AutoCanada Inc.

Christopher Burrows – Chief Financial Officer & Vice President Steven Landry – Chief Executive Officer Thomas Orysiuk – President Patrick Priestner – Executive Chair

Steve Arthur – RBC Capital Markets Anthony Zicha – Scotia Capital, Inc. Chris Murray – AltaCorp Capital, Inc.

Matt Bank – Equity Research Associate Roland Keiper – Chief Compliance Officer Derek Dley – Canaccord Genuity Corp.

Thanks, Brent. Good morning and thanks to everyone for taking the time to attend our conference call for the first quarter of 2016.

As mentioned, I'm Chris Burrows, the Chief Financial Officer of AutoCanada. And on the call with me today is Patrick Priestner, Chair of the Board; Steven Landry, Chief Executive Officer; and Tom Orysiuk, President.

Before we begin with the rest of the call, let me remind everyone that certain statements made in this presentation maybe forward-looking in nature. I refer you to our more complete disclosures contained in our most recent Annual Information Form.

In summary, these include statements involving known and unknown risks, uncertainties and other factors outside of management's control that could cause actual results to differ materially from those expressed in the forward-looking statements. AutoCanada does not assume 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 see the Annual Information Form dated March 17, 2016, which is available on the SEDAR website. With that, I'll now turn things over to Mr.

Steven Landry.

Thanks, Chris and good morning, everybody. First of all, I would like to say that I'm thrilled to be joining Pat and Tom and Steve Rose and Chris and other members of the management team here at AutoCanada as my new role of Chief Executive Officer.

I look forward to bringing my automotive industry experience to AutoCanada, and also, I look forward to working with the team here in the coming year. The retail automotive industry has proven to provide consistent profitability in all market conditions.

In fact, all of our dealerships are profitable thus far this year with the exception of one recently owned dealership. AutoCanada continues to have significant earnings potential, and we have the ability to generate increased cash flow when the economy improves in Alberta where we have a heavy concentration of same stores.

I will speak a bit more on our goals and future plans later in this call. But first, I will turn things back over to Chris who will speak to the financial end of our business.

Thanks, Steven. Generally speaking, the automotive retail sector in Canada improved in the first quarter of 2016 over the same period of 2015.

Overall, Canadian light vehicle unit sales increased by 9.3% for the three-month period ended March 31, 2016 as compared to the same period in 2015. The company's higher sales revenues, gross profits and net earnings in the first quarter of 2016 are direct results of acquisitions made subsequent to the end of the first quarter in 2015.

Lower same-store sales and same-store gross profits are results of reduced economic activity particularly in Alberta. As a group, our same-store new vehicle retail unit sales were down 17.8% quarter-over-quarter.

Our key operating results for the first quarter of 2016 are highlighted as follows. Same-store revenue decreased by 3.1%, same-store gross profit decreased by 5.5%, EBITDA attributable to AutoCanada shareholders increased by 44.3%, the number of new vehicles retailed decreased by 4.3%, the number of used vehicles retailed decreased by 1.9%, repair orders completed for the quarter were up 5.1%, and same-store repair orders completed for the quarter were down 13.5%.

EBITDA attributable to AutoCanada's shareholders for the three months period ended March 31 increased by 44.3% to CAD 18.3 million from CAD 12.7 million when compared to the prior period of 2015. Revenues from all dealerships for the first quarter of 2015 (sic) 2016 increased by CAD 33.5 million or 5.3% to CAD 666.9 million from CAD 633.4 million when compared to the same period in the prior year.

Gross profit from all dealerships for the first quarter of 2016 increased by CAD 6.3 million or 5.9% when compared to the same period of 2015. During the recent quarter, it has been management's focus to reduce our budgeted and actual capital expenditures.

In Q4 2015, we were able to reduce our 2016 budgeted capital expenditures by CAD 32.1 million, down from CAD 83.3 million to CAD 51.2 million. We currently have CAD 45.1 million budgeted for the remainder of 2016 with CAD 31.9 million of that amount committed.

Additionally, management has reduced the total overall capital plan by CAD 7.7 million from CAD 193.8 million to CAD 186.1 million. During the three months period ended March 31, 2016, operating expenses increased by CAD 2.9 million or 3.1% to CAD 96 million from CAD 93.1 million in the same period of the prior year.

However, as a percentage of gross profit, they decreased to 86% from 88.4% from the same period of the prior year due to the impact of the variable portion of these expenses. As a percentage of gross profit, the variable portion of operating expenses has decreased from 74.4% to 70.7%, while the fixed portion has stayed relatively consistent at 14.9%.

We diligently review the operating performance of our dealership and utilize the leverage of a large dealer group to reduce our overall operating expenses. With that, I'll turn things back over to Steven, who has further commentary on our outlook and expectations for the coming year.

Thank you, Chris. Our plan and focus for the balance of 2016 includes three levers.

One, operational excellence, which includes same-store sales in both financial and sales metrics, and also dealership integration into the processes that we have here at AutoCanada. Second lever is cost reduction and capital efficiency.

As internal cost reduction program that we have already began in the first quarter of this year, which is, as Chris just mentioned, on track, and also managing our accounts receivable, accounts payable, inventory expense. And our third lever is growth through acquisitions.

In support of AutoCanada's continued growth, we have reduced the dividend from CAD 0.25 to CAD 0.10 per quarter. This action will allow the company to retain CAD 16.5 million annually that can be used to support the growth and also fund acquisition.

The current economic condition allows AutoCanada to be opportunistic in our due diligence around potential acquisitions. Our strategy is to acquire dealerships that provide accretive, strong returns focusing on large dealerships in major metropolitan markets, and have diversity across Canada as well to ensure that we may relieve ourself from economic pressure that we currently have in Alberta.

In addition to funding growth, the reduced dividend allows AutoCanada to further strengthen our balance sheet while also increasing liquidity. As the new CEO, this also allows me to have a fresh look and a keen focus on three different areas.

One is our central office. Two is our dealerships.

And three is our relationships with the OEMs which is always very important. I will be spending the next several months looking closely at each of these areas to ensure that we are able to unlock potential and the processes that we have and operating efficiently.

I'll also be looking specifically at our sales and operations processes in order to identify opportunities for improvement in areas that may require further focus. And additionally, we will continue our theme of growth with specific focus on acquisitions of large dealerships in metro markets.

We're thrilled with the current acquisition opportunities, and we believe that our focus on larger source and larger markets will provide us with significant gains in the future. With these larger stores, we are able to spend more time and energy on the integration effort at each individual store with a quicker implementation of AutoCanada processes in order to achieve and have incremental gain.

We believe this focus will allow our company to be successful as we move through the balance of 2016 and also allow us to fully realize the earnings potential for our shareholders. Now, before we go to questions, I would also like to say that this is our Annual General Meeting Day and at 10 A.M.

Mountain Time, our Annual General Meeting will be broadcasted via webcast and if you go to the AutoCanada website, there's a link that will take you directly to the webcast again at 10 A.M. Mountain or noon Eastern.

With that, I would like to thank you for your support, and I'll now open it up for questions. [Operator Instructions]

Great. Thank you.

First, just want to digging a little bit more on a couple of the bigger drivers of earnings, in particular new cars, saw same-store down quite a lot, I think 17.8% while ASPs were up. Maybe if you just a comment – a little more color on that same-store number, some sense of what those levels might have look like in Alberta and Saskatchewan and kind of the harder hit regions versus the rest of Canada where the key numbers were?

Hi. It's Tom.

On the same-store side, what you'll find is that some of our bigger stores we've owned for quite a while are in Alberta and BC, and they are the areas that are being impacted. We've got a lot more focus on the used side, on the parts and service side, and I tend to look at it more overall gross profit percentage.

And if you take a look at it that way, Steve, you're just a little bit over a 5% decline, which isn't as traumatic as this on the new vehicle side. We are seeing in this economy a lot of consumers coming in and they are perhaps would have been new car buyers a few years ago and now they're in that nearly new place, plus that's their preferences.

And I think that's reflected in the increase in our new numbers, the increase in the growth we're getting on our new, and it's just a sign of the market that we're in.

Okay. Yeah.

And I guess that makes sense. I guess, following up on that as well there, just comparing it again to the drowsy numbers, we've had these conversations many times about the differences and why do there but the GAAP seems to be a little bit wider this quarter than typical.

Can you just comment again on some of the differences in the drivers of those industry numbers and some of your same-store and the competitive competition in each of the key markets of your stores?

Yeah. I think part of the difference between the drowsy numbers as well would be by brand, right.

So, even what you see in Alberta and BC, as you're seeing some brands up and some brands down, it depends which brands you own and where your focus is. He is showing about a 7% decline in Alberta which is fairly close to what you're probably seeing at the retail level.

Retail wasn't worse than that in Alberta?

But that's what he is showing on his numbers. Yeah.

Right. In other words what you experienced must have been worse than that to [indiscernible] 2017 overall.

Yeah. Some of the brands, it's definitely a little bit more challenging.

Like I was saying, some of them were up and some of them were down. It depends which ones you own.

And really, what we take a look at and I said this on previous calls, we take a look at how we're performing relative to the same brands in the same city, and we're finding that our market share is not declining at all at the stores that we do have in Alberta relative to the same brand.

Okay. And just one last one for me, just F&I seemed to be a little bit lower than what we might have expected.

Any particular explanation there on the financing availability and the fees that you're receiving?

Yeah. Financing has definitely gone a little bit tighter, and that's reflected in the numbers.

And when it does get tighter, there's a couple of things that happen as the commission rates per vehicle sold actually declined and you can see that in the numbers. We actually had a pretty much pickups in all our other areas, new, used, on a margin basis, parts and service.

But on the F&I side, it was a little bit challenged. And we're also seeing a little bit tougher credit conditions.

I think we're not going to see – my best estimate, we wouldn't see any further deterioration in that, that's reflected in the numbers for the quarter.

Okay. Thanks so much.

I'll pass the line.

Hi. Good morning, gentlemen.

Could you give us a bit of color in terms of pricing? What were the main drivers behind the pricing increase on new cars?

And is it sustainable?

Yeah. There's two things that really happened there.

One is we saw a moderate price increases from the OEMs. I would say, over the last six months, you see like we got CAD 400, CAD 500 increase per model.

The other thing that's changed quite a bit is mix. There's a little bit less availability of the lower cost, sport and base models.

So as a result, even though it's a tough economy, we are – the inventory mix that we're getting is a little bit more of the high-end, more expensive vehicles. And as a result, you've seen the CAD 4,000 increase in the average sales price of new vehicle.

And I guess, you're luxury collection, Canbec and BMW, that kind of helped, Tom?

Yeah. Definitely, we're selling a little bit more expensive vehicles there with that line of vehicles.

But I would suggest you that most of it is just sales mix in some of our domestic stores.

Okay. You've done a great job in terms of the inventory management this quarter.

Like, what's the secret behind that?

I just processed. We've got – even through our office, we've got analysts that work with our dealers.

It's a lot of emphasis by the whole team. When we talk to the dealers, we're really trying to reduce our aged used pieces.

And I think the guys have done a great job on that. I really have to congratulate them for all their hard work on that.

And new inventory, it's a little bit tighter than I'd say last year, but it's at a comfortable level.

Okay. And one more question for Steven.

With reference to the acquisition outlook going forward, what do you think could be the minimum amount of dealers that you could buy this year, like what's your feeling on the market and...

Well, Anthony, while we don't give guidance in terms of numbers, but we almost on a daily basis have discussions in terms of opportunities that are in the marketplace. And so we don't have a volume number, but we're actively internally discussing our growth plan.

But you would expect some dealers to be acquired this year? Like it would be rare to see like no dealers, right?

Yeah. That would be rare to us as well.

Okay. Thank you.

Thanks, guys. Good morning.

Steven, just moving back on to the acquisition strategy a little bit, I guess a couple of things. One, can you just elaborate a little bit more about really how you think you'd want to be shaping maybe the portfolio at this point in AutoCanada's history?

And then along those lines, the structure of some of the transactions has always been a little bit odd for a lot of us looking inside out. Any thoughts around future structures?

And you kind of go to that third point where you talked about working with the OEMs a little bit. So maybe if you can address those two issues that would be great.

Okay. Thank you.

In terms of structure, our preference would be to have what we will call a clean structure going forward where AutoCanada would be the 100% voting shares or the dealer principal, if you will. That's not always the case in Canada at the moment.

And so we are dealing with some instances, as you've already known, in terms of a few of our dealerships that have a different structure than that. And so our goal going forward is to have a clean structure in our acquisitions, and at the same time, we would like to diversify two ways, both geographically and by brand.

And geographically, obviously, it would be – we're still a young company in terms of our 10-year birthday, but we are still heavily weighted, if you will, in Alberta, and we are doing a very good job in diversifying into Ontario and eastern markets, et cetera, which have a stronger industry at the moment, which is good. And also we'd like to diversify by brand.

And so we are also and I even in my first month have had an opportunity to see four OEMs and have discussions on our future as AutoCanada and the growth plan that we would like to structure over the next 100 days or so in terms of what do we want to look like three years to five years from now and put the planning down on paper now so that we can work towards that goal.

And how has reception been so far on – I mean, would that mean changing structure with what you have existing today? Would it be – are those conversations with other OEMs?

Just any idea there?

It's Pat. I think that we are making a little bit of progress, but it is slow progress.

Did some meetings with Steven, with some of the OEMs, and I think that Steven is very, very well received as the CEO of the company. So I think that certainly helps, but it's going to take a little bit of time, but believe me, we are working extremely hard on that.

Great. That's helpful.

Maybe just turning to sort of a cost profile of the company. If we think about the numbers in the quarter, but even sort of the cost activities that you guys are thinking about this year, how should we be thinking about sort of the margin profile and the impact you think you'll get on the margin profile as we move through the year and into 2017?

Chris, I think as we move throughout the rest of the remainder of the year, as we've talked a bit on a few times before, we've got cost consolidation activities under way throughout all of our stores as well as our head office. Obviously, the operating leverage in Q1 running at 86% of gross profit, it is always higher in Q1, but I would expect that to moderate down to historical levels, kind of in that near or below 80% for the remainder of the year.

So I expect that's where we'll finish.

And do you think some of the cost changes you make that kind of makes that sustainable maybe as we run into 2017 assuming that Alberta doesn't really see any much improvement year-over-year?

I would say that that's fair.

Okay. Thanks.

Thanks, guys.

Hey, guys. It said in the MD&A that you missed volume targets with the OEMs.

If these targets were to come down to reflect the current situation, how would that actually impact your margins?

You would actually see a slight increase I think in the margins. It's pretty competitive out there.

And if our targets are lowered, all the other dealerships with the same brand would also have lower targets in the marketplace. And typically, a lot of those incentives then get passed on to the consumers.

I believe as the whole marketplace adjusts and starts seeing those incentives, what you do see is a volume increase primarily, and you'll see perhaps a slight margin increase as well.

Okay. With volumes down 18% in the quarter on new cars.

I'm not sure if you can get in this. But how does that look since the quarter ended, and sort of how are you thinking about it for the rest of the year?

A big chunk of that I think is going to depend on sales mix, and it kind of ties into one of the earlier questions. At some of our dealerships, we're not getting as many of the lower-cost, high-volume vehicles, and we're carrying more expensive vehicles, which is a little bit tough in the economy that we're in right now.

Overall, new cars represents about 25% of our total growth, and I kind of look at it that we've got a used car business, we've got a parts and service business, we've got a collision business. And on a same-store basis, I tend to focus more on the overall gross margin of the dealership.

If you have short supply or any other types of issues with the dealership, what really matters is how much cash we're generating from the dealership and how much growth we're generating from all departments working together. And the 5% decline, I'm not happy with the decline.

But a 5% decline overall in gross profits on a same-store basis is something I'm comfortable with in this economy.

Okay. So on that, on sort of how it all ties together, finance and insurance was down in line with volumes.

I know we've discussed a bit earlier. But is that sort of the way to think about it, just very broadly that finance and insurance tracked volumes of new cars?

Yeah. I believe it was also down a little bit on a per-car basis due to a little bit lower commission rates for ranging of financing on vehicles, primarily.

Okay. Thank you.

That should track that way throughout the rest of the fiscal year. [Operator Instructions]

Hi. Good morning.

If get your sense from management in light of your revised CapEx, dividend, current debt position adjusted for the – extending some debt to the past holding company in April and May. I just want to understand what you think your dry powder is for acquisitions given your current financial position and leaving some room for liquidity under your restrictive covenants.

Roland, it's Chris. I think that from a liquidity perspective, we're actually sitting pretty good for the remainder of the year.

We've talked internally as a team and have sufficient liquidity. At the end of the quarter, we sit around a CAD 140 million of available liquidity on the revolving facilities.

Add to that, on a trailing 12 basis, free cash flow of around CAD 45 million to CAD 46 million. Now, you're looking at over CAD 175 million of available liquidity with which the uses of that, as you know, would be acquisitions, capital programs and the dividends now, which is in part why we looked at the dividend very tightly and have obviously made a decision to reduce that.

So I would say that liquidity is there to continue, as Steven talked about, looking prudently at acquisitions, the ability to make those acquisitions within the context and constraints of our existing liquidity.

What would be the appropriate amount of minimum liquidity you think this company given its size and uncertainties ought to be maintaining notwithstanding acquisition goals? Just say, there's minimum liquidity, this is what you want to keep, given the nature of the covenants and given the size of the business, the uncertainties.

We could run very efficiently and generate a lot of cash flow with just meeting our minimum working capital requirements by our OEMs, Roland. And even in the market we're in right now, we're generating significantly more than that.

So that would be the guidelines that the manufacturers would have for running the dealerships, and typically, we've been able to run the dealerships quite profitably below those limits.

I guess, when – the answer was there's CAD 140 million in the revolver, you don't want to go and use it all up, so there might be – just I want to keep at least CAD 50 million on the revolver at all times, CAD 75 million on the revolver at all times.

I think to Tom's point, the minimum working capital requirements would be around CAD 100 million as recommended by the OEMs or as required by the OEMs. To Tom's point, we could run it with liquidity below that, and everybody could still be happy and that would provide us with enough liquidity.

So the number, Roland, is probably in the order of magnitude of between CAD 50 million and CAD 75 million.

Okay. Good.

And just longer term, maybe, Pat, you might have some view on it. You certainly did in the past about – and others as to what the long-term capitalization ought to be for these dealerships in terms of mix of long-term debt.

And using an acquisition line, you got senior unsecured and you've got equity, and from time-to-time, you go to the equity market to assist with your business plans. Long-term, how do you think these – given the uncertainties, what's the mix of capital between long-term debt and equity?

Well, that's a good question, Roland. It's something that we're always looking, and I suspect the combination, and, obviously it depends a lot on our stock prices to how we would do that.

One of the reasons, I think that we really looked at when we cut our dividend and we take that seriously is we actually think that banks in Canada are tightening up acquisition lines a little bit for some of our competitors I have no 100% knowledge of that, but that seems to be what a lot of brokers and everybody are telling us. There was a lot of funding available for a lot of dealer groups over the last few years.

On a pretty easy basis, I suspect that's a little different today from what we're hearing. So, we felt being a little bit conservative here, I do believe there will be a number of good acquisition opportunities coming in.

I suspect Chris and the team will be really involved in that. But to me, it's probably – Chris, if you want to speak a little bit of a combination and, of course, depending where our stock price is.

Of course. I think the valuation on our stock price is obviously not what any of the executive team wants it to be.

Perhaps not what the capital markets want it to be either. But, Roland, honesty, to Pat's comment, we look at what is the optimal leverage to carry in the business and I think we've said very publicly previously that that optimal leverage is probably between 2 times and 2.5 times.

So that's kind of where we would sit from an optimal perspective.

Okay. Great.

Thank you.

Yeah. Thanks, guys.

Just a question on in terms of what you're seeing out there as it relates to acquisitions, and in terms of the multiples. Have we seen any of the multiples come down namely in Alberta, and what type of multiples are you guys looking at outside of Alberta and some of these bigger metropolitan markets where I believe you're going to be focused on going forward?

Good question. We haven't seen a whole lot of change.

They're certainly not going up by any stretch. As I said, I think at the last conference call, it takes a while sometimes for the sellers to maybe adjust to a slightly different market out there.

What I'm finding and our team is finding is we are getting a fair amount of inquiries and people that are interested in selling. If it's not a really top dealership in a market that makes a lot of sense for us, we're probably being extra conservative right now.

But I don't think prices are going up at all and I think there will be slightly fewer buyers at the table for some of these stores. But, again, I think there will be lots coming in the next few years, like a lot, and I think we're going to be patient and buy the best stores we can, like even the Opera store.

There was the odd person maybe said, well, it's Edmonton. Well, I've been in Edmonton for 27 years.

The market in Edmonton it's going to turnaround. There's over a million people and there is two Opera stores.

I mean, that's a really good brand to have long term. So we're looking at real quality , but as for now, I would, my best guidance on that – I hate to give guidance, but I don't think the prices are going up.

Okay. Great.

And can you just maybe comment on which of these metropolitan markets are going to be a focus going forward? I think GTA is one of them.

What are some of the other ones?

Well, some people might not want me to say this, but the GTA obviously, you've already mentioned that, I mean we think will do very well in that market over the next few years and we're working with small OEMS now to look at that. I still like Alberta.

Long term, I mean it's a good, good place to do business. I really like BC.

We like Winnipeg. We like Saskatchewan.

So we've done well in the East Coast. We haven't bought anything there, but for a long time but our dealerships that we have there do very well.

When we look at another one in Quebec if it was close proximity to the BMW stores? I think we would.

So obviously, we're very open. And it's more the quality of the store is what we're really looking at, and we're really looking – and it's something Steven and I and the rest of the management team has spent a lot of time on and going forward or even more conservative and maybe not reaching a little bit like a lot of groups are doing and just buying top stores in the markets I just suggested to you.

Great. Thank you very much.

Thank you, everyone, for joining us this morning. We appreciate you taking the time.

As Steven mentioned earlier, we would invite you to join and view our webcast at 10:00 Mountain. The link, the web links are available on our website.

If you are so inclined, we would welcome your participation. And in the event that you're unable to join, we look forward to speaking to everybody with our Q2 results.

Well, thank you.

Thanks, everybody.