AutoCanada Inc.

Tom Orysiuk - President & CEO Chris Burrows - VP & CFO Pat Priestner - Executive Chairman

Hilda Maraachlian - Cormark Securities Anthony Zicha - Scotiabank Derek Dley - Canaccord Genuity Chris Murray - AltaCorp Capital Mark Petrie - CIBC Steve Arthur - RBC Capital Markets Mark Benjamin - SC Capital

Hi welcome everybody to our Q3 conference call. I would just like to start off by saying with an economic environment similar to Q2 of this year, we continue to experience same-store sales and gross margin challenges both of which we're focused on improving.

Q3 of 2015 also had the misfortune of being compared to Q3 2014, our all-time record EBITDA quarter and this is occurring amidst of a very challenging Alberta economy which is home to 10 of our 26 same-stores. We do have a very clear plan to address these challenges and it applies equally to our stores whether they're out less with certain of our same-stores are underperforming in market and sales or in Ontario and Manitoba where our same-stores are outperforming the market.

Our plan is simple and it is to focus over the coming two quarters solely on the basics and only on the basics, the blocking and tackling that is going to correspond with our past success and there are three main areas that we are focusing on. First, to improve retail vehicle sales which we will do by putting significantly greater efforts, and focus on additional marketing efforts which we will believe provide more and more cost effective leads.

Second, by exceeding rollout of our new sales process technology which will allow our dealerships to more effectively capture and use sales data and allow our dealership, general managers to better and monitor and enhance for their sales process to better measurement and accountability through each steps in the sales process. Second to improve growth, management is working more closely with the dealerships to better manage growth especially in the volume challenging environment that we're operating in.

We are pleased with the progress to-date where our same-stores have increased used retail vehicle gross profit 15.4% over Q3 2014, as well as increased products, service, and machine repair gross margins by 1.2% to 55.5%. And this is significantly higher than the gross margin percentage for products, services, and machine repair for the company overall.

We're confident that there is further opportunity to improve growth in our new dealerships. Third, we are continuing this work with our dealerships to reduce operating expenses as a percentage of gross profit.

Over the past two quarters, we are pleased to have reduced the various component of our operating expenses as a percentage of gross profit from 88.37% to 78.36% to bring it in line with our historical averages and we're working closely with our dealerships to further improve upon this over the coming two quarters. We are diversifying our operations by looking more to these and particularly to Ontario and South Quebec and are very pleased with the recent acquisition of Hunt Club Nissan in Ottawa, our Premium Nissan dealership and partnership with its prior owner, Mr.

Jean Malouin, an exceptional dealer operator together with further Nissan open client expecting to be operating in Ottawa in 2016. In summary, we recognize we need to focus our efforts to achieve the results that we and our shareholders have come to expect and deserve and we are singularly committed to focusing all our efforts over the coming two quarters to implement our plan.

With that, I will turn things over to Chris.

Thanks, Tom. Before we continue with the call, let me remind everyone that certain statements made in this presentation including Tom's remarks previous may be forward-looking in nature.

I would refer you to our more complete disclosures contained in our most recent Annual Information Form. In summary, these include statements involve 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 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 these possible risks, please see our AIF dated March 19, 2015, which is available on the SEDAR website.

Generally speaking the automotive retail sector in Canada improved in the nine months period ended September 30, 2015, over the same period of 2014. Overall Canadian new light vehicle unit sales increased by 2.6% for the nine months period ended September 30, as compared to the same period in 2014.

Figures reported as new light vehicle sales in Canada include all types of vehicle sales including retail, fleet, and daily rentals. Fleet and daily rental sales are not nearly as profitable as retail sales, and as a result, we focus more on retail sales and do not fully participate in fleet and daily rentals.

Our higher sales and gross profits in the third quarter of 2015 are a direct result of acquisitions made subsequent to the end of the third quarter of 2014. Lower net earnings, same-store sales, and same-store gross profits, are a result of reduced economic activity particularly in Alberta.

Our key operating results for the third quarter of 2015 are highlighted as follows: our same-store revenue decreased by 6.9%, while same-store gross profit decreased by 14.1%; EBITDA attributable to AutoCanada shareholders decreased by 8%; the number of new vehicles retailed decreased by 6.6%; while the number of used vehicles retailed decreased by 3.6%; repair orders completed for the quarter were up 2.1%; and same-store repair orders completed for the quarter were down 4.4%. EBITDA attributable to AutoCanada shareholders for the three months period ended September 30, 2015, decreased by 8% to $26.4 million from $28.7 million when compared to the prior period of 2014.

The decrease in EBITDA attributable to AutoCanada shareholders for the quarter can mainly be attributed to tightening market and lower achievement of sales volumes in certain stores. Revenues from all dealerships in the third quarter of 2015 increased by $50.7 million or 6.9%, to $781.2 million from $730.5 million when compared to the same period in the prior year.

This increase was driven by increases in three of our revenue streams as a result of acquisitions since Q3, 2014. Gross profit from all dealerships for the third quarter of 2015 increased by $10.3 million or 8.7% when compared to the same period in 2014.

As of revenues, gross profit increased due to increases across three of revenue streams as a result of acquisitions since Q3, 2014. During the three months period ended September 30, 2015, operating expenses increased by $10.1 million or 11.1% to $100.8 million from $90.7 million in the same period of the prior year.

Operating expenses as a percentage of gross profit increased to 78.4% from 76.6% from the same period of the prior year, due to the fixed portion of these expenses. The variable portion of operating expenses remained steady as a percentage of gross profit at 65.5%, while the fixed components increased from 11.1% to 12.9%.

The increase in the fixed portion of operating expenses is due to the growth of the company since the third quarter of 2014 which resulted in an increase in facility and lease cost, depreciation of property and equipments, and a fixed portion of certain administrative cost. While the fixed costs would typically remain steady as a percentage of gross profit, the slowdown in the economy in the current year has caused this to rise.

As the economy and gross profit improves the fixed cost as a percentage of gross profit will also improve. During the quarter ended September 30, a $1.1 million increase to the fair value of redemption liabilities was charged to financing cost in the third quarter.

Redemption liabilities relates certain put options held by non-controlling shareholder interests and are measured at fair value. During the quarter certain dealerships for which redemption liabilities apply, exceeded the quarterly net income from the comparative quarter, which resulted in the increase in redemption liabilities.

Finance cost likewise increased during the quarter from $5.9 million in 2014 to $9.5 million in Q3 of 2015. This increase was largely driven by an additional $1.2 million in interest paid on the revolving credit facility due to a larger balance outstanding, along with the $1.1 million related to redemption liabilities.

In order to provide us with increased flexibility to execute on our acquisition strategy and capital expenditure requirements, while maintaining appropriate liquidity, we are in advanced stages of negotiations towards expanding our revolving credit facility. As part of this process, we have amended our banking companies to align with current industry lending practices with no expected changes to the interest rate.

Together with the companies increased cash flow from operations this year which was $69.4 million on a 12-month rolling basis, up from $60.7 million at the end of last year, the expanded credit facility along with the free cash flow will provide us with the necessary flexibility to meet our capital requirements. With that, I'll turn things over to Pat for his commentary on our outlook and expectations.

Thanks, Chris. The quarter was challenging and Tom has made clear management's plan to address.

Let me please just say we've always been top performers and I believe me, I'm not happy with this quarter no one here is and we are going to improve on these results. On regarding acquisitions as we have on many occasions stated that company should continue to follow a very prudent strategy.

We're always seeking to provide the best long-term and I emphasize long-term shareholder value. Lately, we've been looking obviously more to the East but we're not going to ignore opportunities out West, and I do share Tom and the rest of the team's excitement about our Ottawa purchase and partnership there, and we look for potentially more opportunities in that region it's a very, very good market and it will be excellent for us.

We've also made it clear in our MD&A that we continue to work with OEMs who do not accept public ownership. And I can tell you I really believe that we're making some progress here and it's a long process, we're probably a year behind where we wanted to be, but I think we’re making some good progress there.

Regarding guidance, we're confident that we shall out in those three to five dealerships by May of '16 which would meet our earlier guidance of 6% to 8% in such period of time three of which we've already completed. And with that, I'm going to turn it over to Tom and Chris and we will be happy to take any questions.

All right. So why don't we turn it over and once again thank you for joining us in the call today and start up the questions.

Good morning guys. My first question here is on the same-stores.

You guys segmented by geography and it looks like in BC gross profit declined. Can you elaborate a bit more of what happened in BC and why it declined?

Yes, overall as I trying to look at it on same-store, there is two real issues. We had two of our larger dealerships in BC and I think we could have performed better there on the quarter and probably one in Alberta as well.

So those three kind of drag down our same-store results which was -- they perhaps partially offset by same-stores that we acquired over the last two years of our expectations.

And why did they underperform, was there a specific reason because BC market was did well, but in terms of revenue you guys were flat, but gross profit declined. Can you give a bit more color on why the gross profit declined?

The reasons in each dealerships and I think, for example at the Alberta store when you're down market some guys will act a little bit better to it, I think it’s an easy fit, we can work with them and get that straight notes fairly easily. And with one of the BC stores we had some staff changes.

We have those changes sometimes you will have a rough month or two. But I think we're getting a handle on that fairly quickly.

Okay. And can you comment in terms of the outlook, Alberta was pretty challenging in Q3, what are you guys seeing in terms of Q4 for now.

Has things changed or is it the same as in Q3, is it getting any better or worse versus Q3 let's say?

It seems to be kind of holding constant with the operating environment that we've been whole year, with the exception of January and February. January and February we saw lot of softness, last week each of those months from a consumer confidence point of view.

And so far in North Edmonton and Alberta which seems kind of a level we've been able to reduce lot of our expenses to kind of matchup to the level of business that we’re doing from a percentage of growth in Alberta and our Alberta stores and I think we’ve got more room to go there complete a little bit of an improvement as well.

Okay. And in terms of the inventory levels industry wide in Alberta have they stabilized in terms of inventory levels not just your guys but just Alberta in general?

That’s certainly the sense that I have Q1, Q2 they got little bit high put a lot of pressure on margins they really come into line to what we're more historically ran at.

Hi, guys good morning. Tom, could you please provide us some more color in terms of your expectation of a strong finish in Q4 '15 and what gives you the confidence that AutoCanada is well prepared for 2016 and may be can touch upon your digital strategy how important is that?

Lot of questions there Tony but we're working pretty close with the dealers. I think we’re really focused after Q1 and trying to get the variable cost in line with the new level of business and I'm really happy with the progress we’ve made there.

I think we’ve got a little bit of room to grow there. On the sales side there is two things that kind of exciting on the volume side is we'd be rolling out some new technology to some of our dealerships which will allow them to stay on process a lot better, it will be really good information for them.

One of our key belief is we provide good solid information for our dealer partners, they will make the right decisions for the customers, and will lead to more sales and results in having happy awareness and we'll just make more money there. On the digital side, I have been spending a lot of time in there with our operational people.

We think that it's an area that's just deserves more focus. It's an area that we've been fairly good at over the past two years.

But I really believe that it’s an area that we can improve on. We can generate some more leads, less expensively and also track and help our dealers close these leads and it should be a competitive advantage to us.

Okay. And Tom are there regions where AutoCanada is performing above market performance?

Yes, there is some we are and there is some that we aren't. One the things I'm noticing is even within Alberta you can take a look at the province average there is process where it's an average, there is a process where people are performing and dealership is performing above that average and there is process where virtually all dealers are below.

Ontario and Manitoba I think there I'm pretty happy with our overall performance there to the markets some of that is brand as well, all those factors make a difference.

Okay. One last one, you mentioned that target multiples remain high and what's the difference between valuations in Alberta targets and Ontario targets in terms of metrics like what's the spread there?

It's Pat, I don't really think there is, we haven't seen a real decline in the values of what the dealerships are trading for an Alberta. And I think the reason is simple like I said earlier on the call and I say it virtually every call, we are looking at long-term.

I mean this is a long-term business we're in and Alberta has been probably 19 of the last 20 years the best place to do business for auto dealers in Canada, and we expect over the next I don't know, whether it's 12, 18, or 24 months that will be the same again. So I don't think most dealers in Alberta looking to give their dealerships away.

I mean we had a lot of valuable properties here so there is some other people. So we the values in Alberta staying down slightly but not a lot at all and similar to really Ontario, Ontario market is really good now as well and obviously we're looking pretty strongly in that market as well, but certainly in Alberta we were continue to purchase and I know some people don't want to hear that but if you look long-term that’s the best place to be for us.

Hi, guys. Can you just comment on your inventory position here heading out of Q3 and then into the rest of the year and then in 2016?

Yes, in Q1 I mean Derek, we were little bit high; we managed to work our way through that. And overall I'm pretty happy with our inventory levels in all of our stores.

We're noticing a little bit of tightness on the take up truck side of it and we comment on that in little bit in the MD&A. I’m not overly positive about it right now, it's hard for me to predict, what the shipments are going to be over the next couple of months but I know it’s going to be tight.

The good news is it will be tight for everybody in the marketplace and we will be operating in the same environment, the rest of dealers in Canada are as well.

Okay, great. And just in terms of your OEM sales volume targets, I mean do you guys expect an adjustment on these targets given the -- in 2016 given the weakness that we’ve seen in Alberta?

Yes, when I look at the targets, typically what happens with your OEMs is you sit down with them and around January they tell you what your target is for the balance of the year. And it doesn’t really get adjusted throughout the year that’s the typical situation with most of our OEM partners.

And based on the sales level this year, we should get new targets in 2016, which should be a little bit easier to achieve than the ones for this year.

Thanks guys. Good morning.

So just thinking about, thanks for the color on inventory that's great but when we think about kind of progression in the quarters I guess guys you said Q3 was lopping a pretty tough quarter just thinking about the trends as they also go together, how you guys thinking about how Q4 is going to shape up versus Q4 next year?

Q4 we’ve got off to really good start in October, I could tell you that, and we’re pleased with October. How November and December is going to shape out is going to be one thing I never watch is consumer confidence, it looks like we’re on track, but we still got a couple of months to complete in Q4.

What I’m pleased about is going in, in Q4 we got a strong balance sheet, there is no real stress on our balance sheet. And from my viewpoint we’ve got a lot of untapped earnings through cash flow.

You take a look at our historic numbers. We’ve got the same people in place, the same dealership if the economy turns even just a little bit positive there is a lot of untapped potential there.

Okay. Do you think you’re actually in a place where you could actually see some year-over-year growth there or do you think there is at least kind of even with some of the acquisitions that come in you think may be flat with the puts and takes?

I would be disappointed but overall math we don’t see a little bit of overall growth. And as for Q4 and Q1, I would be absolutely, make sure, I'd be absolutely cautious if we don’t see year-over-year improvements.

Okay, great. And then just thinking a little bit about the whole credit facility idea, what’s the thought there in terms of just changing, I think you said to make it a more standard credit facility, I guess may be some more color on what you’re actually doing there and really what the ultimate goal is there?

Yes, Chris, it’s, Chris. I think really our focus there was to align the covenants with more common industry lending practices.

So previously our covenants were a little bit antiquated and now the alignment of those covenants would be more consistent with kind of what the U.S. peer publics would be.

Okay. And like any specific examples that you can maybe comment?

Sorry what is that Chris?

Like any specifics that you could maybe highlight for us in terms of what the covenants might be or?

No, our covenants are our income adjusted covenants as well as kind of balance sheet adjusted covenants. And in both cases we’ve increased the income adjustment covenants to account for some of those softness in the existing Western and specifically the Alberta markets.

You will note that the covenants was calculated in Q3 moving well within what the original covenants would be. So we looked at this and we amended our covenants just really as a signal to just to show that we've got very strong lending partners in our syndicate.

Okay, great. And is it fair to think that floor plan financing will be considered more of a working capital item as opposed to any sort of debt item by the bank?

That will continue to stay the same, yes.

Okay, perfect. And then guys may be just the commentary around other OEM partners who haven’t so far been favorable to public ownership.

Can you just give us an idea how or why you think that there you're making some progress there on those discussions kind of an interesting thought if you may be add some more partners over the next couple of years?

Well I think the consolidation of the industry in Canada is clearly picking up and I believe it will continue to do so. Not only are more dealers looking at selling, I really believe the number of the dealer groups in the country are looking at to at least starting to look at their own exit strategies.

So if you are a OEM in Canada I mean they’re very smart, smart people running these companies and they're fully aware of that being out there. And I think as long as we continue to do a good job, I think, as I said in my earlier comments that I’m disappointed that we haven't added what I thought we might this year but I'm very, very confident that progress we're making is good, and I think over the next few years we should be in really good shape.

But again I’m not going to speak individually to anyone manufacture would be completely disrespectful and I'll just comment that I think we’re making progress.

Hi, good morning guys. Wondering if you could just comment about the used retail markets, gross profit dollars per vehicle is pretty strong.

Could you just talk about the general sort of supply/demand that you’re seeing there and are you seeing consumers shift from new to used some extent and is that support of a first profit dollars or is there another dynamic?

Well, Mark I don’t think we’ve seen that much of a shift from people going from new to used and focusing on that. What you might be aware of this is we put a lot of stuff in place just in line to try to get good information, rich information to our dealers on the merchandising of used vehicles.

I think you're seeing a bit of the lift from that. You might be seeing also a little bit of lift where people are may be looking at a new vehicle, are now considering used just particularly in Alberta little bit more cost effective solution.

You’re still also seeing with the dollar change lot of used vehicles nearly new getting purchased by American wholesalers, brokers, and then going through the complicated process of how shipping that vehicle down to the States for resale.

Okay, thanks. Also on the gross profit and could you just comment about the parts business, I mean obviously with the strong quarter in Q3, is that reflective of your efforts or do you think there was and its sustainable or do you think there was a bit of seasonality there or just a bit more color would be helpful?

Yes, I think was sustainable, particularly, lot of first of all I’d like to thank everybody that works in our parts and service team it's a scenario where we had a lot of resources over the last two years and I think we're starting to see the benefits of that. And I think they've done an excellent job of bringing together all the parts and service managers and implementing best practices with the dealerships.

When you take a look at on our same-store basis, we're roughly 55% gross margin which is one of the best that we've ever been and it shows some of the efficiencies that we will been able to get on the same-stores. Overall we're at 51% so that would imply that the stores will be acquired in the last two years are running at considerably less gross margin than our existing same-stores.

And I really strongly believe that that's an area that we have some opportunity to improve. And in particular with the number of vehicles that we've sold over the last two, three years, out of our dealerships, we've seen lot of these vehicles coming back after their first birthday and back into our service space and that’s going to help our business in the long run.

Okay, thanks. The sales process technology that you guys are continuing to rollout across dealerships.

How many dealerships is that in now and like what's the plan in terms of rolling that out?

We’re just continuing to work with our vendor on it. We’ve beta tested a couple of dealerships, we are really happy with it, we're trying to work how to field [ph] the wrinkles.

Should have a firm timeline on the rollout within the next seven to 10 days that’s going to be key focus and then we’re spending a lot of time to on the whole digital strategy. We think that’s another area where we can make some very quick changes in order to boost the amount of leads that are coming into our leaderships, the quality of the leads on a very cost effective basis.

See so it sounds like impactful by Q1 call it conservatively?

Yes, December Q1, lot of the stuff has already been in progress obviously before the conference call.

Yes, sure. And then just last Chris, what’s your view on the tax rate for 2016?

The overall '16 effective tax rate should be in and around 28%.

Hi, you mentioned something to the effect that you will be expanding your credit facilities in order to meet capital requirements. Are you just talking about financing of vehicle inventories or you talking about increasing your debt facilities in order to fund acquisitions?

We’re referring to the expansion of our revolving credit facilities as opposed to the vehicle finance. So the -- we currently have $200 million revolving credit facility and that’s the -- that’s the facility we’re referring to.

And what’s the use of that facilities, that to fund acquisitions or is that?

Yes, I mean it funds acquisitions and it funds capital expenditure requirements.

What I’m just getting out is, is this a change in philosophy from before I mean are you getting, given the harder times more of your acquisitions going forward are going to be funded with data as opposed to say cash flow and equity?

No, I don’t see it as a change in strategy at this point, David. I see this as kind of ensuring that we got sufficient headroom like to execute on our -- execute on both of our acquisition and capital plans kind of in the near-term.

Yes, thank you, operator, but some of these have been covered already but just want to share about capital spending really appreciate the extra scores in there also the magnitude and timing of the spend. But just looking at your overall level still approaching $200 million over the next few years, can you talk a little bit more about how firm that is if there is any discretion in there for some of those programs possibly being deferred or reduced or if it might go higher?

Yes, thanks. When I look at the capital expense, there is obviously at a belief for us to continue to work with our OEM partners to spend and incur capital as its necessary.

We work with them all the time to kind of consider kind of where we’re going in terms of what we’re spending those dollars on. But as you have noted I mean $200 million is a significant amount.

But I would say that a lot of this can be deferred and delayed into the future depending on existing needs. So I look at that and I say there is definite possibilities, as you see in our specific disclosures, and it has been delayed.

Further a lot of this spend we’re looking at how to externally finance it as well whether it’s through mortgage facilities or other financing. So I think that in terms of the drain on our free cash flow our consumer revolver is reduced that way as well.

Okay. That makes sense.

Secondly looks like you’re working hard still on the cost structure, you talked about earlier Tom I guess. Can you talk a little bit more about some of those initiatives just what stages you're at how much further there is to go both at the dealer level and at the DSS level?

Yes most of it resides at the dealer level because that's where the majority of the expenses are. We’ve done a lot of meetings with the dealers, we’re just working on the model one and with our controllers and really pleased with the progress, and we try to highlight that a little bit in the MD&A.

And like, for example, our employee cost as a percentage of the gross that we've generated we're actually at a lower percentage this quarter to maybe we're in a comparable quarter last year. We can probably shave some off of the fixed expenses and there is a couple of other areas where I’ve been working with our operational guys where I’m pretty convinced that we can produce to further savings.

Hi guys. I was just wondering what is your take on acquisitions in Quebec, I know you guys don’t have a lot of dealerships, what is your -- how do you see that on the long run?

That's a really good question. It’s a market that I think that if we have the right partners in, we would do extremely well.

There is a lot of people in Quebec from what I see and here and talk to people that are looking to exit like the rest of Canada but even may be more so somewhat in Quebec. So it’s a market that again with the right partner, the right leadership in that market we think is very right whether that’s next year, the year after we would have to really look at it closely.

But definitely it’s an area that we see a lot of growth and whether timeframe I can’t give you whatsoever on that, it has to be the right deal, so definitely positive on the market.

Okay, okay. Because it’s highly consulting and there is like Park Avenue Group, there is the Group Gabriel and Albie like three guys here and in terms of basically you've had discussions in terms of possible deals there.

It what I'm sensing here?

Well we’re always talking to people, I know exactly what you’re talking about there, there is also a lot, a lot of dealers in Quebec that aren’t in those three groups and there is some smaller groups there that might be looking to exit as well. So again we see it as a good market but again I’m going to have the right partner, do the right thing again I was looking long-term here but it’s certainly an area that we’re looking at.

Good morning. Could you give us a comment on the consumer credit environment especially in Alberta; are you having trouble getting clients approved on credit?

Not at all. I would say the consumer credit environment is fairly strong, it's taking a little bit longer to fund some people particularly if they are working fast -- just little bit more emphasis on throughput income but it hasn’t been inhibitor to sales and all.

Okay. The next question is where are you with regards to growth targets with the OEMs currently, are those targets attainable this year across brands?

That’s something that we generally don’t comment on because I don’t think it’s fair to any factored into comment. They have very good programs they haven’t really changed much over the years.

And as Tom said earlier if the markets down a little bit over a good period of time they obviously look because they want the dealers to hit their targets. And so I don’t see a major change their besides a slight reduction in the Alberta market going into next year based on the results this year.

And just like if next year is a better year in 2016 for all the manufactures in Alberta, then the targets will be slightly higher in 2017.

Right. Is there an entry year move on that or is that sort of the start of the year because the environment is much different?

They again I don’t really want to comment on what manufacturers do, from a competitive situation. But I mean they are smart enough to look at things and I think that’s as much I would like to say about the manufacturers.

Okay. My last question is should we see some margin compression in Q4 to clear some of the inventory?

Okay. I would like to thank everybody for participating in the call.

Chris, Pat and I will be around rest of the day if you think there are some other questions; I think most people know how to get a hold of us. I really appreciate you taking the time and we look forward to talking to you at our next conference call where we will release results for Q4 and for the 2015 year.

Have a great day. Thank you.