AutoCanada Inc.

Christopher Burrows - Chief Financial Officer & Vice President Steven Landry - Chief Executive Officer Thomas Orysiuk - President

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

Stephen Harris - GMP Securities L.P. Matt Bank - CIBC

Good morning and thank you for taking the time to attend our conference call for the second quarter of 2016. I'm Chris Burrows, the Chief Financial Officer of AutoCanada.

On the call with me today is Steven Landry, Chief Executive Officer; and Tom Orysiuk, President. Before we begin with the call, let me remind everyone that certain statements 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 of possible risks, please see the Annual Information Form dated March 17, 2016, is available on SEDAR website.

And with that, I'll begin by discussing the financial results for the quarter and then I'll turn the call over to Steven. During the second quarter AutoCanada generated basic earnings per share of $0.53 exceeding consensus estimates of $0.52.

This translates to $16.7 million of net earnings and a 5.7% increase from Q2 of 2015. These earnings were driven by an increase in both revenue and gross profit over the comparative period.

Total revenue increased by 3.1% or $25.4 million to $842.3 million in the second quarter of 2016. Likewise, total gross profit increased by 3.9% or $5 million to a $134.7 million in the same period.

The company's higher sales revenue gross profits and net earnings in the second quarter of 2016 are a direct result of acquisitions made sub-sequent to end of the second quarter of 2015 having acquired five dealerships as well as provided participatory loan for an additional two dealerships over the last period. Same-store sales and same-store gross profit declined year-over-year as they were negatively impacted by the currency economy in Alberta were 1127 same-store dealerships are located.

Generally speaking the automotive retail factor in Canada improved in the second quarter of 2016 over the same period of 2015. Overall Canadian light vehicle unit sales increased by 3.8% for the three-month period ended June 2016 as compared to the same period in 2015.

The Alberta economy continued to lag with a decrease in light vehicle unit sales of 5.6% in the quarter. As a group, our same-store new vehicle retail sales were down 11.8% quarter-over-quarter with corresponding decline of 12.3% in gross profit.

Our overall same-store revenue declined by 3.2% quarter-over-quarter due mainly to an 11.8% decline in Alberta same-store revenue. Outside of Alberta same-store revenue increased by 3.3% in the quarter.

EBITDA attributable to AutoCanada shareholders for the three-month period ended June 30, 2016 decreased by 1.2% to $27.1 million from $27.4 million when compared to the prior period of 2015. During the first half of the year, it has been our focus to reduce our budged and actual capital expenditures.

We have reduced our five-year capital plan by 25% from 193.8 million at December 31, 2015 to 145.3 million at June 30, 2016 of this amount $37.3 million relates to capital assets purchase during the first half of 2016 with the remaining expected capital expenditures to total $108 million for the end of fiscal 2020. During the three-months period ended June 30, 2016, operating expenses increased by $7.4 million or 7.3% to $107.9 million from $100.5 million in the same period of the prior year.

And as a percentage of gross profit increase to 801% from 77.6% from the same period of the prior year, due to the impact of the fix portion of these expenses. As a percentage of gross profit, the fixed portion of operating expenses has increase from 11.4 % to 13.2 % while the variable portion has stayed relatively consistent at 66.9% compared to 66.2d% in the same period in 2015.

Included in our variable operating expenses is a one-time cost related to senior management transition. This cost have $2.7 million is not recurring and accounts for a 2% change in employee cost as a percentage of gross profit.

Including the transition expenses, the variable operating expenses have actually decreased as a percentage of gross profit by 1.3%. Additionally, removing the tax effected expense, normalized earnings per share would increase by $0.07.

We diligently review the operating performance of our dealership and utilize the leverage of a large dealer group to reduce our overall operating expenses. During the quarter, we also fixed data in reducing our inventory on hands from $629 million at March 31, down to $556 million at June 30.

This decrease inventory was driven by an increased management focus on inventory turnover as well as the implantation of new inventory policies across the group. The carrying cost of inventory has decreased by $500,000 compared to the second quarter of 2015.

With that, I’ll turn things back over to Steven, who have further commentary on our outlook and expectations for the remainder of the year.

Thank you Chris. In the past quarter, we have been focused on new and used vehicle volume as well as inventories and driving traffic to our service department and this has paid off in certain financial results.

Our action plan focus is on three core levers that are implemented in our day-to-day operation. First, we continue the focus on operational excellence, this means we closely monitored each dealerships’ performance, including financial metrics, sales metrics and identifying opportunities where our margins can be improved.

And it also improves the technology in the processes that AutoCanada provides from a central supporting system here in Edmonton. And back from an operational standpoint as well, just this past month we had all of our dealers here in a meeting to discuss best practices and shared among our dealers across the country.

Our second main focus on our action plan is cost control. Since the beginning of the year, the company has reviewed all cost within the group and identified and carried out cost reduction strategy and they are on-track.

Our operating expenses of the percentage of gross profits, has decreased 3.7% since the implementation of the plan at the end of 2015. And we have realized savings and the increase that for managing interest expense in our inventories, managing accounts receivable, accounts payable and implementing innovative ways such as share services and central purchasing.

These all helped to control cost ultimately strengthening our financial position, our free cash flow is increased 8.8% to $66 million in this quarter as compared to the same quarter in the prior year, which has provide an increased liquidity for growth in our company. And third, our current economic condition allows AutoCanada to be optimistic in the subject of potential acquisitions.

Our strategy is to acquire dealerships, continue to acquire dealerships that provide accretive returns focusing on flagship stores in key markets. And we are also spending a lot of time on current acquisition opportunities and we believe that we will be able to show significant gains in our desire for growth.

As part of our acquisition strategy, we are also open to acquiring clusters of groups of dealerships in key markets. We are certainly making progress overall, and it's evident by our performance this quarter and we anticipate further improvement throughout 2016.

So in summary, our earnings of $0.53 per share exceeded consensus of $0.52 and when you add the one time elements that Chris talked about early we actually could add $0.7 to that $0.53 which will be $0.60 EPS which will be higher than even our same quarter last year. Our same-store results, still have headwinds and that’s would obvious results within the Alberta market and our whole portfolio of dealerships.

And there is continued focus on reducing operating expenses and as Chris mentioned our CapEx plan is reduced in the five-year plan. And the strength of our balance sheet has been significant and we will continue to improve as one of our key focuses from our management team.

So we are very optimistic in terms of going forward in the back half of 2016 with our business plans and I would like thank you for your support and now open it up to on your questions.

Great. Thank you.

Just wanted to follow-up on a couple of those points, first starting with inventory down meaningfully as you say in the quarter. So it seems those programs are working, are you at or near levels now where you want to be post in new and used or is there further room there would you say?

Hi Steve its Tom. I would say we are comfortable at the level we are getting to, we have put in the hard turn policy where once used vehicle gets over certain number of days, we require our dealerships to dispose it, and I think that’s really helped us in reducing our used inventories down.

We still got a little bit of work there to do with the few of our dealers, but we have met really significant progress there. We have also been focusing quite a bit on the merchandising of the used vehicle, which is resulting at quicker turns of our used vehicles.

On the new side, probably would like to have a little bit more inventory as certain fast moving pieces and they are bit of struggle to get with some of the OEM partners. But we are pretty comfortable with the overall levels we are sitting at.

Okay. And the other big copy of your capital plan, it’s good to see the reduction there and you have been kind of alluding to that I guess for a little while that you are taking a closer look.

Are now where you want to be, are there further adjustments to be made there and again just in making these cuts or these decisions, what are you foregoing in terms of dealership upgrades on new ones or sales opportunities essentially by coming down to these level?

Thanks Steve for the question. It's Steve Landry.

The CapEx plan were really got scrutinized in this last quarter and we looked that specifically in our plan we have certain dealerships that were going to be replaced in totality, like founding new land and building new building. But we have since worked with the particular OEMs to get approval and permission to do a major renovation as appose to the higher expense of purchasing land and building a new building.

So that’s part of the saving. Another piece of the saving is, some of the OEMs have the new beautification programs in terms of adhering to the OEM standards for facilities and in those, as suppose to doing them in over a two-year period, we have spread them over five-years.

And again, have permission from the OEMs to do it in more of a sequential fashion rather than in parallel.

Okay those made sense. And I guess just final one from me, just on the acquisition plans and capacity I know you talked about pretty active pipeline, so I'll certainly watch more there.

Just on your capacity, it looks like the adjusted debt to EBITDA number went from certainly 4.19 to 4.44 still well below the covenant of five. But just when you look at that, is that an adequate buffer would you say to give you the room for the kinds of things you are looking at?

Or what moves at number lower in coming years, is it lower debt, higher EBITDA?

Steve it's Chris here. I think that we are very comfortable with the existing liquidity in financial position of the company.

Four of seven of our covenants have actually improved since we last reported our covenants. There is still substantial amount of headroom.

So taking kind of the availability of credits on our existing facilities, coupled with the declines in our plan CapEx spending and still a very strong 12-month trailing cash flow. Very comfortable that we have got sufficient liquidity to continue to grow and acquire on the things that we are looking at.

Okay thanks a lot. I'll pass the line for now.

Hi good morning gentlemen. Steven, you have been with the company for last several months, could you please elaborate on your business strategy and what are doing differently today versus what was being accomplished a year-ago?

I think for the most part, I was very pleased when I came to AutoCanada in terms of the people, the process, it's a true automotive company. Good people also in terms of a younger demographic, understanding the digital world from a consumer or customer standpoint.

What I’m focusing on that’s probably different than when I started, is really having all of us and you have heard Chris from a CFO perspective and Tom from an operations perspective and myself from the acquisition side, and really focusing on fundamentals and the base plan for the company. What I like about this company just in general is that it's made up of 53 or more individual dealership or positive businesses that have four or five departments each.

And for the most part, all of them are actually making money. So we are real company, real assets and making real net income every month and earnings.

And as we go forward, we need to keep strong focus on those fundamentals, but also work with our existing dealerships to improve our margins and improve our volume sales from each of our dealership and there is I think room for opportunities in that area.

Okay, and then that was referenced to acquisition pipeline, could you give us an idea of the competitive landscape like you running into more private dealer groups, or private equity players is a factor?

I would say as private equity is not a factor, in terms of what we are just talking to and potential opportunities for us. What we are finding is that there certainly are opportunities and we are national company even though we are headquartered in Edmonton.

So the opportunities for us to grow is to diversify it. And for us it’s better to diversify outside of Alberta and especially into market such as Quebec and Ontario and BC where the overall vehicle industry is higher than the other provinces, in some cases.

And in those areas, there are not only individual single dealerships for sale, but what we are finding is we are having more conversations with private dealer groups in terms of multiple stores for sale and that’s very exciting for us as a company that wants to grow.

And one last question. How soon could we expect the signing of new OEM to AutoCanada?

I know Tom was talking about it a while go, but how do you see things on that front?

Yes. It’s a really hard thing to call.

It's certainly a priority for me and I have been very fortunate to have the meetings that I have desired with the OEMs in Canada and so certainly making progress, its early days, but very positive.

Okay. Thank you.

Thanks guys, good morning. Just coming back Chris to this $2.7 million charge, can you give us some color about it?

And just how much is cash, how much is non-cash and I think you said it was one-time?

Yes, Chris it is a one-time non-recurring expense. In terms of color these are normal and customary transitional charges that you would expect when you are on Board and you are CEO and you have the retirements of an existing executive.

In terms of what is cash what is non-cash, about a third of this it is a cash expense during the quarter, rest of it are estimate and contingency to recognize our liability going forward.

Okay, thanks that’s helpful. I guess just coming to the operational numbers, I mean it certainly sounds pretty good as you said I mean ex the charge your expenses as a percentage of gross profit down of 1.3% in the quarter and I think Steven, I think the number that you suggested was 3.7 since you have really started this program.

Is there a kind of a number that we should be thinking about in terms of run rate of where you get to in terms of those metrics. I know you talked about the $15 million this year, but is there some sort of trend that we should be thinking, like is that 1.3% kind of quarter-over-quarter the right way to think about it as we move through the rest of 2016 and into 2017?

Yes, Chris its Tom here. There is a couple of different ways that I look at it from an operational point of view, or you know we as a team look at it from an operational point of view.

And one is the gross margins we are achieving by department. I tend to lump and use it together, because where you have a new transaction quite often you will have a used transaction.

when you take a look at our same-store sales and our non same-store sale. The non-same-store sales, which we outlined in the MD&A really take a look at the margin improvement year-over-year and then compare that to our non same-stores and try to move the stores we acquired through their margins continuously, so they match up with stuff that we have owned for over two-years.

The other area that we try to focus on is our operating expense as a percentage of growth. So our cost reduction plan, we are looking at on a per unit basis and as a percentage of growth and trying to move the numbers back to where they were about two-years ago, three-years ago.

That being said, you are not going to line up completely on a same-store basis, because you have new OEM such as BMW, which is a fantastic brand and one other thing that’s unique about BMW is they include the regular schedule maintenance with purchase of the vehicle. And we do that at a reduced rate for BMW.

So we are not going to get the fixed sort of parts and service margins as we get into group that we would be with BMW, just because of the unique value proposition that they offer their consumers.

Okay that’s helpful, thank you. And then the last question from me, just one of the thing that was interesting in the release is that you broke your collision repair business as a separate line item from your service business for the first time.

Can you give us some more color on the nature of the work that you guys do in collision repair business? And really I guess what the top process was between carving out and really what do you think you are going to do that business and any intensions on future growth work?

Yes, I’ll handle that too, if you don’t mind. We were not big participants in the collision repair business until recently where we made all the acquisitions over the last couple of years.

And it's grown to be more significant components of our overall business. We decided to break it out for a couple of reasons.

One, it increased significance to our total operations. Two, we think we have got a very significant opportunity there, because of the scenario we haven't focused on - we have made the acquisition, we can see that some of the stores that we required actually were probably better at running their collision centers and we were.

We are looking to leverage some of that expertise. And a third reason why we broke it out was, it's such a mild winter rate across North America and everywhere we operate that it really shows in the results, the collision department just has not been as busy at all, compared to previous years.

And theoretically we are suppose to have a much normal colder winder that will help our collision centers a lot busier. So it's something we are really focusing on and we see as an area of opportunities that we can unlock.

Okay, is that an area that you actually think about putting acquisition dollars into, just say add collision services maybe into that cluster strategy in areas where you don’t have it?

Steve and I have talked about a couple of different things with the collision centers, and one is we have to brand it by dealership, is that the best strategy, how do we leverage or put in group on our cost strategy, but it's pretty earlier days with that as well.

Okay, great. Thanks guys.

Good morning gentlemen. Just wonder if you could provide us with a little more color on the issues in Alberta and we see that you talked about in your release.

Just a sense of the extent to which the weakness you are seeing there is regional, is it plan related, is it individual specific dealerships and the steps you are taking to address that?

Well from an operational point of view what we believe has major impact on our ability sell new and used cars is employment levels, and consumer confidence. And when the economy is challenged where dealerships operate, if you have a falling off that consumer confidence, you have got to increased employment levels, it will impact sale.

On a regional basis in Alberta, we do have higher employment rate where it’s usually [indiscernible] we do think that there is again a lot of opportunity for it to come back and probably fairly quickly, but in the meantime we will just focus on selling cars, because we are good at. Last conference call we talked about how credits was getting a little bit tighter, in particular one of the things was going down these the sales process has a lot more emphasis on proof of income and the banks acquire any more information from a consumer in order approve them for a loan.

And that slows down our businesses as well. But there has been no real change on the access credit I would say from Q1 to Q2.

It's not where it was two-years, three-years ago and I should improve at some point, we don’t know. We are just going to run the business the best we can given the environment we are operating in.

Okay I think what was after there was, there it seems to be some pockets of underperformance even in the top market in Alberta and in BC maybe just some operational challenges in individual dealerships and just wondered if you can give us a little more color on that. We understand the macro and that is nothing you can do about that?

Yes, I would say like if you take a look Alberta, Calgary, Edmonton, Grande Prairie you can pretty lump them into the same buckets right now. There is a while maybe a year ago, year and a half where you could say probably Calgary was running a little bit more than Edmonton.

I think it's pretty much spread out. Brand performance I think was something else you mentioned, the brands do perform differently by region.

That definitely shows in the sales numbers by brand.

Okay. All right so are you comfortable that going forward we should look for basically your Alberta business to mirror the provincial trends or is there anything more than it, you would elaborate on there.

Well if you look at the GDP, I think that’s probably the best indicator of just overall general business, and how Alberta compares to other provinces across Canada and national as well, as the income or employment level structures were announced this morning. All have to do is with business and we seem to track with all of the other consumer goods in terms of the differential between provinces.

Okay, good. Thank you.

I'll turn it over to the queue.

Hey guys. What kind of returns do you need to green light a CapEx project and were they cut in differed product below that hurdle or really just too expensive within in your term?

Hey Matt its Chris. The targeted return on our capital projects would be 11% up for hurdle rate.

In terms of what was cut out of the CapEx plans, it was less about the hurdle rates and more about can we achieve the ultimate results by doing as an example a renovation instead of relocation. Both of those projects would have been above the hurdle rate but overall dollars and overall costs doesn’t make sense to spend that money.

And the answer was in limited capital, limited funds it made more sense to keep the rental projects as an example.

And then sort of on that. Has there been a cultural ship there in terms of how number look at CapEx and sort of a permanent change and how you evaluate or it's more based on the current environment?

I think a lot of it is based on current environment, I think that defiantly we have stepped back and have been to forced to step back as a result of the current environment and take a silver second look at all over the CapEx. Obviously we have had many, many conversations with our OEM partners, manufacture partners, because we still could ultimately achieve their goal and our goals together.

So defiantly, we have taken a fresh look at this and I think what we have presented now for a revised capital plan going forward is based on kind of our best information today with that silver second look.

Okay thanks. And then with the focus on flagships for future acquisition.

How do you think it look the smaller dealership in your network currently, are they core to your portfolio?

We would like to focus on the medium to large size dealers and the demand and effort put into doing an acquisition for a large dealer, large return has still lot better for bigger stores, because it's improves our numbers faster. And I would also like to add color Matt to what Chris was saying on the CapEx, because you will see this year in 2016 that we are spending larger than normal year, but that’s also because really strong return projects such as building.

We are currently building a new Volkswagen dealership in Edmonton and also building a new Audi dealership in Winnipeg and that where we really have a decent return on invested capital.

Okay. Last one, so the industry data in June had Alberta positive, did you guys see a noticeable improvements sort of as you move into Q3?

So Matt, sorry what did you say was positive for Alberta?

Industry light vehicle sales.

Well the industry is up in Canada, but it's actually down and new vehicle sales are down in the province of Alberta.

In June?

Matt its Chris. Year-to-date Alberta is down, I think there was a small improvement 1% or 2% in Alberta in June.

Alberta is an interesting and challenging retail environment for us right now. From a month-to-month, and I think even if you look at the monthly data, you will find small positives and small negatives and big negatives on a month-to-month basis throughout the year.

Overall, Alberta year-to-date is down 6.2 which is I would say more consistent with what our experience is.

Thanks very much.

Just kind of following up to that question, one other thing that was interesting just the July data that came out. Chrysler I guess is in the process of restating how they are going to report some of their sales on a monthly basis.

And I know this is part of debate we have been having about registration data versus OEM reported data. Any early thoughts on how that process maybe taking place, whether you see that moving through other OEMs and whether or not the data that starts to change might be more representative of what you guys actually see at a retail level?

Well Chris I think obviously that was a point in time for FCA in terms of restating their sales in U.S. and Canada.

What we did is get together and make sure that is there any impact on AutoCanada at all and there is not. We booked revenue and vehicles are sold at the dealership and the dealership receives the money, and then we are charged for the vehicle by the OEM, when the vehicle is shipped to us and our floor plan takes over.

So we are following the money, we are outside of the actual accounting. I think from as business practice standpoint if you were to read automotive news or any of the automotive journals, there is a lot of articles on the reporting system and how they work and they are different for each of the OEMs but we are not affected by any miscounting.

So do you think this is the data might become more representative of what you guys are actually seeing on a multi basis or quarterly basis?

Chris it's Tom here. I think one of the challenge out there that I have always struggled with is we tend to focus on pure retail sales, like sales to consumers, people like yourself, your wives, your uncle’s aunts, cousins’ friends.

What the OEM report is overall sales and that includes sales to dealerships, by the dealerships, small and medium size leasing companies, daily rental companies, sleek sales which we participate in, but not fully and we certainly don’t make much money off of. So there is always I think going to be a bit of disconnect between what we report as retail sales and what the OEMs report as overall sales.

What we do know and we can't really share with you because its confidential OEM information is we do have a good idea of what retail stock sales across the dealer network and we can use that benchmark and see how our stores are performing over a quarter or a year. And generally, we are very happy when our stores performing, picking up their share of the retail markets.

Okay, great. Thanks guys.

Just wanted to say thanks everyone for participating in today's conference call. We look forward to speaking with everyone at the release of our Q3 results.

Thanks everybody.

Thank you.