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Edited Transcript of ACQ.TO earnings conference call or presentation 13-Mar-20 3:00pm GMT

Q4 2019 AutoCanada Inc Earnings Call

Edmonton Apr 3, 2020 (Thomson StreetEvents) -- Edited Transcript of AutoCanada Inc earnings conference call or presentation Friday, March 13, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin McPherson

AutoCanada Inc. - Director of Finance

* Michael Rawluk

AutoCanada Inc. - President & Director

* Michael A. Borys

AutoCanada Inc. - CFO

* Paul W. Antony

AutoCanada Inc. - Executive Chairman

* Tamara Darvish

AutoCanada Inc. - President of U.S. Operations

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Conference Call Participants

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* Christopher Allan Murray

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst

* Luke Hannan

Canaccord Genuity Corp., Research Division - Associate

* Matt Bank

CIBC Capital Markets, Research Division - Associate

* Maxim Sytchev

National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst

* Meny Grauman

Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the AutoCanada Fourth Quarter 2019 Earnings Call. (Operator Instructions)

I would like to remind everyone that certain statements in this presentation and on our call are forward looking in nature, including, among other things, future performance and the implementation of the Go Forward Plan. These include statements involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. AutoCanada does not assume any responsibility for the accuracy and completeness of the forward-looking statements and does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information about possible risks, please refer to our AIF, which is available on SEDAR and on our website within the investor documentation and filings section.

I will now turn the call over to Kevin McPherson, Director of Finance. Please go ahead.

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Kevin McPherson, AutoCanada Inc. - Director of Finance [2]

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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'm 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.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [3]

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

Before we get started, I'd like to say 2 things in light of the recent global volatility and in 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've taken all the appropriate steps to carefully consider how to responsibly handle this pandemic. Your safety is our highest priority, and we'll 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've worked diligently to rebuild the foundation of AutoCanada, including our operational philosophy, team and balance sheet. You'll hear more of those highlights on what I believe was an extremely successful 2019 on the call today.

While we'd 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'll succeed in 2020 regardless of what the future brings. Said differently, while the markets are going to do what they're going to do, we remain highly confident that what we've built has in no way shaken our collective resolve.

I'm pleased to report that Q4 marked our third consecutive quarter of strong performance, marked by a number of key wins and accomplishments. I'll process all of that by restating our top 3 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've 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're a 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 were to normalize for increased lease costs absorbed due to the sale-leaseback transactions we completed in the preceding 4 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've 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 EBITDA 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've done just that. We reduced our net indebtedness by $147 million in the year. We took our net debt leverage from 6x at the end of 2018 to 2.6x 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 tenor of 4 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 enter 2020 on a solid footing, ready to face any economic uncertainty in North America. We're confident that our strengthened business model will be able to weather any coming storm. I'll 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 of the most paramount importance.

As we've 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'm going to now turn it over to Mike.

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Michael A. Borys, AutoCanada Inc. - CFO [4]

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Thanks, Paul, and good morning to everyone on the call.

I'll build on the third priority that Paul just spoke to, namely fixing the balance sheet.

In the quarter, we continued to fine tune our management of working capital. Building off 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 continued to exercise discipline over our cash conversion cycle over receivables and payables. The improved policies, disciplines and the management of our working capital are systemic and sustainable actions. We will continue to refine our actions and hold their 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 6.0x to 2.6x. 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 the facility and the debentures would be going current in early Q2, and we want them to get ahead of that, for sure. We are very happy with how everything turned out. We have a new credit facility with a 3-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 initiatives. The overall size of the facility, including new and used floor plan, is $950 million.

Our new senior unsecured debentures has a maturity date of February 11, 2025, reflecting the 5-year term. Issued at a slight discount, our debentures carry an 8.75% coupon. We have improved our overall credit profile, moving from an average tenor of 16 months to 4 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 to our new senior unsecured notes. We are in a much healthier financial position today with these actions completed.

I also wanted 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. The 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 forecast 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 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'll 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'll adjust previous quarters for comparison purposes.

The last adjustment was also announced with the refinancing and relates 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'll turn it over to Kevin to discuss our results.

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Kevin McPherson, AutoCanada Inc. - Director of Finance [5]

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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 were 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'll speak to the results on a segmented basis. For the fourth quarter, our 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 to $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. And 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. U.S. operating expenses continued to be a focus, where 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.

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Michael Rawluk, AutoCanada Inc. - President & Director [6]

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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're very proud of everyone for the performance we've produced this quarter and for the year as a whole as we look back. We'd would also like to thank our OEM partners, our strategic partners and everybody that's helping this full team effort to improve operations. This is truly a team effort, and we thank everyone.

We continue to see positive traction and performance from our Canadian operations. 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 costs absorbed due to the sale-leaseback transactions we completed in the preceding 4 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're materially better than the prior year.

As we've highlighted in the past, our strategy is focused on the complete business model, including all segments of the business. With regards to the vehicle -- to vehicles sold, our focus is on total vehicles 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're focused on the stable, reoccurring, 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 economic cycles 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 [2] quarters, demonstrate the traction we're 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've had in the past. If I speak to February, I'd add 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.

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Tamara Darvish, AutoCanada Inc. - President of U.S. Operations [7]

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Thank you, Michael. Good morning.

I'm pleased to report that we've made good progress in the fourth quarter in the U.S. I'll 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 on 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-downs, our normalized adjusted EBITDA would be a positive $1.8 million for the quarter, representing a better view of how far we've 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 bottom line profitability with the new management team as opposed to simply driving unit sales. We also closed and ceased operations at 2 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 top grading 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 sales; continued strict discipline over all operational expenses; and finally, a focus on the optimization of fixed operations, where we've implemented new systems as well and thoughtful cost rationalization where appropriate.

With Q4 results, we are beginning to show the operating leverage we've been building towards. We're not where Canada is with the progress they've shown over the last 18 months. This team has only been added for the last 9 months, but we're 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 valued business partners and our OEMs, who continue to be the key to us for delivering on our U.S. Go Forward Plan. And I'm really honored to be able to continue to lead our team forward.

Now back to you, Paul.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [8]

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Thanks, Tammy.

Again, I'd like to thank our team of more than 4,000 hard-working 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'm extremely proud of the progress we've made against the priorities we'd set out for ourselves at the start of 2019. We've validated the complete business model for our Go Forward Plan and the way it was designed. We have good traction, extremely strong momentum in Canada, and we're building a better business case in the U.S. We have reset our balance sheet, debt leverage and credit profile. We've 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're 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've 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're well poised to operate in this environment. And as we have been over the past years, we'll 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 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 allows 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've seen no impacts 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 wild changes in people's behavior may negatively impact future business patterns. For example, if there's much more nesting in homes, there's 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'm hearing of people canceling their summer flights and considering driving for summer vacation. In the shorter term, people that move to public and shared transport and park 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're 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'll reestablish 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 on simply executing against our many go-forward initiatives.

Now we're going to turn it over to the operator for any questions. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Chris Murray from Atlantic Corp (sic) [AltaCorp].

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [2]

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Maybe Tammy, we'll start with you and if anyone else wants to chime in on this. So the U.S. operations, I think the comment was made that you've moved 4 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're a little bit behind where the folks in Canada may be 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 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've made the -- ultimately the decision not to sell those 4 dealerships, that would be helpful.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [3]

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So this is Paul. I'm happy to maybe start backwards. The decision to not sell the 4 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.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [4]

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Okay. And as to U.S. operations and what we should expect in 2020?

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [5]

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So with that, I mean I -- we're encouraged with what we're seeing in the U.S. And I think Tammy even spoke to this and what she was saying that she's kind of 9 months behind Michael. And obviously, we have a fraction of the dealerships in the U.S. that we do in Canada. But we're very optimistic that we're going to see those dealerships turning into profitability.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [6]

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

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [7]

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At this point, I don't want to necessarily comment on that. I think that -- I'm just going to leave it that we're going to see those dealership moving into profitability.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [8]

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All right. Fair enough...

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [9]

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It's very difficult. I mean obviously, the environment, that I'm just cautious of everything we say right now because I don't want to overlay the template of we've 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.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [10]

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Okay. Fair enough. And then Paul, just thinking about where you're sitting today, it feels like the operational folks have their plan kind of locked and loaded. And then the question really becomes, strategically, where to from here. I mean it feels like the balance sheet's in an okay place, accepting 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've kind of got it on a path where the existing business was kind of stable?

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [11]

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So look, that's a great question. And I think if we were talking 2 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, that there's so much uncertainty going forward right now that I can't comment as to when we're going to turn on the acquisition engine. We -- the #1 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.

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Christopher Allan Murray, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Diversified Industries & Senior Analyst [12]

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All right. Fair enough. And then Mike, to 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 noncash items?

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Michael A. Borys, AutoCanada Inc. - CFO [13]

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Yes. For the most part, they were -- you hate to call write-offs noncash items because you hate write-offs, but these were noncash items. So there wouldn't be tax impacts [to consider]...

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Operator [14]

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Your next question comes from Meny Grauman from Cormark Securities.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [15]

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I'm wondering if you've closed any stores or are contemplating closing any stores and how you're thinking about that.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [16]

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So Meny, I'm not sure what you're referring to. We'd closed previously...

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [17]

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No, no. Sorry. Just to clarify, I'm talking about related to coronavirus. That's what I'm talking about. Sorry for the confusion.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [18]

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I see. 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, but at this point in time, there's been no effect to our business.

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [19]

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Got it. And then I'm just wondering about how evolving events are changing the way you're 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?

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [20]

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Well, I think we've -- these are different flavors of kind of the same question. But listen, our -- as I said before, we -- 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're 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've got our hedges, the used car business, the F&I, the service and repair. We feel that we're well, well positioned for that.

Alongside of that and to the previous question, there are a lot of opportunities to buy dealerships, and I'm sure that they're going to come harder and faster over the course of the next 6 months, if things -- 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're 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?

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Meny Grauman, Cormark Securities Inc., Research Division - MD & Head of Institutional Equity Research [21]

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It makes sense. I guess just to maybe go a little deeper. I'm just wondering. For instance, like 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 time line you set out is just the time line that that is going to be? I wondered how much flexibility you have with different components on that...

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [22]

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So yes. So to earlier comments, we -- 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'm 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're poised to take advantage of anything that comes our way with regard to the markets. So if we need to pull the lever of more used cars, we are absolutely set up to accelerate that.

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Operator [23]

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Your next question comes from the line of Luke Hannan from Canaccord.

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Luke Hannan, Canaccord Genuity Corp., Research Division - Associate [24]

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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're going to see that being disclosed going forward?

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Michael A. Borys, AutoCanada Inc. - CFO [25]

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It's Mike here. We -- I guess we pulled that for various reasons. We'll -- 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.

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Luke Hannan, Canaccord Genuity Corp., Research Division - Associate [26]

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Got it. Okay. So I appreciate the color on the talking about those higher-margin areas of the business, but I noticed that in the MD&A, it also mentioned, and 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?

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Michael Rawluk, AutoCanada Inc. - President & Director [27]

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Yes, for sure. It's Michael here. So when you're scaling the higher-margin businesses, you're not looking at just the onetime transactions with customers. You're looking at changing consumers' behavior. You're focusing on customer loyalty. It's repeatable revenue. And so it's much more difficult to change consumers' 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're 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 up your service advisers, then you've got to hire technicians because you have increased business, and you've 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 in 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.

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Luke Hannan, Canaccord Genuity Corp., Research Division - Associate [28]

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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'd be able to realize relatively quickly?

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [29]

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This is Paul. Look, there's a lot of opportunity. I mean we just had a strategy session 1.5 months 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 and February, we think we do that better than the -- most of the industry. If you look at what we've done with the 2 most recent acquisitions that we made last year, both Heritage Valley and our Ford store Rose City, those stores are running like they've 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're going out and buying stores. And so until price and multiples come into line, we're going to be disciplined.

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Operator [30]

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Your next question comes from the line of Matt Bank from CIBC.

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Matt Bank, CIBC Capital Markets, Research Division - Associate [31]

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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'm not sure how much you can say, but I'm wondering how you're thinking through that, what you're seeing in your Alberta stores. I know it would be quite recent. And just how you think about that cascading through 2020.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [32]

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I can take this for a second, and then I'll 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 kind of economic challenges. But AutoCanada saw revenue growth in Alberta of 11% in Q4 and actually 17% in 2019 as compared to the rest of the period in prior year. So Michael, I -- or Mike, if you guys want to add to that...

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Michael A. Borys, AutoCanada Inc. - CFO [33]

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Yes. No, I was going to, I'm just going to say that we do have a strong portfolio of dealerships in Alberta. You've quoted the growth that we've seen. As we divested some of our underperforming dealerships over the last 18 months -- so 4 of those weaker-performing stores were in Alberta. So we do have that much more of a stronger portfolio of dealerships remaining. And those are for the right fit for Alberta. So again, I think we're well suited for where we are in the market, and I think we're well positioned for it. And again, I think the other comment I'd make is, as we continue to make gains on the Go Forward Plan and building up used-to-new and F&I and our Business Development Centre 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'll -- 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.

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Matt Bank, CIBC Capital Markets, Research Division - Associate [34]

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Okay. And I know you're 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're thinking about 2020 in the base case?

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Michael A. Borys, AutoCanada Inc. - CFO [35]

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Yes. I'll provide my comments, and Paul may add on to it. But I think what you've seen in Q2 and Q3, we're ramping up the business. So again, we're beginning to -- we're coming off a transition piece from the end of 2018 and as we came into 2019. So if you 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 were about -- I'm just looking for it right now. Again, 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, and it's something that's not going to be obviously recurring, we would have been ahead of the prior year by 132%.

So we're not putting out guidance. We want to continue to get more traction on our results. But clearly, we're indicating that we're showing very, very strong double-digit growth over those quarters as the plants ramp up. And you've 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've had. So you know that we're going to be well outperforming that quarter. So we're optimistic. We know where the analysts have us in terms of overall consensus, closer to $93 million. We'll stay away from guidance right now, but I think we're 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. The wild card right now is going to be COVID-19.

So we'll have -- to Paul's earlier comments, 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've got to be protecting that balance sheet to understand how those impacts actually flow to the business even though they haven't happened to this point. So we're going to have to be that much more mindful, but I think we're doing all the things we need to be doing, and we're entering this point in time with the balance sheet that we wanted to have. So you've got good leverage. We're at that 2.6x, and the business is beginning to -- or has been moving actually for 3 quarters in a row in the right direction.

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Operator [36]

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(Operator Instructions) Your next question comes from the line of Michael Doumet from Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [37]

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Just the first question, for Michael Rawluk. So as it relates to 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 2 months, that those ratios are where they are purely on the growth of used?

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Michael Rawluk, AutoCanada Inc. - President & Director [38]

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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're executing on. I don't know if that answers your question, but it's definitely, again, our new was up, and our used was up that much more. That's what we wanted to do. That's what we did.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [39]

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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've 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're sort of already there?

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Michael Rawluk, AutoCanada Inc. - President & Director [40]

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It's like Paul has 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've 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%, but the increase in used made up almost that entire deficit. If you look at 2009, 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've 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're well positioned, at least better positioned, to handle this type of event than in the past.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [41]

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Yes. No, I couldn't agree more on that last remark. But just sort of taking a step further, as we think about F&I in particular and as we sort of combine that thought with the mix change from new to used, like what are the differentials on F&I for used versus new?

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Michael Rawluk, AutoCanada Inc. - President & Director [42]

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Yes, it's a great question. It depends on the segment. And I don't want to be elusive, but if you're selling an older car at $10,000, your F&I profile is a lot different than if you're selling a 1-year-old car or an off-rental car. The way we are looking at the used business is we're not as obsessed about the front and gross profit, but we're looking at the total gross profit from the sales plus the F&I, and we have specific targets in that regard. And really, if -- I know people say they use businesses as if it's 1 business, but we look at it as 4 distinct businesses, and each 1 of those segments within used has a different gross profit margin profile.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [43]

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Okay. And maybe -- I don't know if you can take it further, but on a combined basis, is there much of an impact, [4 switching, 1 new to 1 used]?

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Michael Rawluk, AutoCanada Inc. - President & Director [44]

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I would say that's -- it's -- 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 bottom line, and where new impacts 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.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [45]

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Okay. No, that's helpful. Look, hopefully, I'm last on the call, but I want to sort of take this a little bit further. It's a couple of other questions. So just flipping to your operating costs. That was flat sequentially. So I want to make sure that I'm thinking about it correctly. And I understand there are additional sort of lease expenses in there, but generally, was that 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?

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Michael Rawluk, AutoCanada Inc. - President & Director [46]

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Yes. 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 in operating costs. And so over time, those ratios will start to look better and better. But it -- like, for example, if you take -- there's various segments that we are building. I'll focus on Special Finance for a minute. It's 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 investments that went into that 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 costs and then -- but you'll 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 -- hopefully, that carries through, but no doubt the current situation will become a test of our culture and our leadership resiliency and our overall business model.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [47]

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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, and I know you were at 86% of gross margins, like what range is a reasonable range to expect?

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Michael Rawluk, AutoCanada Inc. - President & Director [48]

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It's difficult to say because of the uncertainty that we have. And we're modeling the potential shifts in our business. This is a difficult call because, again, we're in such a volatile state. But we're -- I would say this. It's that we benchmark against the U.S. peers. We're driving towards that, and we feel confident in our ability to reach that under normal situation.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [49]

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Any comments in terms of fixed versus variable generally?

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Michael Rawluk, AutoCanada Inc. - President & Director [50]

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Mike, any thoughts on that, if you want?

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Michael A. Borys, AutoCanada Inc. - CFO [51]

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No. I mean I think I'd repeat what Michael was getting at in terms of you're going to continue to see improvement. We built that into our budget expectations in terms of our overall cost structure simply because we would have incurred those setup costs, implementation costs or ramp-up costs in 2019. And you're beginning to see that impact in -- certainly a little bit in Q2. Then you saw it in Q3, and you're seeing it in Q4. Again, Q4 had that noise. So I'll keep coming back to when you actually compare operational results to operational results and you take out that onetime item. Our results were actually quite impressive for the quarter.

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Operator [52]

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Your next question comes from the line of Maxim Sytchev from National Bank.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [53]

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

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Michael A. Borys, AutoCanada Inc. - CFO [54]

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Yes, I'll take it. No. I mean everything that we'd done, we were very, very conscious of ensuring that it wouldn't be undone. It's just it's disciplined. It's keeping our eyes on ensuring that -- whatever we have in -- specifically on used vehicles, that we are floor planning it and not using our revolver. So a lot of the gains -- if you think about the $50 million of improvement in Q4, the -- easily, half of that would have been driven by using our floor plan for -- and freeing up floor plan capacity on the used vehicles. So all that we have to do is ensure that we continue to optimize our used vehicle floor plan. We built in more room with respect to our new credit facility. So we took advantage of all the discussions that we were 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 that used-to-new in the first quarter. So we're certainly working together with operations in terms of ensuring they have the capacity to do it. All the other stuff that we've done in terms of working capital are repeatable. It's sustainable. It's taking a look at receivable collection. It's taking a look at payables. We take a look at our own metrics, and we're trying to get into that right range so that we can spot if we're off a little bit. But right now, everything that we've done, we don't anticipate having those unwind. And again, we're going to -- some of the gains that we've taken in Canada -- we're certainly going to be looking a little bit harder at the U.S. Now that they're in that profitability mode, we'll be taking a bit of a harder look with Tammy in terms of any additional opportunities or incremental opportunities on working capital in the U.S.

So cash is king. I mean I think 2019 was a year where there's a lot of confusion over IFRS 16 and all these different adjustments and so on. And I think the bias we've taken in the last half of the year and going into 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.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [55]

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But so when I look at the cash flow from operations. So noncash working capital contribution was positive $40 million for 2019. Do you think you can keep this above 0 for 2020?

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Michael A. Borys, AutoCanada Inc. - CFO [56]

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We should be, yes, for sure. We should be able to.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [57]

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

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Michael A. Borys, AutoCanada Inc. - CFO [58]

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Well, we haven't provided any specific guidance other than I think when -- obviously, when we were speaking about the refinancing, we looked back for the last 2 years. And the last 2 years would have been in that $25 million to $30 million. I mean actually I think the average was about $28 million over the last 2 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're stress testing the balance sheet. We're stress testing how business might be impacted as part of that work.

Good business will dictate we're going to be identifying discretionary spending that can be held off, and that includes capital. And so we'll be identifying capital. If we see material impacts on the business, then we'll begin holding off on some of the capital spending. So we're being smart about it. So again, I'd primarily point you to last 2-year average or that $28 million, but again, we'll be mindful as we move forward how we spend that money going into 2020. Again, we have to be taking a look at the impacts of COVID-19.

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Operator [59]

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There are no further questions at this time. I'll turn the call back over to the presenters.

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Paul W. Antony, AutoCanada Inc. - Executive Chairman [60]

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Listen, we really appreciate everybody's time today and hope that on the next call we have just better things to talk about other than the business and COVID-19. So with that, we'll close the day. Thanks, everybody, for their time.

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Operator [61]

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This concludes today's conference call. You may now disconnect.