AutoCanada, Inc. (AOCIF) on Q1 2020 Results - Earnings Call Transcript

AutoCanada, Inc. (OTCPK:AOCIF) Q1 2020 Earnings Conference Call June 4, 2020 11:00 AM ET

Company Participants

Kevin McPherson - Director, Finance

Paul Antony - Executive Chairman

Michael Borys - CFO

Michael Rawluk - President & Director

Tamara Darvish - President, U.S. Operations

Conference Call Participants

Christopher Murray - AltaCorp Capital

Matt Bank - CIBC Capital Markets

Michael Doumet - Scotiabank

Luke Hannan - Canaccord Genuity

Maggie MacDougall - Stifel GMP Research

Operator

Good morning. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoCanada First Quarter 2020 Earnings Call. [Operator Instructions].

I would like to remind everyone that certain statements in this presentation and 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 statement. 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 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.

Kevin McPherson

Thank you. Good morning, everyone, and thank you for joining us on today's first 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 Q1 results after the market closed 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.

Paul Antony

Thanks, Kevin, and good morning, everyone. Thanks for joining us on today's conference call. Before we get started, I'd like to say a few words about the COVID-19 situation, including some initial data on Q2 trends and an update on recent initiatives. Our immediate initial priorities included a focus on the safety of our people and customers and ensuring we followed all government requirements to safely address the pandemic. As we announced in April, we took quick action to enhance financial resilience in response to evolving market conditions, and Michael will discuss these measures in more detail in a moment. These actions, combined with the substantial work done over the last year on the business overall give me great comfort that we will stand in the downturn and emerge an even stronger and nimbler company. This was an unexpected challenge to a year where we expected to play offense out of the gate and our thousands of employees who I'd like to take this moment to thank mobilize quickly to manage through a difficult time. Accordingly, and as a result of these efforts, we're seeing a more moderate impact than initially expected from the pandemic. We've experienced steady improvements in the unit sales since the end of March, as restrictions begin to ease and our business model adapts to the new normal. Notably, Canadian retail vehicle new and used unit sales for AutoCanada have progressively improved from a year-over-year decrease of 54% for the last 2 weeks of March to a decrease of 49% for the full month of April to a decrease of 16% from May, again, compared to last year.

I can't speak to the broader Q2 business on this call, but suffice it to say, improvements in year-over-year new and used unit sales in May is a key step towards normalization, which I'm immensely proud of our team for. One month does not a recovery make, and we're all keeping an eye on areas, which have reopened, but it's headed in the right direction for now. In addition, we're seeing some of the costs we took out of the business in an effort to prepare for COVID-19 may not be necessary when the market fully recovers. We'll have a better sense for this as we head into the summer, but I suspect that times like this can sometimes result in a strengthening of a business foundation. And this time, may be no different.

Lastly, and Mike will speak to this, we've continued to manage liquidity well. At the end of May, we reduced our net debt position by $20 million since the end of the first quarter. As for Q1 results, we continue to realize ongoing traction and momentum across our complete business model through the end of February 2020, recording strong year-over-year dealership gains. In fact, January and February combined were the best on record for those months. In the last 2 weeks of March, however, the unexpected effect of COVID-19 more than offset the positive performance at that point.

On a consolidated basis, adjusted EBITDA for the quarter was $5.7 million compared to $11.5 million in the prior year. Because March seasonality accounts for about double the first 2 months performance in the quarter, the impact of COVID-19 in the last 2 weeks of March drove the decline in our results. I'll touch on some highlights.

In Canada, Michael and his team have done an excellent job in continuing to prove our complete business model. For the fifth consecutive quarter, we outperformed the Canadian market with the same-store new retail units down 16.9% compared to the market decline of 18.7%. Our used to new retail units also increased to 1.08 in the quarter from 0.85, and this is better than the 1:1 ratio provides critical diversification in our business as we start to see the economy recover.

In the U.S., we continue to see marked progress in stabilizing the business, even with the impact of COVID-19. As we've seen for several quarters now, Tammy's initiatives continue to lay the foundation for future profitability.

Adjusted EBITDA in Q1 for our U.S. operations reflected an increase of $2.5 million as compared to the prior year, despite the onset of COVID-19. This improvement demonstrates the focus on profitability and continued improvements to the expense structure.

Speaking to the balance sheet, we continue to manage cash with an eye to preserving liquidity and our financial flexibility. Net indebtedness is down by $108 million as compared to Q1 last year. Our ongoing actions to manage working capital combined with our refinancing of the debentures and our credit facility renewal have allowed us to come into this pandemic environment with the strongest balance sheet since the current team, myself included, join the company.

I want to thank all of our fearless employees in Canada and the U.S. who have worked hard through this challenging period. We entered 2020 in a solid footing, and we are all well prepared to face the current challenging environment. We're confident that our strength in business model positions us to weather this pandemic and emerge even stronger. I'll come back to speaking to COVID-19 in my concluding remarks. But again, I want to emphasize the health and safety of the entire AutoCanada team. Our customers and partners continue to be the most paramount important as we adapt our operations to new normal.

I'm going to now turn it over to Mike.

Michael Borys

Thanks, Paul, and good morning to everyone on the call. The first item I'll quickly touch on for our various stakeholders. That with a full year of IFRS 16 results under our belt for 2019, we start this year by reporting on an IFRS 16 comparable basis year-over-year.

We've removed the back and forth with pre and post-IFRS 16 results throughout. Having said that, we will continue to include an exhibit in our MD&A that captures our results and a reconciled pre-IFRS 16 basis for each quarter. Okay. So the balance of my comments here will be on the balance sheet and all things cash.

During what I'll call this COVID period, we have focused on managing cash and preserving, if not growing, our liquidity. It's early in, but we've done well so far. At the end of the first quarter, our net debt was $170 million, which was higher than our 2019 year-end debt of $158 million. Some of that change is driven by seasonality as well as what occurred in the last 2 weeks of March when we took the full hit of COVID before our action plan was in place. That said, at the end of May and not too much different than where we are today, our net debt is closer to $150 million, an improvement of $20 million from the end of the first quarter. Based on this figure, we have available liquidity of approximately $145 million. Aside from the work that operations is doing on keeping our dealerships open, driving revenues and managing costs, I'll highlight some of the other key drivers on the cash side.

We've deferred capital spending to the extent we can, bringing our expected total CapEx spend closer to $12 million for the year. This compares to a 2-year average of $29 million CapEx spend. We've suspended the dividend. For the balance of 2020, this represents $8 million in cash savings. On an annualized basis, this is worth $11 million. As we noted in our April 20 press release, the company intends to consider reinstatement of a dividend in the future when a greater degree of visibility and normalcy returns. We've also applied for various government support subsidies where we thought appropriate in support of our business including the Canadian emergency wage subsidy, which provides reimbursement for 75% of employee wages. We have applied for the wage subsidy from March 15 to April 11 in the amount of $6.8 million. We've qualified for the period April 12 to June 6 and expect to receive approximately $10 million for this period. And we will assess our eligibility for the remainder of the 12-week program that last until the end of August.

We continue to refine our management of working capital. We're getting better at managing to the day and driving systemic improvements to processes by leveraging our systems to generate what we call our BI or business intelligence cash dashboard. This allows us to manage to the day as opposed to driving focus at month or quarter end. We now look at an index of our average daily net debt as compared to our quarter end net debt and are seeing good improvements over previous quarters. Movement here also drives interest expense savings.

As noted in our April 20 release, we've also restructured 1/3 of our interest rate swap portfolio, which was established in late 2018 to early 2019. Based on where interest rates have moved, we now see this is driving approximately $2 million in cash savings over the next 12 months. Combined with securing the covenant relief amendment with our credit facility syndicate, these actions have ultimately allowed us to cut our annualized breakeven cash flow to approximately $30 million, approximately half of what it was previously. We did this while also ensuring the company will have ample liquidity and full access to our $175 million credit facility.

While we don't yet know what the future holds of COVID-19, we feel we're very well positioned with the actions taken to weather any outcome.

And with that, I'll turn it over to Kevin to discuss our results.

Kevin McPherson

Thanks, Mike. For the first two months of 2020, our performance improved compared to the prior year. However, being at March represents almost double the first 2 months' performance in the quarter, the impact of COVID-19 in the last 2 weeks of March drove our results decline. At the consolidated level, revenue was $709 million, a decrease of $31 million or 4%. Gross profit came in at $117 million, a decrease of $9.4 million or 7.4%. Adjusted EBITDA came in at $5.7 million, which was a decrease of $5.8 million from Q1 2019. In order to understand the independent drivers of our consolidated results, I'll speak to our segments. For the quarter, the Canadian segment generated revenue of $627 million, a reduction of 1.4% versus the prior year. Gross profits were $106 million, a decrease of 6.1%. Adjusted EBITDA was $8.7 million, a decrease of $8.3 million. It's important to note that the Canadian adjusted EBITDA includes a $2.3 million foreign exchange loss incurred to limit all forward contract exposure associated with the cross-border wholesale division at quarter end.

In our U.S. segment, revenue was $82.2 million, which decreased from Q1 2019 by 20.9%. Gross profit was $11.2 million, a decrease of 18.6% over Q1 of 2019. Adjusted EBITDA showed improvement coming in at negative $3 million, which was an improvement of $2.5 million from 2019. I also want to speak to the impairment of nonfinancial assets taken in Q1 2020. This charge can be directly attributed to the economic conditions and impact of COVID-19. Under IFRS, we are required to perform an interim quantitative test for impairment when indicators are present. This quantitative test resulted in a total charge of $31.5 million which was split between the Canadian and U.S. segments being $22.7 million and $8.9 million, respectively.

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

Michael Rawluk

Good morning, and thanks for joining us today. I have to start with a sincere thank you to all of our team members, our dealers and our head office support team. This has been a very trying time and each one of you has endured unimaginable adversity, uncertainty and personal health risks in order to keep AutoCanada moving forward. We are grateful beyond words. We'd also like to thank our OEM partners and our strategic partners for the significant support you've provided us during these unprecedented times. Your guidance and assistance at all levels was invaluable and greatly appreciated.

We continue to see positive traction and performance from our Canadian operations in the first two months of the year before the impact of COVID-19 took place. For the first two months of 2020, Canadian revenue increased by approximately 14%, and total retail vehicles sold increased by 6%. However, as noted earlier, these -- only March accounts for more than double the amount of business in the first 2 months combined.

So the impact of COVID-19 in the last 2 weeks of March resulted in declines for the quarter. Some performance highlights for the quarter include that on a same-store basis as compared to our results in 2019, Q1 2019, revenue increased 0.8%. Same-store new and used retail decreased by 7.8%. However, we did outperform the Canadian market from new retail for the fifth consecutive quarter. Same-store used retail units still increased by 2.4% over last year, despite the significant disruption to the business in March. Same-store new retail vehicle gross profit percentage increased to 9.1% from 8.3% in the prior year. While same-store used -- the new retail units ratio increased to 1.1% in the quarter from 0.89%, an increase of 21%. Same-store gross profit decreased by 2.1% and our gross profit percentage declined from 18.1% to 17.6% as a result of wholesale activity as opposed to retail.

Same-store gross profit per new vehicles sold increased by over $700 a car and $400 for finance and insurance. While same-store gross profit per used vehicles sold was flat on a retail basis and increased over $200 a car for finance and insurance. Same-store parts, service and collision combined gross profit decreased by 6.4%, while margins for the service and parts business combined increased by 150 basis points. Adjusted EBITDA for Canadian operations was $8.7 million for the quarter, down $8 million year-over-year. Approximately 1/4 of this shortfall to the prior year was driven by the Ford contract loss as we absorbed on eliminating our FX exposure at the end of March as a result of COVID impacts on our cross-border market. The balance of the shortfall was driven by the impact of COVID-19 in these very important last 2 weeks of March, which is the start of the selling season.

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 vehicles sold, our focus is on total vehicles sold. Generally, 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 is selling more used vehicles to help counter the cyclicality of new vehicle sales, we are continuing to focus 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 take longer to develop, they provide stability throughout the economic cycle and support long-term growth and the generation of cash in any economic environment. The results we are showing prior to the impact of COVID-19 demonstrate the traction we're seeing with these various initiatives.

In Q1 2020, for the first quarter in AutoCanada's history, we sold more used vehicles than new. Finishing the quarter with a used to new ratio of 1.08 compared to 0.85 last year, representing an increase of 27%. We are aggressively pursuing strategies focused on enhancing resiliency to ensure we emerge from the current environment much stronger and more agile. These include cost efficiencies, process reviews, enhanced business intelligence, including management dashboard technologies, advanced inventory strategies, online sales processes and continued focus on working with our OEM partners to improve business processes and the customer experience. All these examples are part of building on the foundation of our business model that we have established and proven successful, and it's even more critical now to accomplish these initiatives in this challenging environment. Now we have lots of work to do, and we remain focused on building what we've already accomplished and driving consistency on performance. But we believe we remain well positioned to demonstrate the strength of our corporate -- or of our complete business model and the strength of our team in 2020 despite the current environment.

Tammy, over to you.

Tamara Darvish

Thank you, Michael. Good morning. I'm pleased to report that we continue to make significant progress in the first quarter in the U.S. despite the impacts later in the quarter from COVID-19. I'll begin by speaking directly to the results in the quarter.

Adjusted EBITDA for our U.S. operations improved by $2.5 million or 46%, to negative $3 million as compared to negative $5.5 million in the prior year. These results are a reflection of our core focus on profitability by ensuring vehicle profits are not sacrificed in the pursuit of vehicle unit sales and continued improvements to the expense structure. Other notable improvements in the quarter included new vehicle gross profit increased by $0.3 million, and new vehicle gross profit percentage increased by 0.4%. Used vehicle revenue increased by 3% and used vehicle gross profit increased by 0.6%. We've been focused on increasing used retail vehicle sales volume with improved inventory management. Used retail vehicles sold remain relatively flat, while the used to new ratio increased to 0.72 from 0.59, representing an increase of 21.7%.

F&I gross profit percentage increased to 95.9% as compared to 94.2% in the prior year. This improvement is attributable to favorable rebate and compensation terms we negotiated with our F&I partner in late 2019, which allowed for higher profit retention in Q1 2020. We've also implemented formal financing and insurance structure and process certification. It's also noteworthy that these improvements were made even though we closed and ceased operations at 2 of our franchises in the quarter. We're taking disciplined actions to manage through the challenging environment, including building on our recent successes and improving customer retention to create sustainable growth, implementation of better training and related processes, particularly in our used vehicles and finance and insurance segments, a continued shift in culture towards a focus on the customer versus a focus on the unit sale, continued strict discipline over operational expenses and finally, a focus on the optimization of fixed operations as we've implemented new systems as well and further cost rationalization and -- where appropriate.

We're also improving working capital management and leveraging successful Canadian operational initiatives. As of June 3, our U.S. operations are open for service and sales at our locations, so long as we continue to adhere to capacity restrictions set by our states. Prior to this date, our sales and service operations were by appointment only. We'll continue to monitor developments and ensure that our operations safely comply with all government requirements as things, hopefully, continue to open up. I, too, would like to express my deep appreciation, especially to our dedicated team members who relentlessly committed to serving each other, our customers and our communities with a simple mission of whatever it takes through this challenging time. We also appreciate our valued business partners and our OEMs, who continue to be the key for us to deliver on our U.S. Go Forward Plan. And I'm really honored to be able to continue to lead our team forward.

Thank you. And now back to you, Paul.

Paul Antony

Thanks, Tammy. Again, I'd like to thank our fearless 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, investors, as Michael and Tammy have as well. I'm extremely proud of the progress we've continued to make against the priorities we've set for ourselves at the start of 2019, which have really set us up for resiliency in the current environment.

Despite the impact of COVID-19, we continue to see good operational improvement and related traction in Canada. We're building a better business case in the U.S. We reset our balance sheet, debt leverage and credit profile. I'm also asked regularly how I think about COVID-19's impact on longer-term trends. While it's early, I'm cautiously optimistic for a few reasons. Firstly, we're starting to see the behaviors towards car ownership versus ride-sharing and public transport will shift favorably. Many people may not want to take the chance of getting on a plane, bus, taxi, Uber, Lyft or subway. And people are not likely to take flights this summer and are instead driving for summer vacations where allowed. In turn, people that had previously moved to public and shared transport could drive an uptick in our business along with increased service and repair. For example, Volkswagen reported that 60% of their April sales in China were new car buyers.

And just recently, Walmart announced they're exiting the service and repair business in Canada as it's noncore for them. This, to me, speaks volumes to the fact that companies like Walmart are unable to properly service and repair vehicles due to increased complexity. And as a result, OEMs are taking back their mineral rights and pulling away from these types of businesses and instead shifting focus towards dealerships. Second, there are some economic impacts that could support demand, including lower fuel prices, should they persist. Average vehicle age may increase as well, as we saw in the financial crisis of '07 to '09, beginning as a gradual creep in vehicle age and then accelerating to lift the average by a full year in the U.S. If this pattern repeats during the COVID crisis, the increase in older vehicles could boost the need for repairs and drive demand for servicing and parts. I also think that we need to see how plan and potentially expanded government stimulus may impact demand.

On the more cautious side, however, some trends that could reduce market demand include lower vehicle miles traveled as more people work from home. fewer collisions and people delaying discretionary repairs, which lowers demand for servicing. We also have yet to see how deep and prolonged recession we may be in for. For our business specifically, the impact from COVID-19 has been more modest than we originally expected and planned for at the outset, which is largely attributable to the solid foundation we established heading into the pandemic. We're already seeing improvements on just about every metric we track, signaling a recovery. As I mentioned before, our new and used sales progressively improved from a year-over-year decrease of 54% for the last 2 weeks of March to a decrease of 49% for the full month of April to a decrease of 16% for May.

If we were to back out Quebec, which was more severely impacted by the restrictions imposed, that negative 16% trending moves much closer to positive territory and highlights the broader recovery we're seeing. We have seen a marked increase in sales in Quebec over the past week since restrictions have been lifted. Over the last 10 days, we've seen additional positive trends in our business, including new vehicle units are up approximately 5% year-over-year, excluding Quebec. The restrictions on Quebec over these past number of weeks led to pent-up demand. With the restrictions lifted, if we were to include Quebec, we're seeing new unit growth of over 10%. With used vehicles, we're seeing ongoing positive trending for the month of May which is already depressed by the impact of the Quebec store restrictions. We're now seeing a healthy double-digit growth, excluding Quebec. And if we include Quebec, this would only improve.

All this to say that we feel confident that we're through the other side of the downturn, and we're well positioned to thrive. While we don't know what the future holds at this point with COVID-19, we've taken proactive steps to ensure we will weather any outcome. And we're confident that our complete business model, our balance sheet and our team will position us to emerge from this pandemic even stronger. In the meantime, we'll continue to prioritize what's within our control, the safety of our people and support for our customers. 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. We continue to see strong growth potential by simply executing against our many go forward initiatives.

Now I'll turn it over to the operator for any questions. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of Chris Murray of AltaCorp Capital.

Christopher Murray

First question is just maybe going back to some of your commentary around maybe some structural cost savings and also the cash moving the $20 million kind of interesting there. Can you give us some additional color on the kind of things that you're seeing that maybe you were able to take out of the system? And along those lines, what do you think that, that does to your operating expense ratio as a percentage of gross profit? And as well on the cash side, how much of that was tied to things like deferring CapEx? But how much of it you think is going to be part of like changing your approach to working capital and some of the other processes you've put in place?

Michael Borys

Chris, it's Mike. I'll talk to the cash piece. I mean when we take a look at what we've done from the end of March to where we are right now, we'll take a look at how we're managing receivables. So again, how we're managing working capital. I think we're getting a little bit more refined in terms of accounts payable and just basic stuff, like pushing off the number of days to which we'll be paying vendors, and we're being a bit more rigid in terms of how we're doing that. We think that's generating approximately $5 million to $10 million in cash. We are being -- we're getting better at floor plan utilization. So we keep moving the needle. I think we're being a little bit more aggressive in terms of pulling levers to actually create floor plan capacity.

So that's worth -- if we were to put a number on it, I'd call it, $10 million to $15 million. Smaller point, we knew that we had a tax refund coming. So that was in that $3 million to $4 million range. So that probably helped -- that did help us in the last couple of months. We did have rent deferrals. So there were some rent deferrals that were probably worth about 2 -- I'd say, $2 million. And then to the extent there were some costs that we pushed out of the quarter, that could add another $1 million. So between AR and AP management, call that 5 to 10, floor plan utilization 10 to 15, tax, rents and other cost deferrals, you're into the range of like $5 million, $7 million or $8 million. And that would have -- that would kind of bridge you to where we are right now. And we're holding. We're actually -- again, going back to my earlier comments about managing to the BI dashboard, we're looking at it every day. We're continuing to improve upon it. The business is doing better. So that obviously has some impact on where we are with that, but we're feeling very good.

A little color. We talked about the wage assistance. We have only received, if I go back to the beginning of this week, we had received approximately $3 million of the $6.7 million that we had put in that first application for. So that would have been a little bit of a help on that. Again, a little bit of straddling March -- May 31 and June 1. So those are the key drivers. Those are the kinds of things we think we can continue to maintain. We're feeling pretty positive in terms of continuing to show cash positive for the quarter, I mean, barring any other unusual events. But given where we are and given that we ended Q1 at 170, we would expect to be ending in a positive position, whatever that number is at the end of Q2.

Christopher Murray

Okay. Fair enough. And then just in terms of the sort of the structural cost changes you think you've been able to achieve? Any thoughts around that?

Michael Borys

Yes. I think on that one, it's more along the lines of using the opportunity to do a whole bunch of benchmarking in terms of how our more profitable dealerships are operating, taking a look at cost structures, what could be refined and then actually using the opportunity to enact something -- take advantage of the fact that we are biased towards a variable cost structure. So one, we are benefiting from what I would call the temporary component, whereas revenues are coming down, you are able to -- you can adjust your cost profile but some of those elements, as you work through what you actually need, you realize and you can begin to quantify that some of those are going to be permanent. And I think as we move through the quarters, we'll -- that's where we'll be providing a little bit more color. But we do know that there are going to be areas where we can refine part of our cost model. So again, that one, I think, is you'll get more color for the market as we move through Q2 and Q3.

Christopher Murray

Okay. Fair enough. My other question is just thinking about M&A. One of the things, I think, with your application for some covenant relief on your credit facility is that you may have some handcuffs a little bit on M&A. Can you sort of walk through any restrictions or any issues you might face if you actually wanted to return to doing some M&A with the changes you made to the credit facility, if I understand this correctly?

Michael Borys

Yes. If I speak to the credit facility, while we're under covenant relief, we're not restricted from any M&A activity. We -- all we would have to be doing is putting any possible acquisition in front of the lenders, and then we can proceed. But it's -- we have to go to our syndicate and get that approval. So again, we don't -- look, I think anything that we would be looking at, we'd be talking to our lenders. And we've followed a practice over the past few quarters of continuing to give lenders an update on what we're doing. They've been extremely supportive prior to COVID. They've been supportive through COVID. They've been great strategic partners for us.

So we don't see that as an impediment or any kind of a restriction. It's just you got to manage through the hoops that we've got to jump through. But again, we've got pretty good relationship with the lenders. And we're actually -- again, we're -- I'm kind of -- we were reading some of the analyst reports earlier, and there was -- I think there was some reverse engineering on the covenants that we had structured and the takeaway was our results must be much worse because the covenant gave us a lot of room. And I guess my only comment would be, we are way ahead of whatever we would have modeled for the banks. Because at the outset of this, we were extremely conservative. Paul made a comment in his opening remarks that the impact of COVID-19 has proven to be more moderate than what we had initially expected. So again, I think with everything that Michael and the ops team and Tammy in the U.S., what everything that they've been doing in terms of keeping dealerships open and operating and people coming in and combined with the measures that we're taking to manage the balance sheet, we're in a far better position than certainly than what we had thought. And again, that just creates more room and more liquidity for us. So I think we're -- I think we're doing -- again, like I said earlier, I think we're doing pretty well given the impact of what COVID brought upon us.

Paul Antony

And Chris, this is Paul. To couple with what Mike's saying and to kind of -- at your question, bringing the banks in or lenders in a collaborative fashion just makes us more disciplined as far as we see it with acquisitions right now because as you know, we are here today because acquisitions didn't go as well as they should have previously for previous management. And so we need to be taking a much more rigorous approach and the more eyes on it, the better. So we actually don't see that as an impediment at all.

Christopher Murray

Okay. Fair enough. Last question, just a quick clarification. You had mentioned $12 million in capital spending. Sorry, is that will be $12 million for all of 2020, so that would include the $7.7 million in Q1? And is that netted against the asset sales?

Michael Borys

We're not -- no. So it's not netted against the asset sales, it includes Q1, and it's an approximation. I think when we had the press release, April '20, we used $10 million. We're saying $12 million right now. Like it's going to be in that range of $10 million, $12 million, $13 million. So we're being approximate right now, but that is meant as a full year number. That number may also -- sorry, the other point I would make is that number can sometimes come down because if we were to get any kind of rebate money for certain remodel work for dealerships, you sometimes will see that number come down because we've received cash that hadn't been reflected in earlier spending. So there's a little bit of modulation on that as we go through the year. But directionally, 12 is a good number to use.

Operator

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

Matt Bank

I wanted to -- first of all, thanks for all the additional detail on how things have trended so far in the quarter. I was wondering if there's anything you could share on parts and service and F&I over the April and May periods.

Paul Antony

In Canada or the U.S. or both?

Matt Bank

Canada.

Paul Antony

Michael? Is there anything specifically?

Michael Rawluk

So I would say the last 10 days, service is down about 11% to 12% on a gross profit year-over-year and trending up. Parts is a little bit better than that, probably around 10% would be very close. F&I is strong, continues to be a bright spot, it just continues to improve. Every time we think that we can't improve it anymore, the F&I team improves it again. And so they're setting new benchmarks and new high points, and they've got a lot of momentum. So that hasn't stopped through any part of this crisis.

Matt Bank

So on that finance and insurance, it pretty significantly outpaced unit sales in Q1. Is it fair to assume that that's continuing, and that's a trend that you see as sustainable?

Michael Rawluk

It's continuing. I don't really know what the trends are and what's sustainable or not. But every time we have a look at those numbers and we talk to that team, they're doing better and better all the time. And so they've got a lot of positive momentum. They feel that they have a lot of runway to continue to improve. And that's been a real bright spot for the entire organization.

Matt Bank

Okay, great. On OpEx, in the April release, you mentioned 40% layoffs and $1.5 million a week of savings. Can you just update us, like have you hired back? Or I guess, what percentage are you at now in terms of layoffs? And how do you see that percentage trending?

Paul Antony

Okay. So when it comes to layoffs, I don't know if this will answer it directly, but just to give you a flavor for the layoff. So April, we expected a significant decline. Well, just to give you a flavor of it going back to March 15. So we felt the business starting to shake I would call it, in the second week of March. And then March 15, we just hit a wall, and the tap got shut off on us. And so the last 2 weeks of March, again, there was so much uncertainty, we didn't know what to expect with nobody knew much about COVID at all. And so we started to significantly pull costs out of the system and ramp down and do layoffs. And a lot of the layoffs initially were volunteer layoffs for people that were worried about their health or had vulnerable immune systems and on and on.

So the whole goal was to try and let everybody who wanted to go home, go home and keep our core team there and then go through a real robust process of reevaluating all of our headcount productivity measures, cost per car, percentage of gross profit and everything else like that, so that we could rescale up in a rational manner. And you've got to remember that the goal was not to hunker down, survive COVID and come out the other side. The goal has been and continues to be to use this crisis to completely dismantle our business and to scale and build it back up in an optimized fashion. So 2019 was the first year that we got to really run the Go Forward Plan. And that was -- as we started to escalate and push the business, you could see and feel all the drags around the business. And you knew where all the inefficiencies were as we drive to that important first milestone of that 3% EBITDA margin. And so we knew where that was. So if you take all the social stuff and you put it off to the side as far as the impacts of COVID and everything else like that.

And if you look at it, really focused on our business, this was an absolute gift of us, like the gift of being able to stop and dismantle and tear down our business and rebuild it in an optimized fashion. And so that involves resetting a number of commission plans, rightsizing, benchmarking and also determining the proper cost per car and headcount. So overall, in this 1 area of our business, I would estimate that we have, as of today, about 500 permanent removals of positions, we'll call it, that annual cost savings to date on a go-forward run rate is approximately $10 million. We've successfully top rated over 300 positions and again, have implemented hundreds of adjustments and changes to commission plans.

Matt Bank

Okay. That's really helpful. And then I just wanted to ask, one clarification. I didn't quite understand the statement about cutting annualized breakeven cash flow.

Michael Borys

Yes. So that statement really refers to when you get beyond EBITDA and if you're driving towards cash flow, typically, if you look at the capital expenditures over the last 2 years, 3 years, the average has been about $28 million, $29 million. So we brought it down -- for the current year, we brought it down to $12 million that I spoke about earlier. So that reduction is worth about $17 million. We have finance costs, which I rounded to about $20 million. And then you would have dividends that were worth about $11 million. So if I take the finance cost of $20 million, the dividends of approximately, I rounded here to $10 million, and if I take the average capital expenditures and round it again up to about $30 million, and there's some rounding in there as well with tax and some other stuff, you kind of get to about a $60 million what I'll call breakeven or what -- these are the cash outflows once you get beyond EBITDA. And by reducing for the current year, by reducing CapEx to where we reduced it and by suspending the dividend, in essence, we've taken down the $60 million down to something closer to $30 million. And that's really what that's referring to.

Operator

Our next question comes from the line of Michael Doumet of Scotiabank.

Michael Doumet

Just curious to see or to hear what you're seeing in the used vehicle market. I mean, presumably, there's a lot of inventory out there as dealers and rental companies look to reduce inventory. So just to get a sense for how you guys are reacting to the market right now. And if you've seen any softness in pricing in particular. And maybe I'll extend the question. Just to get your thoughts on how you feel about your current inventory levels as you sort of go into Q2 and Q3 here?

Paul Antony

So Michael, there's two parts of this. There's Canada and the U.S. And so I assume you want to hear that from both sides. But just generally speaking, and I'll turn it over to Michael and Tammy, but used vehicles were declining in a pretty alarming fashion, starting from the third week in March onwards. And as things started to open up and people had started selling off vehicles, like dealers had liquidated used vehicles in order to generate cash to keep running operations, what we saw was we saw used vehicle prices start rebounding. And not to mention the fact that new cars were starting to come in short supply. And so people were using used to at least hold the sale. And so just as an overlay of the whole business in Canada and the U.S., generally speaking, the used cars started declining at 5% to 10% a week and then started rebounding just as quickly. But I'll turn it over to Michael and Tammy if you have anything to add to that.

Michael Rawluk

Yes. It's Michael here. That's a great question on inventory. And that's actually going to be the toughest part of this whole situation to navigate. But at the end of Q2, we will have gone through a very robust audit process of touching every car, revaluing every car, making sure that we don't carry forward any issues. And part of the issue is, is that people don't know what inventory is worth right now. There's -- if you follow the data in the states when they talk about the Manheim retail index to the wholesale index, there's a real disconnect between what retail prices are doing and what wholesaler prices are doing. And so the whole strategy was really to come out of the gate as fast as we can and sell down our inventory and take advantage of the opportunity with the pent-up demand in the market.

So we have less inventory to worry about when the market starts to rationalize. And there's lots of significant supply and demand factors at stake that are still trying to solve themselves. But we're selling a lot of used cars, and that's ultimately our strategy. If you look at the last 10 days of business, and I don't want to say this is the go-forward run rate for used cars. But in the last 10 days, used car, retail used car sales are up 45% over prior year. So the fact that our teams stayed even in a situation where nobody knew what the health risks were that everybody stayed, they battled through, they took it as an opportunity to reset their business and made sure that they were there available to deal with day 1 of the return of customers, that's proven to be the most successful strategy to deal with inventory. It's just move it as quick as you can. Does that help?

Michael Doumet

Yes, that's really helped. I'm just curious on the U.S. side, Tammy?

Tamara Darvish

Certainly. So it's pretty similar on the U.S. side, and we are monitoring values very cautiously on a weekly basis right now. It's critical for us as well to make sure that we try to move these cars as quickly as possible as they're coming in. We are seeing greater ranges of decreased and swing of values of used cars in 5% and 10%. I mean, we've seen them as high as 15% to 25% depending on the models, going up and down. And the market is so confused right now. Although on the retail side, our retail sales, if we look at our used vehicle sales in May versus April, they were up 23% over April. So on the retail side, we are up, but on the wholesale value side, it becomes a very fluid situation that has to be very closely monitored.

Michael Doumet

Okay. Great, guys. That's some really good color. Just changing the topic here. So I'm interested in hearing your thoughts about maybe the change in consumer behavior at the point of purchase in the post COVID world, I mean, how much of your retail sales are being done call it, online-only channels. Can that be an area of growth/outperformance versus the smaller dealers? And maybe any insight on the economics of online versus store?

Michael Rawluk

Okay. I'll take that one. On the online sales, I would say, when you look at the context of using a crisis to improve your business, the online sales and the virtual sales component has definitely been one area where we have significantly reengineered the entire process. And -- because we have to. And we knew that at one point in time, all of our dealers knew that at one point in time, we would slowly have to gradually start moving in that direction. But then all of a sudden, overnight, if you want to keep the doors open and you want to make sure that your people have an opportunity to get a paycheck, you have to sell virtually. And that was a group-wide national effort to reengineer risk. It goes back all the way to restructuring the way that we market, the tools that we utilize, the people that we have allocated to certain processes in the dealerships. It's a major structural shift.

Now our website users, all the way through this COVID crisis, almost doubled overnight. So people in April weren't walking in the doors but they were definitely online. And our Internet leads or I leads have doubled compared to the same period of time last year. Now when I say doubled, I'm saying like it's double. It's actually slightly more than doubled. The number of vehicles that we're selling online have more than doubled. And so that's an area of our business that we're really excited that we're already seeing the benefit that when the foot traffic and the phone traffic returns to the dealerships, which it really has in full form in the last 10 days, that we still have this structural change in this new foundation that we can keep going and elevate our business. This is one area where I just don't know how individual dealerships can pivot like this to provide specialized resources because it's such a complex and heavy lift for an organization. So I think this is going to be a long-term strategic advantage for us.

Tamara Darvish

I think on the U.S. side, I would just add to that. It's also caused a change in some of the legalities of how we sell cars as well. So we have some laws that require certain documents must be signed inside of the dealership versus outside of the dealership. So there's been a pretty quick reaction from state legislation to address those concerns. Our online traffic, too, in U.S. continued to grow. But what we have found was a lot of this growth in online traffic was from a lot of people really just having a lot of time on their hands. And the leads became much more higher funnel than they normally would by the time it works itself out through the system. But we are working diligently as a team to adjust to our customer needs, which varies. Some could care less and want to come in and sit down and touch and feel and drive as many cars as they can. And someone to sit in their car in the parking lot and have you bring everything to them or in the comfort of their homes and have you serve them from their homes.

Kevin McPherson

There's still a lot of complexity around buying online. I mean there's valuing trade-ins, making sure that the customer experience is the right one, that you're giving them the same value online as in person. They're calling the car properly if it's a used car to make sure that every stone chip or the tread depth is exactly as called. So there's still a lot of complexity to be solved industry-wide with digital retailing. But for sure, as Tammy said, there's people with a lot of time on their hand sitting at home, able to shop because there's just time.

Michael Rawluk

I mean, so it's early stage, but it sounds like an area of growth and differentiation.

Michael Doumet

So moving to the numbers, I mean, Q2 is going to be a challenge for us to forecast. I mean, you made some drastic cuts in late March, it sounds like they were too deep. The conversation around cash flows and debt repayment provide some clues to what EBITDA is tracking at and if you look back at previous results and for the company as far back as through the great financial crisis. I don't think the Canadian business has had negative adjusted EBITDA for Q2. And then you start to think about next quarter, you get sort of a $10 million top-up from IFRS, about $17 million from the Canadian emergency wage subsidy. So just putting all this together, it feels somehow that Q2 really could be relatively okay from an EBITDA perspective. I mean, look, it's just a comment. But I mean, any way you can help us grain Q2 expectations and profitability?

Paul Antony

I actually want to address this, and I'll let Mike take it on from there. But look, when you're talking about what Q2 could look like, you have to take into account if there's going to be any resurgence in this virus, the propensity for people to get back to work and earn money to be able to afford vehicles. It's not just predicting how well we're going to operate the business. And so for that, it just -- it's -- we'd rather give no information when we're not clear than information that might be muddied or even try and sell everybody on something. We prefer to deal with facts. And unfortunately, right now, nobody is a fortune-teller, nobody has a crystal ball. What we can tell you for sure is, and this, I feel very confident that we will outperform the Canadian market and the way everybody else operates, we just don't know what the final numbers are going to be. But Michael, I'll let you opine.

Michael Borys

Yes. No, I agree with your comments. I mean, we don't want to be putting out guidance. In Q1, we know because of the impact of COVID, it turned it into an absolute messy, beyond messy quarter and hard for anybody to come up with any kind of an estimate as to what the number was going to be from an analyst perspective. I'd say the same thing for Q2. I mean Q2, as much as we're trending better and we are seeing the other side of it. I mean, I don't think we're questioning anymore whether we're going to be to the other side. I mean, Q2 is still going to be messy.

And so I think what we're shooting for, what we're hoping for, what we're working towards is to kind of get into showing the market what our Q3 -- to get back to a run rate in Q3, Q4 and kind of do what we had hoped to be doing for all of Q1 before COVID hit. So again, like Q1 and Q2 are, I don't want to say they're lost, but they are kind of lost. And to the extent that we can come out of Q2 with a better debt position or better liquidity, and to Michael's point, with a reworked model that's even more agile or more nimble and is generating more EBITDA on a run rate basis. I think that's -- like that's the best that we could be working towards. And I agree with Paul's comment, I think we're -- we'd be outperforming any other dealership that's out there. So we haven't -- we've been smart in terms of dealing with what is a very unfortunate event in the pandemic. So the only -- yes, no guidance on EBITDA. I think there are too many moving parts. The only guidance, I think I've already provided is we don't expect we're going to be reversing some of the gains we've made on cash. And so we do believe cash is going to be better than where we were at the end of Q1.

Paul Antony

And the other thing I'd say, Michael, is when you had mentioned, and not in a defensive way, but yes, we definitely cut hard. And we cut in hard because we didn't know the extent the breadth and depth of this crisis. And as fiduciaries of this company, we wanted to make sure that no matter what happened, we were going to make it out the other side. And so we tightened and bolted down the hatches. And everybody did 80% more with 80% less. And the learnings we have from that are the result of what Michael is talking about that we achieved tons of efficiency with much less resources. And so clearly, that wouldn't be sustainable over the course of 3, 4 years. But in the short term, it certainly helped us get to where we needed to be. And so we were battle ready to withstand a stronger storm. And thankfully, up until now, it hasn't been what we had planned for, thankfully.

Operator

Our next question comes from the line of Luke Hannan of Canaccord Genuity.

Luke Hannan

Okay. I appreciate all the color that you guys have given so far, most of my questions have been answered. The one quick one I had. Just a clarification on how those wage subsidies, how those are going to flow through the statements. So Mike, is that going to be directly sort of offset against SG&A? Or should we be thinking about that as more of a onetime cash flow benefit?

Michael Borys

Yes, we've actually had discussions with our auditors in terms of how to look at it. I mean we're going to -- we'll call it as part of our EBITDA but we're calling it out. So we're not -- we're certainly not trying to hide anything. So obviously, it's going to be nonrecurring, but there's an element of when we bring it, we're incurring incremental costs that we're going through COVID. So you would think that the 2 have to match, and ultimately, that's -- that would be the rationale for including it within what we'll call adjusted EBITDA in Q2. So it is going to be shown as EBITDA. There was a point made earlier about why we didn't or I think it was in one of the analyst reports, why we didn't recorded in -- or any portion of in Q1. The legislation wasn't enacted prior to March 31. So it was really just -- it was just more of a -- you didn't have the ability to record it in Q1. So we'll be putting in the full amount in Q2, and it will be EBITDA, but we'll call it out. So that will be how it's reflected.

Luke Hannan

Okay. Understood. And then the second one I had was just mostly on related to the inventory position. Obviously, you ended Q1, it looks like with a fairly healthy inventory position. And I think to the extent that, that was available, you're probably able to service demand over April and May. I'm curious, though, in the discussions that you've had with OEMs, again, I imagine these are probably more constructive than maybe what was happening in '08 and '09, but have you seen anything different, maybe more supportive as far as OEM incentives? And maybe any color you can share on what they're thinking as far as the rollout of the new model years on the floors? Any color there would be helpful.

Michael Rawluk

Yes. So the inventory question is in mind. And I know to speak for the operations, even dealers, is that's the biggest question mark about the whole thing. And it's speculation at this point in time. But when you miss April and you miss May for inventory sell down, the system gets really backed up. And with 2019 model years and 2020s and then you have the global supply chain shutdown and ramp up. And all the meetings that we have with the OEMs, the message is consistent, which is we've never been through a global shutdown of a complete supply chain before and ramping it up is proving to be a very complex exercise. So we have this worry and every dealer has this worry of this convergence of 2019 model years, 2020 and 2021 arriving in September and October. And so we don't know the outcome of that yet.

The only thing that we know for sure is that we will have better insight at the end of Q2 of what the impact is on used car pricing and used car inventory and new car pricing and new car supply and demand factors and inventory and we will absolutely not kick the can down the road on that issue, that we will leave all things COVID and crisis in Q2. And then our focus is really on Q3. And like the only thing I can say about Q3 is like look out because this is AutoCanada 3.0. We did not hide in a corner during this crisis. We tore down this company. All of us, every dealer in the country, and we rebuilt it up with improved efficiency, improved processes, improved revenue streams on the online sales side. And Q3, people are going to be very excited about what AutoCanada 3.0 looks like.

Paul Antony

I will say -- and I'd just add to that. Listen, we -- that save and except for as long as everybody is measured, we don't know the outcome of the pandemic. And so we're excited about what we've built with this company and what Michael has done with the Canadian operations, what Tammy has done with the U.S. operations. And when things do return that are outside of our control, for sure, this company is poised for greatness.

Luke Hannan

Okay. Understood. Last one for me, just a clarification. Paul, I think you had given some data points on the trends that you've seen in the last 10 days. I just want to make sure that I heard it right. I think you said that new units across Canada, excluding Quebec, was up 5%. Did I hear that right?

Paul Antony

Yes.

Luke Hannan

Okay. And then if we include Quebec, it was closer to 10%?

Paul Antony

That's correct. But keep in mind, Quebec only opened like 1.5 weeks ago, right? So this is just -- like these are just initial -- this commentary is just to give everybody color around we're seeing this thing rip back. And we're excited. And again, we're cautiously optimistic. Because, again, we're trying to be measured. And obviously, we hope that things are going to be contained, that we're doing the right things, et cetera, et cetera. And as much in control as we are of everything that we are in control of, we're seeing things come back in a substantial way.

Luke Hannan

Got it. Okay. Actually, sorry, one last one. Obviously, it's hard for us to be able to prognosticate what's going to happen with COVID, whether there could potentially be a second round of lockdowns, if you will. I'm just curious, just from a high level, were there any learnings from what would have happened over the last couple of months that you think were it to happen again, you'd be better positioned going forward?

Paul Antony

Yes. Look, we really started over rotating, I'll say. We really started getting concerned in February. And so our team started doing sensitivity analysis on every single dealership. Like what would happen if we had to shut each dealership down completely 90%, 80%, 70%. And like we have that so we can toggle each dealership separately. We know the impact to our balance sheet. We know how long we can survive if that happens. We feel that if it were to happen again, for sure, there were learnings now that we have and lessons that we have of how to operate in an environment like that. The question is, like how long can you operate in that environment? Like you wouldn't want to do it in a sustained fashion, right? Because this -- we're asking a lot of our member -- our teammates and clearly, you don't want to continue to operate in an environment like that for any prolonged period.

Operator

Your next question comes from the line of Maggie Stifel.

Maggie MacDougall

So I wanted to kind of switch gears here and just talk a bit about the competitive environment. Obviously, this has been a pretty tough go for a lot of small businesses, and there's a lot of automotive dealers and collision shops for that matter that are small business owners. I'm wondering what's your observations so far? And if you think that there may actually end up being some opportunities for you through brownfields where maybe a person who owned a Collision shop or had a dealership simply has to sort of move on from that business, and you've got a facility ready to go that you could take over for very little cost.

Paul Antony

That's a great question. When this initially started happening, our inbounds were -- for stores for sale were lighting up. And as you can imagine, obviously, being an acquisition engine or an acquisition machine like AutoCanada should be and will be. Obviously, you hate to say no, but the #1 thing that we needed to consider was making sure that our ship had no holes in it, so we could take advantage of things in the future. And so while there were a lot of opportunities when a lot of these people that had generational wealth that was at risk because multiples are coming down on stores, for sure. And the future for a dealership in the midst of a pandemic is not that clear as with any small business, body shop, I know collision repair industry suffered a big downturn, because there's less vehicles on the road and less accidents, et cetera.

And so there was a lot of opportunity, but there was a limited amount of bandwidth from our team to actually be able to engage because we're focused on our business. That said, as things started snapping back, it was snapping back for us, and it was snapping back for everybody. And so you have people that might have been over levered and bought dealerships over the course of the last 3, 4, 5 years and paid extremely high multiples and levered their dealerships up in order to take advantage of money that was cheap and available. And so the desperation of trying to sell these stores in the midst of a pandemic kind of subsided. And so while we're still actually getting a fair number of inbounds, it were people -- it was probably -- this COVID-19 is basically serving as a forcing function for many people to say, like, if this does come back as a second round, do I really want to be here? Do I really want to go through this again? And do I have the stomach for it, et cetera, et cetera? And when you're talking about this was your family's centerpiece and there's a lot of emotion tied up in that as well. And so what I would say is that, long and short is there were a lot of people that were looking to sell when things were unknown.

Things right now are coming back. It's probably less drastic or less the need for these people to actually exit the business. And I think until there's certainty around it, there's just going to be this wave of people trying to sell and then reconsidering and so on and so forth. And so we'll just have to play it by ear. And obviously, we're going to be disciplined and measured as we look at opportunities in the future.

Maggie MacDougall

Okay. Great. One more question, and I'll keep it to just a housekeeping item, because I know we're getting on into 2Q on this call. So I just want to understand the details of what was judged permanently impaired and included in that impairment charge that you guys took?

Kevin McPherson

It's Kevin here. So on the impairment charge, if I speak to it kind of at a more high-level what really was the driver of that was the consideration around the discounts rates used within that assessment. So the little market, there was some uncertainty in regards to rates coming down, but at the same point, increased risk. So we really leaned on some market reports that showed from a general perspective, discount rates were moving up. And so if I speak to that, a 1% change in our discount rate, impact of that impairment assessment by about $25 million. So that accounts for the majority of that impairment charge. So that was really the driver of it, if I kind of put it in the simplest terms.

Operator

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

Paul Antony

Listen, we really appreciate everybody's time on today's call, and we wish everybody the best of health and look forward to speaking to everybody at the next conference call. So thank you so much.

Operator

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