross profit in the quarter increased by $4.5-million, an increase of 9.4 per cent, attributed in large part to improving traction with Dealermine and the BDC strategy:

• Revenue was $871.2-million, up 20.1 per cent.
• Total retail vehicles sold were 15,253, an increase of 1,628 units or 11.9 per cent:
  • Same-store new and used retail unit sales increased 12.7 per cent to 14,226.
• Used retail units to new retail units ratio increased to 0.72 from 0.67, an increase of 8.4 per cent.
• Net income for the period was $10.7-million (38 cents per diluted share), up 178.0 per cent from a net loss of $13.5-million in 2018. Impairment charges of $19.6-million were reflected in the 2018 results. The adoption of IFRS 16 resulted in additional total expenses, which negatively affected the Canadian operations segment net loss by $1.7-million.
• Adjusted EBITDA increased 86.7 per cent to $30.9-million, an increase of $14.4-million; IFRS 16 resulted in an increase to adjusted EBITDA of $8.7-million. Adjusting for the impact of IFRS 16 in 2019, adjusted EBITDA was $22.2-million, an increase of 34.1 per cent over the prior year.

U.S. operations highlights (year-over-year comparable basis) (1)

Good progress -- near breakeven quarter/two franchises to be closed in fourth quarter 2019

The U.S. operations segment continued to see improvements as a result of the focus on improving the expense structure, which included a reset of all vendor contracts and restructuring of compensation toward performance-based rather than fixed arrangements. Time in position for the new management team has impacted the progress of operational performance, as indicated by adjusted EBITDA before the impact of IFRS 16 being near breakeven at ($400,000). With an eye on driving future profitability, a decision was made to close two loss-generating franchises in the fourth quarter of 2019. A non-cash restructuring charge of $13.4-million was taken in the period related to the wind-down of these two franchises, scheduled to occur in mid-November:

• Revenue was $110.7-million, a decrease of 21.9 per cent.
  • Retail unit sales decreased to 2,550, down 823 units or 24.4 per cent.
• Net loss for the period was $14.8-million, compared with $1.5-million in 2018. The 2019 results included a non-cash restructuring charge of $13.4-million. IFRS 16 adjustments resulted in a decrease of total expenses for the U.S. segmented operations for the period, which had a positive contribution of $400,000.
• Adjusted EBITDA was $1.5-million, an increase of $1.9-million from 2018; IFRS 16 resulted in an increase to adjusted EBITDA of $2.0-million. Adjusting for the impact of IFRS 16 in 2019, adjusted EBITDA was $400,000, near breakeven and a substantive improvement over the previous two quarters.

Note:

1. The company adopted IFRS 16 on Jan. 1, 2019, but the comparatives for the third quarter of 2018 have not been restated. Accordingly, 2018 comparatives for the third quarter of 2018 may not provide for a meaningful comparison with the corresponding measures for the third quarter of 2019.

Same-store metrics

Same-store new unit sales growth of 9.1 per cent

Total same-store new and used retail unit sales for Canadian operations increased 12.7 per cent to 14,226, with new retail units showing an increase of 9.1 per cent and used retail units up 18.1 per cent. The increase of new retail units by 9.1 per cent compares with a market decrease of 3.0 per cent in the Canadian new vehicle market for the brands represented by AutoCanada, as reported by DesRosiers Automotive Consultants. The same-store metric includes only Canadian dealerships that have been owned for at least two full years since acquisition:

• Revenue increased to $818.6-million, an increase of 20.4 per cent.
• Gross profit increased by $15.3-million or 13.9 per cent.
• New vehicle gross profit per retail unit grew 12.1 per cent or $377 per unit.
• Used-to-new-units-sold ratio increased to 0.73 from 0.67.
• Parts, service and collision repair gross profit increased to $48.7-million, an increase of 9.0 per cent.
• Finance and insurance gross profit per retail unit average increased to $2,491, up 8.5 per cent or $195 per unit.

Financing activities and other recent developments

Net indebtedness reduced to $202.3-million

Total financed debt to bank EBITDA: Effective July 1, 2019, the credit facility lenders granted the company an extension of the previously provided increase to its total financed debt to bank EBITDA covenant. Under the terms of the extension, the company's total financed debt to bank EBITDA covenant will be 4.50 to 1.00 until March 31, 2020, and will subsequently revert to 4.00 to 1.00 beginning April 1, 2020.

Current ratio consent: In the quarter, the company requested and received lender consent to reduce the current ratio covenant to 1.00 from 1.05 for the quarters ending Sept. 30, 2019, and Dec. 31, 2019. The company is actively undertaking initiatives to strengthen its balance sheet through improved and more efficient working capital management, with the intention of generating additional cash flows which will be used to reduce indebtedness under the credit facility. Modifying the current ratio covenant requirement provides the company with additional headroom to pursue opportunities to better manage its working capital.

Sale-leaseback transaction: On Aug. 23, 2019, the company executed an agreement to sell and subsequently lease back two dealership facilities with Capital Automotive Real Estate Services Inc. for a purchase price of $20.0-million. On the transaction, the company recognized a pretax gain of $600,000. Funds from this sale were used to pay down the company's revolving credit facilities. Combined with the impact of sale-leaseback transactions completed over the last four quarters, the company will realize incremental cash lease costs of approximately $2-million in the fourth quarter, as compared with the same period last year.

Dealership divestiture: On July 2, 2019, the company sold substantially all of the operating and fixed assets of Calgary Hyundai, located in Calgary, Alta., for cash consideration. Net proceeds of $2.0-million resulted in a net pretax gain on divestiture of $400,000, included in gain (loss) on disposal of assets, net in the Canadian operations segment.

Real estate: The company continues to actively market $23.0-million of unproductive real estate.

Dealer ships held for sale: As part of the plan to optimize the U.S. dealership portfolio, the company is actively engaged in seeking buyers for four of its U.S. dealerships.

Wind-down of two U.S. franchises: In addition to the four dealerships held for sale, the company has committed to voluntarily terminate two franchises in the fourth quarter of 2019. A non-cash restructuring charge of $13.4-million was taken in the quarter to reduce the carrying amount of tangible assets to their recoverable amount and to accrue a provision related to future unavoidable premises costs

Dividends

The company has declared a quarterly eligible dividend of 10 cents per common share on AutoCanada's outstanding common shares, payable on Dec. 16, 2019, to shareholders of record at the close of business on Nov. 29, 2019.

For purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and any corresponding provincial and territorial tax legislation, all dividends paid by AutoCanada or any of its subsidiaries in 2010 and thereafter are designated as eligible dividends (as defined in 89(1) of the act), unless otherwise indicated. Please consult with your own tax adviser for advice with respect to the income tax consequences to you of AutoCanada designating dividends as eligible dividends.

Third quarter financial information

The accompanying table summarizes the company's performance for the quarter.

                                        CONSOLIDATED OPERATIONAL DATA

                                                                              Three months            Three months
                                                                            ended Sept. 30,         ended Sept. 30,
                                                                                      2019                    2018

Revenue                                                                        $   981,870             $   866,918
Gross profit                                                                       150,754                 134,835
Gross profit %                                                                       15.4%                   15.6%
Operating expenses                                                                 124,772                 126,492
Operating profit                                                                    16,695                  (5,260)
Net (loss) for the period                                                           (4,104)                (15,007)
Basic net (loss) per share attributable to AutoCanada shareholders                   (0.15)                  (0.56)
Adjusted EBITDA                                                                     32,489                  16,185
New retail vehicles sold (units)                                                    10,419                  10,353
New fleet vehicles sold (units)                                                      1,849                   2,121
Total new vehicles sold (units)                                                     12,268                  12,474
Used retail vehicles sold (units)                                                    7,384                   6,645
Total vehicles sold                                                                 19,652                  19,119
Same-store new retail vehicles sold (units)                                          8,245                   7,560
Same-store new fleet vehicles sold (units)                                           1,777                   1,915
Same-store used retail vehicles sold (units)                                         5,981                   5,066
Same-store total vehicles sold                                                      16,003                  14,541
Same-store revenue                                                                 818,550                 679,684
Same-store gross profit                                                            125,699                 110,367
Same-store gross profit %                                                            15.4%                   16.2%

The accompanying table shows the segmented operating results for the company for the three-month periods ended Sept. 30, 2019, and Sept. 30, 2018.

                                                Three months ended Sept. 30, 2019      Three months ended Sept. 30, 2018
                                                   Canada        U.S.       Total       Canada         U.S.        Total

New vehicles                                    $ 492,149   $  63,694   $ 555,843    $ 426,277    $  83,004    $ 509,281
Used vehicles                                     235,955      26,342     262,297      170,096       36,572      206,668
Parts, service and collision repair               101,189      15,250     116,439       96,131       16,956      113,087
Finance, insurance and other                       41,885       5,406      47,291       32,670        5,212       37,882
Total revenue                                     871,178     110,692     981,870      725,174      141,744      866,918
New vehicles                                       35,035       1,720      36,755       25,908        3,242       29,150
Used vehicles                                       9,690       2,041      11,731       11,962          993       12,955
Parts, service and collision repair                52,150       7,491      59,641       47,690        9,516       57,206
Finance, insurance and other                       37,468       5,159      42,627       30,404        5,120       35,524
Total gross profit                                134,343      16,411     150,754      115,964       18,871      134,835
Employee costs                                     65,478       8,934      74,412       63,731       10,449       74,180
Administrative costs                               33,568       5,621      39,189       32,049        7,321       39,370
Facility lease and storage costs                       60         508         568        5,696        1,452        7,148
Depreciation of property and equipment              4,295         232       4,527        5,074          720        5,794
Depreciation of right-of-use assets                 5,518         558       6,076            -            -            -
Total operating expenses                          108,919      15,853     124,772      106,550       19,942      126,492

Operating profit (loss) before other income        25,424         558      25,982        9,414       (1,071)       8,343

Operating data
New retail vehicles sold                            8,855       1,564      10,419        8,176        2,177       10,353
New fleet vehicles sold                             1,815          34       1,849        2,114            7        2,121
Total new vehicles sold                            10,670       1,598      12,268       10,290        2,184       12,474
Used retail vehicles sold                           6,398         986       7,384        5,449        1,196        6,645
Total vehicles sold                                17,068       2,584      19,652       15,739        3,380       19,119
Number of service and collision repair
orders completed                                  186,384      32,139     218,523      203,312       37,791      241,103
Number of dealerships at period-end                    50          14          64           54           14           68
Number of service bays at period-end                  886         200       1,086          906          200        1,106

Management's discussion and analysis (MD&A) and financial statements

Information included in this press release is a summary of results. It should be read in conjunction with AutoCanada's consolidated financial statements and MD&A for the quarter ended Sept. 30, 2019, which can be found on the company's website and on SEDAR.

Conference call

A conference call to discuss the results for the three months ended Sept. 30, 2019, will be held on Nov. 8, 2019, at 9 a.m. MT (11 a.m. ET). To participate in the conference call, please dial 1-888-231-8191 approximately 10 minutes prior to the call.

AutoCanada's presentation that will be discussed on the conference call is available at the company's website.

This conference call will also be webcast live over the Internet.

About AutoCanada Inc.

AutoCanada is a leading North American multilocation automobile dealership group currently operating 64 franchised dealerships, comprising 27 brands, in eight provinces in Canada, as well as a group in Illinois, United States, and has over 4,200 employees. In 2018, AutoCanada's dealerships sold approximately 66,000 vehicles and processed approximately 915,000 service and collision repair orders in its 1,157 service bays, generating revenue in excess of $3-billion.

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