AutoCanada Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 10 speakers on the call.

Operator

Good morning. My name is Colin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the AutoCanada First Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Listeners are reminded that certain matters discussed in today's conference call are answers that maybe given the questions and asked and could constitute forward looking statements, which are subject to risks and uncertainties related to AutoCanada's future financial or business performance. Actual results could differ materially from those anticipated of the forward looking statements. The risk factors that may affect results are detailed in AutoCanada's information form and other periodic filings and registration statements, and you can access these documents at SEDAR database at sedar.com. I'd like to remind everyone that this call is being recorded today, Thursday, May 4, 2023. I'd like to introduce Mr.

Operator

Paul Anthony, Executive Chairman of AutoCanada Inc. Please go ahead, Mr. Anthony.

Speaker 1

Thanks for that, and good morning, everyone, and thanks for joining on today's call. On the call today, we have Azim Lalani, our new Chief Financial Officer. I'd like to begin by welcoming Azim, who joined us March 27, following Mike Boris' retirement. Azim is a seasoned executive and we're very pleased to have him as part of our management team. Conference call.

Speaker 1

We released our 2023 Q1 results last night after market closed and you can access the news release as well as our complete financial statements and management discussion and analysis on our website at autocanadata.com. Our news release, financial statements, MD and A have also been filed on SEDAR. Today's call, we're going to discuss results for the period ended for March 31, 2023 and provide a general business update and then we'll open up the call for questions. Throughout the Q1, demand for AutoCanada's products and services remained strong with our company achieving another revenue record and strong same store sales growth. At the same time, new vehicle supplies remain constrained for most brands and consumers' preferences have shifted to lower price point vehicles, which caused both new and used gross profit margins to decline relative to historically record levels in the Q1 of last year.

Speaker 1

But despite these headwinds, We saw significant used car volumes continue. We've been building out our subprime and near prime muscle for the last 5 years and as consumers trade down, we're flexing this muscle, which helped us to grow our used car sales despite shifting consumer behavior. Additionally demand for F and I parts and service and collision repair was strong with these divisions benefiting from higher used car sales. Conference call. During the Q1, we recorded sales of $1,500,000,000 and that's a Q1 historical record.

Speaker 1

Adjusted EBITDA of $45,000,000 and net earnings of $8,400,000 sales grew 15% when compared to the same period of 2022, including a $226,000,000 contribution from 27 acquisitions completed over the past 2 years. Our same solar sales, which does not include acquired revenue and excludes foreign currency exchange, increased by 11.7% in the 1st quarter. Notably, Canadian same store new vehicle unit sales growth was 4.3% during Q1 and its first meaningfully positive growth in a quarter in almost 2 years. This is again a positive confirmation that new vehicle supply continues to come online. Our Canadian same store used vehicle units sold increased by 3% in the quarter with the ratio of Canadian used to new retail units sold increasing to 1 point 72 from 1.5 to 1 last year.

Speaker 1

During the last 12 months, Auto Canada sold 31,171 new retail vehicles and 53,809 used retail vehicles in Canada. That's a ratio of 1.73:one. As you'll recall, when this management team came on board in 2018, This metric was 0.62:one on an annual basis in Canada. We're pleased with the trajectory of this ratio over the 5 years as this is a key focus metric for us given the used markets unconstrained nature, which gives us a wide open runway to continue to grow our share of the used vehicle market in the future. Increasing used retail volumes also gives us more opportunities to generate higher margin parts and service growth through vehicle reconditioning and to utilize our best in class F and I department, all of which saw continued strength in the quarter.

Speaker 1

The U. S. Division retailed 1168 new units during the quarter. However, new gross margins declined 53.5 percent versus the Q1 of 2022. Recall that last year the shortage of new vehicles resulted and U.

Speaker 1

S. Dealers selling new vehicles for prices above suggested retail price, a practice that is not allowed in Canada and create an outsized profitability in the U. S. New vehicle sales across the industry. This year, we have had a more typical start to the year for Chicago dealerships with sales expected to pick up in Q2.

Speaker 1

Used to new ratio increased slightly to 1.87 from 1.83. Parts service and collision repair experienced good demand with same store sales growth of 3.1%. This translated into healthy profitability in the segment as customers hold on to their vehicles longer, requiring more service needs, Parts Service and Collision Repair gross profit increased by 7% and gross profit percentage increased to 54%. F and I also had a very strong quarter against the backdrop of Q1 2022 being one of the best quarters ever in the industry of the car business. Same store F and I revenues increased by 5%, gross profit increased by 4.8% and gross profit percentage increasing to 93.7%.

Speaker 1

These results reflected our selling more product per deal. Consolidated gross profit percentage was 16.6%, down from 18.4% in the Q1 of 2022. The decline in gross margin was a result of a shift in consumer preference to lower price point vehicles compared to our inventory mix which was leaning towards higher priced vehicles. The decline in gross profit margin due to this dynamic was partially offset by healthy profitability in both parts, service and collision and repair and F and I divisions. Operating expenses before depreciation for the Q1 were $212,000,000 or 77.6 percent of gross profit compared to $194,000,000 of 73.4 percent of gross profit in 2022.

Speaker 1

The increase as a percentage of gross profit resulted from lower gross margins as discussed as well as an increase of $12,400,000 in floorplan financing costs due to higher interest rates on these facilities and the inclusion of recently acquired businesses to our platform, which will be optimized in the coming quarters. Adjusted EBITDA was $45,000,000 a decrease of 27.6 percent over the same period in 2022. However, adjusted EBITDA per diluted share decreased by only 14.5 percent to $1.83 from $2.14 reflecting the 4,700,000 shares repurchased during 2022, which has benefited our per share performance in this more challenging environment. I'm now going to turn the call over to Azim to discuss our financial position. Azim?

Speaker 2

Thank you, Paul. Good morning, everyone. As of March 31, 2023, we had $185,000,000 outstanding on our $375,000,000 revolving credit facility. Other debt also consisted of $350,000,000 in 7 year senior notes and $32,000,000 in non recourse mortgages on 3 dealership properties as well as $1,000,000,000 in floor plan, which supports our inventory. We also have restricted cash on hand of approximately $115,000,000 Excluding our floor plan facilities and our lease liabilities, our total net funded debt as of the end of Q1 was $465,000,000 compared to $460,000,000 at December 31.

Speaker 2

Our total net funded debt to EBITDA covenant ratio of approximately 2.25 is below our 4.0 covenant limit. This compares to our total net funded debt ratio of 2.0 at December 31, 2022. During the trailing 12 months ended March 31, 2023, we generated $181,000,000 in free cash flow compared to $94,000,000 for the same period in 2022. During the quarter, our B plus credit rating was affirmed by our rating agency S and P. We continue to have access to over $300,000,000 of liquidity under our revolving facilities and cash on hand as at the end of March.

Speaker 2

As we move through the coming quarters and continue to allocate capital, We expect the leverage ratio to remain consistent. Our effective fixed rate portion of total debt includes swaps, including swaps is approximately 40%. We'll be focusing on opportunities to materially increase that portion from current levels over the coming quarters to add greater stability to the business given the current rate environment. Our basic weighted average shares outstanding were outstanding were 23,500,000 shares as of March 31, 2023, which is a 13% decline compared to 27,100,000 shares as of the end of the Q1 of last year. For the trailing 12 month period ending March 31, 2023, AutoCanada purchased and canceled approximately 3,800,000 shares for total cash consideration of $108,000,000 under NCIB and SIB at an average price of approximately $28 per share.

Speaker 2

We will continue to use share buyback strategically when appropriate, while maintaining a solid balance sheet and prioritizing high value growth objectives. I will now turn the line back over to Paul to discuss the outlook.

Speaker 1

Thanks, Azim. Consumer preference for lower price point vehicles has so far persisted during the quarter. For context, during Q1, Our Canadian GPU for used was $11.51 versus $2,596 in the prior year, representing a significant decrease of 1st quarter variable gross profit in the Canadian operation. During Q1, we made a conscious decision to reconfigure inventory and what we are now seeing is that GPU has started to recover into Q2. Our focus over the past 5 years has been to establish industry leading new used subprime F and I, parts service and collision repair businesses, plus a significant real estate portfolio that support our operation.

Speaker 1

We now have multiple levers of sustainability built into our business model. Segment. As a result, we've meaningfully insulated ourselves from market volatility, so we can continue to focus on our long term growth objectives across all of our divisions. Conservative balance sheet management and disciplined capital allocation decisions with a continued focus on best in class performance across all segments remain our priority. Subsequent to the end of the Q1, we announced the acquisition of premier chef Cadillac Buick GMC, both the dealership and collision center in Windsor, which is a top performing Canadian Cadillac store and brings our store count to 83 franchise dealership locations across 28 brands, 3 used vehicle dealerships, 1 used vehicle Automation business supporting the youth digital division in 12 right ride locations and 11 standalone collision centers within our group of 27 collision centers.

Speaker 1

On May 1, we also acquired London Auto Collision. After acquiring Burwell Collision in London, Ontario in July of 2022, there's been a significant increase in volume at the shop such that it's now operating at full capacity. We acquired London Auto Collision on May 1 to handle the work overflow and continue scaling our collision operation in that market. Our M and A pipeline is healthy and the pace of inbound inquiries from potential sellers remain really robust. We are beginning to see multiple compression in the private market due to normalizing operation and operating conditions following 2022, which was without a doubt the best year that the automotive retail industry has ever experienced.

Speaker 1

We intend to be very prudent in our capital allocation decisions. Also subsequent to the quarter, we announced our expanded partnership with Kijiji, which furthers our online retail strategy. Kijiji has 11,800,000 unique visitors per month with 1,400,000 for sale by owner cars listed for sale every year on their marketplace and a consumer base that is presently unserved by Finance and Insurance Products. It's too soon to provide guidance on the potential financial contribution from this initiative. However, we believe that it is a unique untapped opportunity that is now exclusive to AutoCanada.

Speaker 1

That concludes our prepared remarks. At this time, I'd like to turn the call over to the operator to open up the call for questions and answers.

Operator

Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. And your first question comes from David Ocampo from Cormark Securities. David, please go ahead.

Speaker 3

Thanks. Thanks for taking my questions, everyone. Paul, maybe we could start on the U. S. Side of the business.

Speaker 3

In the MD and A, you guys called out focusing on quality over volume in the U. S. Just curious why the shift and can we expect that shift to happen in Canada as well?

Speaker 1

So with the U. S, we've learned a lot. Last year that business created roughly over $20,000,000 of earnings. And last year what I would tell you it was in an anomaly. And so if you go back to normal times, I don't want to say normal like when we bought it that business was losing a lot of money in Q1.

Speaker 1

What we've come to realize is that normally in the U. S. In Chicago. January February are usually months that those businesses lose money. And then March usually make up pretty close to January February and then by April you're kind of getting to escape velocity and getting profitable.

Speaker 1

And that's precisely what's happening. And so what I would say is things are turning into a more normal business in the United States versus what we had previously.

Speaker 4

Got it. And if I

Speaker 3

take a look at the used margins down south, they're quite a bit stronger than Canada. Just curious what's driving that? And Is it simply just a difference in inventory or market?

Speaker 1

So and I'll talk more about this in Canada as well. So maybe just to kind of I'm sure we're going to get this question from a lot of people about margin. Depending on the mix of inventory, because of the rising interest rate environment that we operate

Speaker 4

in, people that

Speaker 1

might have been funded on a vehicle for $50,000 and now qualify only to be able to buy a vehicle for $40,000 And so our dilemma internally is do we compress margin and just roll the car and reconfigure our inventory to kind of match it with market demand or do we just hold on to inventory and try and sell it at the same premium we were before. And so we made a conscious decision in Canada to go ahead and lower the price of the vehicle to make sure that people finance and actually move more cars and you'll see that with our number. We had a historical March. I think we beat our July last year as far as volume goes by a significant number and we also had a record Q1 for used car sales. And what I'll point out is, We actually sold more cars in the quarter in Canada, with roughly 3,300 less cars in stock.

Speaker 1

I'll come back to that in a second. In the United States, the configuration was a little bit different. So we had more of a cleanse inventory. And so we were able to probably hold margin more than in Canada.

Speaker 3

Got it. That makes a lot of sense. And then maybe my last one here is on the OpEx as a percentage of gross profit. Obviously, that increased in quarter. But how should we be thinking about your cost structure on a go forward basis?

Speaker 3

Do you think there's a lot of low hanging fruit out there that you can trim the cost to get your that profile closer to U. S. Peers.

Speaker 1

So what I would tell you is there's a lot of fruit. I don't want to say that it's low hanging. This is the hard stuff. And this will happen over the course of the next 1 to 2 years. As we start this journey, There's a lot of opportunity for us.

Speaker 1

And so what we decided again internally was to move volume. We're really focused on moving volume because we can attach more F and I to those cars. We can generate more parts and service repairs and and actually just get more customers through our doors. And that's of the highest priority for us. And so we did that last as I said last quarter.

Speaker 1

And part The job also, we're very conscious to our expense structure. We know what needs to be done. But as I said, it's a journey and it's going to take It will take time and so you'll see that kind of bearing fruit over the next year to 2 years, even 3 years because it's going to be a longer process.

Speaker 3

Okay. That's perfect. Thanks a lot, Paul. I'll hop back in queue.

Operator

Yes.

Speaker 3

Fund.

Operator

Your next question comes from Chris Murray from ATB Capital Markets. Chris, please go ahead.

Speaker 5

Yes. Thanks guys. Good morning. Paul, maybe going back to the margin question, I think you made the comment that Your GPU was a lot significantly lower. I guess a couple of parts to this question.

Speaker 5

I mean, one, are you able to get supply of, fly of, call it, lower value vehicles, the OEM because the OEMs for a long time were sort of focusing on the best margin vehicles, which also had a tendency to have a higher ticket price. So just wondering about your incoming supply, if you have to rotate maybe to smaller vehicles or less expensive vehicles. And then 2, is there anything in that you have available to you other than you know the F and I, to bring that GPU up over the next couple of quarters.

Speaker 1

Yes. So it's actually it's pretty simple. When The average so the impact of the interest rate and I don't want to blame things on the interest rate, but the impact of the interest rate. It's over $2.40 of increased interest cost per month for a consumer on average year over year. And so that money has got to come from somewhere and that came in compression on the GPU on our vehicles that we had in stock.

Speaker 1

And so it's up to us, as I said earlier to David, it's up to us to reconfigure our inventory. It's not that we were overpriced on our inventory anymore. It's actually having inventory that's less in demand than lower priced cars. And so for us, it's all about reconfiguring our inventory mix buying lower priced cars that I don't know if you've heard the term before, but booking out. And so when we refer to booking out like what a car books out at, You're basically talking about how much will the bank loan against that car given the current interest rate environment and the credit profile of that customer.

Speaker 1

And so with more expensive cars, they don't book out as attractively because they're priced out of the market with a higher interest rate environment. And so that actually gets us so hopefully that answers part 2 of your question. So then the question is, where are we going to buy the cars from, in order to sell more cars in order to keep up that volume. I don't want to get into this in a meaningful way on this call, but we did sign a deal with Kijiji. 1,400,000 active sellers that are selling cars in market in Canada to active buyers and there's an opportunity for those cars to be purchased.

Speaker 1

And those are kind of right in our wheelhouse.

Speaker 5

Okay. And then on new supplier sorry, on new supplier you're getting are you able to get or the OEMs producing enough of

Speaker 3

those lower cost cars for you.

Speaker 1

I think that the OEMs are producing whatever they can as they can produce it. And We're starting to see volumes come back online. They're still not where they need to be. A lot of the import brands are not necessarily there yet. On the new car side, I think we take, we get, we sell it as it comes.

Speaker 1

And so I don't think that's the issue. I think that's my opinion. I think the key for us is make sure we have a pipeline of strong solid used vehicles to sell into this market.

Speaker 5

Okay. Fair enough. And then the other question is just around overall inventories and how you're feeling with those. I know we've been struggling a little bit and certainly, I guess, there's a bit of a rotation going on with inventories now. How are you feeling going into the spring selling season?

Speaker 5

And we saw the April numbers, which were a little bit soft. I think they're 5% across the industry. How are you folks feeling about your inventory position as we kind of start

Speaker 3

to pick up this year?

Speaker 1

So I'll talk about both new and used. So if you'll recall on our last earnings call, we talked about one of our issues, which was getting vehicles reconditioned in a timely fashion. I think we said that the inventory or the industry standard is like 10 to 14 days and we were at 41 days originally when the guys got here, the latest management team got here and took over the helm, we're at like 48 days. So We sold more used cars this quarter and I keep on coming back to this. We sold more used cars this quarter with 3,300 less vehicles than we had a year ago, which helps our floor plan, But we're also now able to get these cars reconditioned to the frontline in 27 to 28 days.

Speaker 1

And so that's like a 13 day increase over last quarter. And as that number gets better, we're able to turn cars faster. So in other words, doing more with less. So on the used car side, we feel really good about it. On the new car side, again, We're kind of beholden to the OEMs and whatever they produce.

Speaker 1

We I think we're doing a really good job of Moving the inventory, keeping it profitable with what we have. And how do I feel about it? I feel like It kind of is what it is and we did well last year and we'll continue to do well this year. I'd say the U. S.

Speaker 1

Is still struggling to find inventory. And so we're really focused on used cars there.

Speaker 4

All right. Thanks. I'll leave it there folks.

Speaker 1

Thanks.

Operator

Your next question comes from Michael Doumet from Scotiabank. Michael, please go ahead.

Speaker 4

Hey, good morning, guys. Good morning, Mike. And Azim, welcome. Look, I mean, I think if I look at the quarter, the trends were, I think at least to me, largely expected or as expected except for 2 items, operating costs and U. S.

Speaker 4

EBITDA. I think Dave did a pretty good job at asking some of the questions there, but I'd like to get maybe a little bit more specific on those two items. So On operating costs, that was up, if I look at Q2 last year versus Q1 last year, about 20,000,000 quarter on quarter. I'm just wondering if we should expect similar seasonality, this year or if there's anything Maybe that would make that a little bit different. And then on the U.

Speaker 4

S. Side, you spoke about that pretty well. Should we expect profit normalization into Q2, but given maybe the better seasonality, not the same extent in terms of the dollar decline EBITDA wise year on year.

Speaker 1

So let me start with the last question first because that's the only one that I can remember right now. And so The U. S, I think this is all uncharted water for us. And I don't know like not that I'm trying to cleanse myself of everything I've said every earnings call, but I am trying to cleanse myself of everything I've said in the earnings call. And so what I would say, if you recall, We keep on saying these are unnormal times.

Speaker 1

There it's COVID, we don't know where the market is going to be and we're just doing their best

Speaker 3

Hi, hello, Paul.

Operator

I think there might have been an audio issue. I'm just checking in to see if you're still there.

Speaker 1

Hopefully, you can hear us now. We're back on. Hopefully, Operator, are you there?

Operator

Hi. Yes, I am. Yes, you're back. I can hear you loud and clear.

Speaker 1

And that's our answer, Michael. Sorry about that. Where did we lose you?

Speaker 4

Pretty much right at the beginning. Okay. Sorry to make you go all over again.

Speaker 1

So in the U. S, I would say, and I don't know where everybody heard to, but in the U. S, the issue was, I guess, let me actually. So you asked the question, what is normal in the U. S?

Speaker 1

I think that's That's what you're trying to drive at, right?

Speaker 4

So for the U. S, the dollar drop and kind of going so the dollar drop on EBITDA in Q1, just thinking whether or not we should expect something similar or not given there's a little bit better seasonality in Q2 and Q3.

Speaker 1

Yes. So I would just tell you our experience and everything we're hearing and understanding operating 5 years in that environment states is that Chicago and Illinois in particular is very difficult in January, February and the winter months. So we saw losses in those months in our stores. We raised alarm bells internally, Said to our operators like what's going on there and they said don't worry March this is more normal. March things will pick up and they did.

Speaker 1

They offset the losses in January February. And we're told by April, we should start seeing more profitable months. And I'm here to assure you that that's what we're seeing. And so what we're seeing is more normal against the backdrop of what was very unnormal last year and even a bit of a year before. And so we made over $20,000,000 U.

Speaker 1

S. Last year. That's more of an abnormal year. And our expectation is we're going to see more of a normal year, which is still going to be a very profitable business in the U. S.

Speaker 1

And that's what I would say. That's our expectation. Does that make sense on that question?

Speaker 4

100%. And then maybe the first part of the question, which was OpEx. 10 minutes ago. Yes. OpEx, Look, the OpEx is part of the business that you can control, right, whereas maybe everything else a little bit more challenging.

Speaker 4

So I'm just thinking, if I look at Q1, Q2 last year, whether or not we should expect similarities within that quarter on quarter jump in terms of OpEx.

Speaker 1

So what I told David and I'll stand I'm going to say it again just for consistency purposes, is that the next leg of the journey is going to be attacking OpEx and it's the harder stuff and it's going to take time. And you will see that over the next year or 2, because there's a lot of things that we're actually now privy to that we didn't know before, where we say, if you look at our U. S. Peers, they just have they have expenses far more in control. And so when you look at productivity and where we should be putting our resources.

Speaker 1

I would just say that we need to actually match the resources with to produce the highest productivity. And I'll kind of leave it at that. It's the harder part of the journey and we're just embarking on it now. Okay.

Speaker 4

It's still like I'm going a little bit longer, but this would be my second question. So I guess one of the benefits to selling a lot of used is the incremental parts and service that you would capture Especially with the extended warranty. Can you and look, we've seen obviously gross profit from parts and service move up quite substantially. Can you speak to Maybe the capacity utilization of that business or maybe even the penetration rate of the car park, just to give us a sense for where that business could continue to go?

Speaker 1

Like the volume of used?

Speaker 4

So the product support, so the parts and service collision repair business, The gross profit continues to make new highs. Just wondering if this continued ability to grow that business on the back of used sales?

Speaker 1

Well, I think it's very labor dependent on the collision repair and parts and service, right? And so that's something that we can actually scale up as we grow. We still have service bay occupancy, so we still have resources to actually handle more throughput. And our goal is just like a hotel or a rental car company to make sure that we get to 100% utilization. And so there's definitely a lot of opportunity as we grow that business.

Speaker 1

And for that reason, we're actually growing our used car business in a significant in a way. We want to become untethered to the constraints that we have of the new car business and selling just new cars. And so there's a lot of knock on effects of us selling used cars. There's a lot from customers for life to increasing product per deal to selling more finance, selling more insurance, selling more service. There's an opportunity for us to warranty vehicles and have customers that we didn't even sell the car to start coming back to our stores if we bring deductibles down to make it more advantageous for them to get their cars serviced in our facility.

Speaker 1

So there's just a lot of opportunity that's untapped.

Speaker 4

Perfect. Thanks for that, Paul. Appreciate the time.

Speaker 1

Thanks. Take care, Michael.

Operator

Your next question comes from Tamy Chen from BMO Capital Markets. Please go ahead.

Speaker 6

Okay. Thank you. Good morning. First question I had is, Paul, last earnings call, You alluded to potential strategic assets. There was some discussion about it.

Speaker 6

Obviously, you couldn't say much. And I'm just curious if you're able to, to the extent that you can give any update to that. Like was that in reference to the Kijiji announcement? Yes. Okay, got it.

Speaker 6

And then so my second question is, My understanding, you elaborated a bit more on this in this call, but the Tajiji announcement, I thought the opportunity was more so in facilitating F and I for the transactions that would happen on that platform. Now it sounds like from what you've said that that is an opportunity, but the other much more meaningful, it sounds like opportunity is that you would essentially look to purchase source your used vehicles From the listings that are on the website. So I have that understood like are those the 2 primary opportunities for AutoCanada through this announcement?

Speaker 1

Yes, those are definitely 2 of the primary opportunities. And I actually I don't want to wait one over the other, but I would say Given that we're kind of operating a best in class F and I business in the country, even North America. We see this as being a completely untapped market. And if we look at our penetration rate or our attachment rate that we're able to sell to. We think that that's just a it's just a wonderful opportunity and one that nobody has actually gone after.

Speaker 1

And so we're actually quite excited by it.

Speaker 6

And you mentioned exclusive. So you are the exclusive, I guess in terms of if you wanted to source the vehicles from the listings on Kijiji like that's an exclusive funnel for you then. Is that correct?

Speaker 1

I would say the way we're going about it is of an exclusive nature.

Speaker 6

Got it. Okay. And then I was Curious, with respect to the dynamic between new vehicles and used vehicles, historically, There's nuance differences between the dynamics in both of these two channels. But as New supply will gradually come on, perhaps more so later this year. Can you Just talk a bit about how you're thinking of demand for used vehicles.

Speaker 6

I know it's still a key initiative to continue improving that used to new ratio. But just right now, what are you seeing or expecting with respect to used demand as we go through the rest of this year?

Speaker 1

Tammy, I think that used is going to be off the chart for the next 3 to 4 years. And I'll tell you why I think this and we've been saying this over and over again. And so hopefully, I actually hear other people starting to adopt it. So maybe I stole it from somebody and somebody will steal it from me. But Look, we're short roughly 9,000,000 to 10,000,000 cars that weren't built for North America in the last 3 to 4 years, which means that we're short 9000000 to 10000000 used cars that haven't been built in the next in the last 3 to 4 years, which means that there's not only a shortage in pent up demand that needs to be made up on the new car side, but there's also limited used cars out there.

Speaker 1

That would be data point number 1. There's just a shortage of used cars. And in Canada specifically, a lot of our used cars get end up getting exported to the United States. And so there's even more of a shortage because of the exchange rate arbitrage. So if you take that and if you kind of use that as your backdrop, and point 2 is the interest rate going up is having people kind of tilt more towards buying cheaper, more affordable vehicles.

Speaker 1

And so It's tough with new cars. The price of the average new car in the States, I think is at $48,000 in Canada, I'm not Sure, exactly. We just finished our board meeting. That was a number that stuck out to me. And that's a lot of money for the average consumer.

Speaker 1

And given the fact they're going to pay an extra $2.50 per month, just in interest rate charges, finding affordable vehicles that will suit the consumer of high importance. And I don't know how quickly we're getting out of this higher interest rate environment. So it could be the new norm for at least the next 3, 4 years or 2 to 3 years. And so we're positioning ourselves to sell volume and to sell used vehicles in order to drive business through our shops and our dealerships, that we think is more sustainable. And eventually that used car customer, if we treat them right and service them well, They end up becoming a new car customer.

Speaker 1

And so it's actually just a whole cycle of cycle of the lifecycle of the customer. Is that helpful, Tammy?

Speaker 6

Yes, that is. I appreciate it. One very small last housekeeping question is just on the OpEx. There is seasonality through the quarters, correct? I'm just thinking, I think following on some of the other previous questions like through this year, I think historically like you've had some ebbs and flows to the quarters, I should say.

Speaker 6

Can you just confirm that there should be some seasonality? I think historically, is it Q4 might be one of the higher periods?

Speaker 1

That is correct. Yes.

Speaker 6

Okay, got it. Thank you.

Speaker 1

Thanks, Tammy.

Operator

Your next question comes from Christa Friesen from CIBC. Christa, please go ahead.

Speaker 7

Hi, thanks for taking my question. I was just wondering if you could give some color as to how you think about your cash flow priorities, choosing between continuing to be active on the acquisition front versus being active on your share buyback.

Speaker 1

Yes. So I would say that's a great question. From our perspective and we have alignment with our board, When our multiple is trading higher and it makes sense to go and buy dealerships, both strategically and financially, the decision to actually buy dealerships is quite easy. And when our share price becomes get to such a level as we way higher return buying our shares back versus buying dealerships. We actually shift the focus from M and A to being just all about capital allocation, right?

Speaker 1

And so I would just say that We are going to buy our shares back in a meaningful way when our share price is cheap and when our share price is ahead of what we think it ought to be, we'll be looking to do more M and A. And so at this point in time, I would tell you that we're not going to be advancing on M and A for a couple of reasons. Number 1, it just doesn't financially make sense. And number 2, Our results are not just indicative of what we're doing in the market. They're indicative of everybody in the market.

Speaker 1

And so frankly, I think there's a lot of dealers that have to recalibrate what they think is the new normal and that's going to take some time. And so Until that time, we see this as being a tremendous opportunity for us to look at, our own company to invest in.

Speaker 8

Okay, great. Thank you. I think everyone else is taking my other questions.

Speaker 7

So I'll jump back in the queue.

Speaker 1

Thank you.

Operator

Your next question comes from Luke Hannon from Canaccord Genuity. Luke, please go ahead.

Speaker 3

Conference call.

Speaker 9

Thanks. Good morning, everyone. Paul, I wanted to get your view. I know you said you didn't want to talk too much about it, but I just wanted to get your view or your opinion on why it is that there was no F and I partnership before that was in place with Kijiji, whether it's with regards to AutoCanada or some other more national F and I player before it seems obvious what the benefits would be. So I'm just curious what your thoughts are and why that wasn't in place previously.

Speaker 1

I think we kind of like I wish I would say that we were smart enough and we looked at this and we figured it out. I I think we kind of stumbled on it as a team and we all kind of thought about it together and thought about the opportunity. And like 20 years ago, there was no car proof and everybody said that they had thought about that and wanted to do it. And Everybody told us it was their idea and they were going to do it. And hopefully, we have the same outcome with this.

Speaker 1

And everybody says, We were going to do this and nobody thought about it. And so everybody's got to think of something once and better to be lucky than good. So hopefully we thought about it before everybody else.

Speaker 4

Right.

Speaker 2

I hope.

Speaker 9

Yes, right. Switching gears a little bit here. With Car prices sort of pulling back a little bit here. I would imagine, you can correct me if I'm wrong, but I would imagine that the amount of disequity that you are seeing out there This probably increased a bit. Can you remind us, I mean, well, 1, is that the case?

Speaker 9

And 2, if it is, what are the best vehicles or best inventory that you have to be able to absorb that disequity and are you well represented with that inventory on your lots today?

Speaker 1

Well, I would just say, so the compression that you saw in the GPU in Q1 is a result of us shedding the mix of cars that didn't book out well. Recall what I was saying about booking out and reconfiguring our inventory to cars that do book out well. And so are we well positioned? I would say we are better positioned. I would say over the course of the next quarter or 2, We should be in prime position, because before like I said, we were not selling cars.

Speaker 1

Everybody in the business was just taking orders. Like we've not I don't want to take away from our sales people and our people that did a ton of work over the last 2, 3 years during COVID because They've climbed an unbelievable hill. That said, it was The art of selling a vehicle and the whole way you actually go about selling a vehicle is going to change over the course of the next year, 2 years 3 years. And instead of people just coming in and basically being jumping out of airplanes into your dealership and wanting to buy cars, and I was just filling orders. We're actually going to have to get back in the business of selling vehicles.

Speaker 1

And that's where positioning ourselves to do. Okay. Thank you. Thanks.

Operator

Your next question is open. I apologize. We have one more question that's coming from Maxim Sytchev from National Bank Financial. Maxon, please go ahead.

Speaker 7

Paul, I was wondering if you don't mind providing a bit of color in terms of how you think about the interplay between, I guess overall revenue growth versus profitability because when we look at some of the cohorts of U. S. Players, definitely less revenue growth, but holding a little bit better in terms of the gross margins. And I'm wondering is this the question of geography or OpEx. Just what are your thoughts there?

Speaker 7

Again, like how do you achieve maybe a better balance from that perspective? Thanks.

Speaker 1

Is it to do with geography or which?

Speaker 6

Or OpEx.

Speaker 1

Yes. Listen, I think a lot of it has to do with OpEx. What we've learned with some of the executives that we brought on board was that our OpEx was too high and we've got to cut OpEx. And You could say, you guys suck or you could say, wow, you guys have a great opportunity. We're choosing to think that we have a great opportunity.

Speaker 1

And so where the guys in the states actually don't have that same opportunity because they've already walked this path. And so for us, it's It's exciting times and what I said stands, I think to David, I'll say it again, we have fruit. It's not low hanging, It's work. And this is going to be the tough stuff. The good news is the operators that we have in the chair now have just been through this.

Speaker 1

And so for them, there's some muscle memory where they're going to just do what they did in their groups they were in and kind of help us achieve what they achieved, which is what you're comparing us to. So that's one thing. The other thing I will say and I ask this question of our management team all the time. What's different between Canada and the U. S?

Speaker 1

Like I probably say it so much they think I have like dementia, but I'm asking because I'm keep on trying to understand The difference between Canada and the U. S. And the day supply of used vehicles is massively different in Canada versus the U. S. And the way we deliver cars in Canada versus the U.

Speaker 1

S. Is also markedly different like in the U. S. You can actually spot deliver a car. You buy a car and we just talked about this in our board meeting yesterday and Jeff suggested, you buy a car in the States, You're driving out with that car.

Speaker 1

In Canada, you have to license it, safety check it. There's a lot of things that you have to do. And so there are nuance differences between Canada and the United States. And so we don't expect to be exactly the same as the U. S.

Speaker 1

To be compared against. However, there are a lot of learnings that we're getting now as a team where When we took over this company 5 years ago, I think we're like $72,000,000 of earnings that year. And I think last year we're over 200. So we've done a lot of work in 5 years and we basically took the low hanging fruit. And so That's why I say there's fruit there, but it's not going to be low hanging and it's going to be the tough stuff, but we're all signed up for it.

Speaker 7

And then a quick question in terms of floorplan financing. Some of the commentary out of the U. S. Is that because regional banks are curtailing right now the credit availability that could potentially lead to sort of higher rates on that part of the capital structure. Just wondering if you can maybe comment in terms of what you're seeing on the ground right now.

Speaker 1

Yes, we're not seeing that issue at all. We've talked to Our banks and everything seems to be status quo. I know I've heard the same, but it's not turning out to be reality for us.

Speaker 7

Okay. Good to hear. And lastly, just in terms of can we have an update on CapEx plans for 2023?

Speaker 1

I think at that point, I think that's more of an Adeem question. Adeem has been in the chair for 1 month. I think I'm happy to probably answer that more on the next call. Not that I'm trying to play hide the peanut. I just Don't have an answer and I don't know that Adeem has it at his fingertips.

Speaker 7

Okay, fair enough. That's it for me. Thanks a lot.

Speaker 1

Thank you.

Operator

There are no further questions at this time. I'll turn it back to you.

Speaker 1

So I said it and I noticed that it wasn't in my script and I want to say this again. I want to thank all of our OEM partners and everybody at AutoCanada, for pulling together. These are change it's a changing environment and we're very fortunate to have the team that we have From everybody in the dealerships to everybody at head office to our OEM partners, we're very fortunate. We are building something special. And I hope we look back at these times in the next couple of years and we go, wow, was that ever a ride.

Speaker 1

So really appreciate everybody joining us and Thanks again. We'll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your

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