AutoCanada Inc. - Third Quarter 2026 Results - DEFI TECHNOLOGIES INC

Financial Performance:

• Revenue from continuing operations increased 3.1% YoY to $1.2 billion, driven by growth in new and used vehicle sales and collision strength, partially offset by lower parts and service revenue.
• Gross profit rose 4.9% to $197 million, with gross margin expanding 30 basis points to 15.9% due to collision and used vehicle strength, despite new vehicle GPU pressure.
• Adjusted EBITDA from continuing operations was $48.4 million (3.9% margin); Adjusted EBITDA in the ACX collision business grew 58.7% YoY.
• Net income was $40.3 million ($1.63 diluted share) compared to a $2.9 million loss ($0.14 loss per share) in the prior year period.
• F&I gross profit improved 5.5%, with average GP per retail unit increasing to $3,381 from $3,346.
• Used vehicle revenue rose 6.9%, supported by a 7.4% increase in retail units.
• Operating expenses (excluding D&A) remained flat YoY at $149 million.
• Cash position increased to $171 million from $142 million in Q2, driven by divestiture proceeds and working capital improvements.
• Net debt decreased 25% YoY to $322 million (from $427 million in Q4 2025), with total net funded debt to bank EBITDA ratio improving to 3.4x from 3.6x in Q2.
• Inventory efficiency improved significantly, with used vehicles aged over 90 days declining from 34% to 22% in Q3.

Guidance and Future Outlook:

• Management expects automotive retail margins to stabilize and improve starting in spring 2027, contingent on a improving Canadian macroeconomic backdrop and the rollout of new sales training platforms.
• Q4 2026 is projected to remain strong, with dealership activity better in October than September and collision growth continuing.
• Long-term leverage target is to reduce net debt-to-EBITDA to a range of 2.0x to 3.0x; current trajectory is downward but timing depends on the completion of U.S. divestitures and collision strategic review outcomes.
• Capital allocation priorities: prioritize liquidity protection, invest in high-return operational initiatives, pursue selective accretive M&A, and consider share repurchases.
• Management anticipates used vehicle inventory will modestly increase in the winter leading into spring, but overall levels will remain lean compared to historical norms.
• Collision business is expected to accelerate growth and potentially self-fund its acquisition pipeline at a significant pace following the conclusion of the strategic review.

Business Segments and Product Lines:

• Dealership Business: Focus remains on reshaping the portfolio by divesting underperforming assets (e.g., 3 BC dealerships divested for $1.1M EBITDA loss recovery) and reinvesting in higher-return clusters.
• ACX Collision: Grew organically and inorganically with 10 new shops added since Q3 2025, expected to generate $7.1 million in annual post-rent EBITDA at maturity; targeting 3-4x EBITDA multiples through integration.
• Strategic Review: A strategic review for the ACX collision business is ongoing and active; management aims to unlock value by potentially separating the collision platform to allow accelerated growth.
• Operational Initiatives: Unwound the used digital limited partnership to save ~$6M annually and free up management focus; launched new sales training programs to standardize processes and rebuild margins.
• Fixed Operations: Identified a shortage of technicians driving lower parts and service revenue; dedicated recruiters have been hired to address labor gaps.

Market and Competitive Landscape:

• Market share in new vehicles has been won consecutively for four months when weighted by the specific brands Auto Canada owns and operates.
• The Canadian automotive retail environment faces headwinds from affordability concerns and tariff uncertainties, impacting margins despite volume growth.
• The collision repair market is described as a "blue ocean" with significant fragmentation and room for roll-up activity.
• Management notes that while Tesla and Toyota hybrids captured market share during the high oil price summer of 2025, Auto Canada's core portfolio brands are outperforming.
• The company is rebalancing its portfolio to focus on areas with lower real estate costs and building density through clusters to gain operating leverage.

Risks and Challenges:

• Macro economic pressures including affordability constraints and tariff concerns are suppressing automotive retail margins.
• Inventory pricing dynamics and higher cost inventory from prior periods continue to pressure used vehicle GPUs, though inventory age is improving.
• Labor shortages, particularly for qualified technicians, are constraining parts and service revenue potential.
• U.S. divestiture process involves complexities regarding auto mall franchises and OEM involvement, which may delay debt reduction timelines.
• The ongoing strategic review of the collision business introduces uncertainty regarding future capital allocation and balance sheet impact.

Management Commentary and Tone:

• Tone was optimistic yet pragmatic, acknowledging current margin pressures while expressing strong confidence in the turnaround trajectory for 2027.
• CEO Samuel Cochran emphasized a "simplify and strengthen" strategy, highlighting the sale of underperforming assets and the successful integration of collision shops.
• CFO Mike highlighted the strength of the finance team and the disciplined approach to capital allocation and debt reduction.
• Management expressed pride in the operational execution, specifically the reduction of aged inventory and the recruitment of high-performing talent (e.g., Skills Canada medalists).
• Confidence was high in the collision team's ability to execute roll-up M&A, with plans to potentially spin off the business to maximize its growth potential.

Analyst Questions and Answers:

• Market Share & GPUs: Clarified that Auto Canada is gaining market share by brand; sales training programs and macro recovery are expected to drive GP recovery without requiring further margin concessions.
• M&A Strategy: Dealership M&A is paused for testing small deals in the near term to focus on existing asset optimization, while collision M&A continues at a serial acquisition pace.
• Collision Maturation: Defined the $7.1M EBITDA target for recent acquisitions as a 3-4x multiple outcome, typically taking up to three years to mature; current assets are at various stages.
• Leverage Path: U.S. divestiture proceeds (including land sales) will be directed to debt reduction to hit the 2.0-3.0x target; timing is fluid but the trend is consistently downward.
• Parts & Service: Weakness in Q3 attributed partly to labor shortages rather than just demand deferral; new hiring initiatives and BDC improvements are underway.
• Technology Investments: In-house AI and OEM-specific sales training programs are being deployed to improve performance management and sales consistency.
• Collision Strategic Review: Prompted by the need to unlock value and leverage the platform's growth potential separately from the dealership business to achieve the target debt ratio.

Other Key Points:

• Three dealerships in BC were divested, removing $1.1 million in YTD adjusted EBITDA losses.
• The used digital limited partnership was unwound, generating $6 million in annual cost savings.
• New sales training programs will be standardized by OEM to improve deal desk consistency.
• The company is actively recruiting dedicated technicians for fixed operations to address labor supply constraints.
• Management reiterated that the collision business is a "phenomenal platform" with a proven track record of reducing acquisition multiples from 6-8x to 3-4x quickly.