CAR Holdings - Calendar 2018 Update
Greetings and Happy New Year - We are pleased to provide update on calendar 2018 and take this opportunity to share CAR Holdings progress as we evolve our strategic plan for 2019 and beyond.
2018 was an extremely busy year at CAR Holdings when we had some achievements, faced various challenges and dealt with a few significant disappointments; in many respects indicative of forging a new business model.
2018 began with a strategic plan to ramp up the company’s growth through acquisitions. To facilitate this strategy we focused on building the infrastructure and team to support the rapid growth in our network of automotive repair shops. We successfully acquired 8 additional individual repair facilities, growing our annualized revenues to approximately $13 million. We launched mechaniQ; the first new brand to enter the automotive repair market in the GTA in over 3 decades and converted 6 traditional repair facilities in the GTA into facilities under the mechaniQ brand. Today mechaniQ facilities operate in Hamilton, Oakville, Mississauga, Newmarket, Aurora and Scarborough.
In June we formally completed the acquisition of Tire Hotel Inc. The addition of Tire Hotel increased our gross revenues a further $3.0 million, bringing our consolidated annualized revenues to $16.0 million. Consolidated revenues for the 6-month period from July 1 to December 31, 2018 were $8,550,000 ($6,886,000 from mechaniQ, and $1,456,000 from Tire Hotel).
Another accomplishment was the successful pilot of our Easy Monthly Payments (“EMP”) program. EMP provides us with a financial tool to help consumers overcome the difficulty of budgeting for annual operating costs by allowing them to amortize and smooth out the costs of repairs over a 36-month period. We achieved our goal of $50,000 in sales from this program over a 60-day period. We are actively seeking a financial partner to provide capital for this program. Once secured, we intend to launch the program in all mechaniQ locations.
We attempted to complete the acquisitions of two multi-store operating (“MSO”) businesses: MSO 1 being a 40-location franchise, situated in the GTA, ( “MSO 1”). MSO 2 was a 70-location franchise organization operating across Ontario. Due to confidentiality agreements we cannot disclose the name of either MSO in this update.
During the first quarter we worked diligently to firm up a Term Sheet for the acquisition of MSO 1. Ultimately, CAR Holdings was unable to reach agreement on an earnings multiple for sustainable revenue that made sense for its shareholders. Our due diligence found a material number of franchisees had the right to terminate their franchise agreement before our payback period was to be achieved. In light of this we terminated our discussions. To date, this business has not sold for the asking price and there may be another opportunity to revisit a transaction in 2019.
At our last investor night, we spoke about the acquisition of MSO 2, for which we had an agreement to acquire the business for $50 million. Signing a Term Sheet in May, we were optimistic about closing the transaction in October. The acquisition of MSO 2 was meant to propel us from an operating deficit to approximately $8 million in annual profits. This acquisition would have launched CAR Holdings forward well ahead of our original plan.
Given its size we spent a considerable time and incurred a significant costs performing due diligence; including engaging KPMG to undertake a Quality of Earnings analysis. In addition, we incurred a material amount of external legal and investment banking fees. We had arranged with Canaccord Genuity and Cormark Securities, working in cooperation, to fund this acquisition by listing CAR Holdings on the TSX Venture Exchange. While completing the definitive purchase documents in September, the owner of MSO 2 reneged on our signed Term Sheet and refused to complete the transaction as originally agreed. After further negotiation, we felt this transaction was no longer in the best interests of CAR Holdings. MSO 2 was a major disappointment to the entire team working on the transaction and resulted in considerable expenses to the organization.
Licking our wounds in October, we paused all further acquisitions, choosing to focus on achieving near-term profitability from existing shops acquired and Tire Hotel. This shift in strategy lead to a significant reduction in staff and a laser focus on optimizing the operating model, within our current locations. Further seasonal layoffs, at the store level will be made in January 2019 as we scale down our operating costs during our traditionally slower first quarter.
One positive outcome of our diligence exercise on both MSO’s was exposure to the franchise model as compared to the corporate model. This has led us to evolve our business model to include putting ambitious entrepreneurs back in the driver’s seats. We refer to this business model as mechaniQ Partners. As a practical matter, franchising existing locations would allow us to monetize a portion of the value we have created through our mechaniQ transformations and recover capital for future use. We are working to finalize the concept and are targeting the end of January to pilot our first location with two internal applicants. This pilot location will allow us to test and perfect our formula for a mechaniQ Partners model.
We are currently in preliminary discussion with a new MSO ( “MSO 3”). It is a national banner brand with approximately 300 owner/operator locations in Ontario, Quebec and Atlantic Canada. We have an Expression of Interest (EOI) signed with the vendors as of December 7th. In addition to providing combined positive income, we view this particular MSO as a pipeline for transforming “traditional garages” into advanced repair facilities under the mechaniQ brand. A transaction with MSO 3 could take the form of an acquisition or merger and would provide us an opportunity to introduce our proprietary products and services to the 300 owner/operators including, tire storage, EMP and our Digital 360 inspection software. Both parties continue to be excited by the opportunities a combined offering could bring. We do not foresee the costs associated with pursuing this opportunity as material or negatively impacting the operations of CAR Holdings, as experienced with the MSO 2 acquisition. We will continue to update you on our progress.
Our Tactical Plan for 2019 will focus on increased efficiencies both at head office and in-store, resulting in reductions in headcount and operating savings. We believe this plan will allow us to achieve financial sustainability from our operations in 2019. The planned changes include John and Marcus managing the executive team, while Jeff spends more time on the front lines, working with the mechaniQ shops to achieve a 70% or greater labour efficiency rate. In addition, we want to ensure each shop is delivering, our digital 360 experience consistently to our client’s; achieving our vision for mechaniQ. Additional cost reduction measures taken in 2018 include significant reductions in compensation to management; reduction in professional fees; decrease in travel expenses and the elimination of our annual holiday party. We are committed to running a very lean operation as we work towards sustainable operations.
As with any early-stage venture, a significant challenge facing management is the ability to continuously access capital to operate and expand the business. This may be our greatest challenge in 2019. Nevertheless we estimate that we currently have enough operating capital to carry us through to the end of 2019 as we work to achieve financial sustainability within our existing operations. Please bear in mind your management team is a significant investor in CAR Holdings, so our goals are aligned with our investors.
We welcome any questions you may have.
The Executive Team at CAR Holdings
Highlights from our fiscal year ended June 30, 2018:
June 30, 2017
Revenues $9,783,000 $2,916,000
Gross Profit $3,310,000 $1,344,000
EBITDA ($3,090,000) ($228,000)
Key Performance Indicators:
Cars serviced 29,996 6,809
Avg. Repair Bill $313  $445
Total shops 13 5
As you are aware, mechaniQ is a new concept in the marketplace. Our vision is to professionalize the auto repair industry; transforming a “traditional garage” into an Advanced Repair Facility. The mechaniQ experience is predicated on using state-of-the-art digital technology that creates transparency; allowing us an opportunity to build loyal and trusted relationships with our clients. This is a radical departure from the “traditional garage” experience. We must be persistent and agile as we attempt to evolve our vision into a reality.