AutoCanada Inc.

Christopher Burrows - CFO Steven Landry - President and CEO

Chris Murray - AltaCorp Capital Matt Bank - CIBC Derek Dley - Canaccord Genuity Maggie MacDougall - Cormark Securities Steven Harris - GMP Securities

Thank you. Good morning, everyone, and thank you for joining us on this call.

With me here today is Steven Landry, our President and Chief Executive Officer. And before I turn the call over to him, 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 AutoCanada's most recent Annual Information Form. 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 any responsibility for the accuracy and completeness of the forward-looking statements, and does not undertake any obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. For additional information of possible risks, please see the AIF dated March 15, 2018, which is available on the SEDAR website.

With that, let me turn it over to Steven.

Thank you, Chris and good morning everyone. Thank you for joining us on this call.

I will open the call with some high level observations on the year including some of our key company achievements and then pass it back to Chris, who will provide detail around the financial numbers and our performance for 2017. And at the end of the call, we will be happy to take your questions.

We had a very strong finish to the year continuing a trend that really started to take hold late in the second quarter of 2017. We were helped by a strong new vehicle market in Canada, in fact the new vehicle market hit or exceeded 2 million units for the first time in 2017.

The market was particularly strong in Ontario and the West and it provided us with a nice tailwind for three consecutive quarters in a row. We also hit three records in 2017.

One was revenue $3.1 billion, up 16% from last year, EBITDA $112 million up 11% from last year, and net earnings $57.8 million up 24% from 2016. And while reducing our operating expense marginally during the year.

In 2017 for AutoCanada, we had a strong finish as I mentioned a moment ago we added two new brands to our portfolio. In April, we expanded our luxury portfolio with the addition of Mercedes-Benz Rive-Sud in Montreal and we also announced the first Mazda dealership in October adding to our Asian import platform called Planet Mazda.

Both dealerships are located in the Montreal area where we already have two BMW and two mini stores and 2017 acquisition brings our total dealerships in Montreal to six. Other major manufacturer development in 2017 happened in December and that’s when we signed a public company master agreement what we called PCMA with General Motors of Canada.

Under the PCMA, AutoCanada is allowed direct ownership and voting control of GM Canada auto dealerships for the very first time. At the same time, we also reached an agreement with a company controlled by our former CEO and founder which resulted in us assuming control of five of the nine GM dealerships where we had a majority equity stake but not the voting rights.

These agreements were a long time in the making and well worthy efforts. Now the acquisition of additional GM dealerships for AutoCanada is a very important part of our acquisition plan going forward.

The combination of new dealers in Montreal and our divestiture of GM dealerships in Edmonton and Colona shifts our geographical weight from the west and then also adds luxury and import brands in diversifying our product along with our domestic brands. So let me now turn the call back over to Chris for more details around the quarter and the annual performance.

And then I'll come back and talk about the year ahead. Chris?

Thanks Steven. As Steven said we were able to continue our momentum into the fourth quarter through to the end of 2017 with strong performance including double digit year-over-year same store revenue growth.

Let me turn to some of our key metrics for the year and the quarter. Additional details can be found in our MD&A accompanying the financial statements that we released yesterday.

You can find all of these materials on AutoCanada's Investor Relations website and filed on SEDAR. In 2017 we grew total revenue to $3.1 billion this is an increase of 7.3% from 2016 and an all-time record.

On a same store basis our annual revenue grew by 2%. We had a very strong fourth quarter with a 16.5% jump in revenue to $733 million.

Same store performance was particularly strong with an increase of 11.1%. In 2017 we sold 43,773 new vehicles, an increase of 9.3% over the prior year, in dollars that amounted to $1.8 billion, up 10.6% from 2016.

New vehicles accounted for 58.9% of our total revenue and 25.3% of gross profit both of these percentages up from 2016. In the fourth quarter, we sold 9,822 new vehicles posting an increase of 16.3% from the same quarter in 2016, again in dollars this was $417.6 million, an increase of 20%.

As a percentage of total revenues, the sale of new vehicles in the quarter accounted for 57%. As a percentage of gross profit they were 24% again both proportions increasing compared to the fourth quarter of 2016.

Annual sales of used vehicles was 19,379 units, down slightly from last year, in dollars that was $716 million down 1.3%. Used vehicles accounted for 23% of our annual total revenue, and 8.4% of gross profit, slightly down from 2016.

But in the quarter used vehicle sales were up 4.3% to 4,653 vehicles, in dollars that was a $175.3 million up 11.1%. As a percentage of our total revenue for the quarter, the sales of used vehicles accounted for 23.4%, as a percentage of gross profit they were 6%.

So up in terms of revenue and down in terms of gross profit compared with the same quarter of 2016. Annual revenue from parts, service and collision repair generated $416.7 million up 8.8% from 2016.

This accounted for 13.4% of our total annual revenue but 41.3% of our gross profit, again consistent with 2016. For the quarter parts, service and collision repair revenues were $107.2 million or an increase of 16.1% from the same quarter last year.

This was 14.6% of total revenue for the quarter and 45.5% of gross profit, slightly lower than in the fourth quarter of 2016. In 2017, our finance and insurance revenue was $141.3 million up 8.6% from the prior year.

This was 4.6% of our total annual revenue and 25% of gross profit both measures up from 2016. For the quarter finance and insurance generated $33 million of revenue, an increase of 6.1% in the same quarter in 2016, which is 4.5% of our total revenue for the quarter and 24.5% of gross profit.

In 2017 gross profit totaled $518.6 million up 6.7% compared to the prior year, as a percentage of revenue it decreased slightly to 16.7% from 16.8%. On a quarterly basis, gross profit was $125.2 million up 7.2% compared with the same quarter in 2016.

And as a percentage of revenue quarterly gross profit decreased to 17.1% from 18.6%. EBITDA attributable to AutoCanada shareholders increased by 17.3% million or 18.3% to $111.8 million from the prior year.

For the quarter, we also posted an 11.3% increase to $28.1 million compared to the same quarter last year. Annual operating expenses were $426 million for the year.

As a percentage of gross profit, operating expenses improved slightly to 82.2% in 2017 from 82.4% in 2016. Operating expenses in the fourth quarter were $104.6 million.

As a percentage of gross profit operating expenses were 83.6% compared to 83.4% in the same period of 2016. As Steven referred to earlier, the divestiture of certain GM dealerships will have a dilutive impact to our company.

However, the reduction in earnings is offset by the acquisition of the minority ownership positions of the five GM dealerships acquired as part of the reorganization of those investments. Our past practice required the full consolidation of earnings of all nine dealerships and consequently this transaction will reduce consolidated revenues by $370 million and $58 million of gross profit based on the reported amount from the 2017 fiscal year.

Finally, in 2017, we generated net earnings attributable to our shareholders of $57.8 million or $42.7 on an adjusted basis. In a per share amount this is $2.11 per share or $1.56 on an adjusted basis significantly up on a reported basis this reflects some onetime items in the year.

Otherwise, we saw a very healthy increase on an adjusted basis as well. In the quarter, we also achieved increased earnings.

Our fourth quarter net earnings was $17.1 million or $8.9 million on an adjusted basis. At $0.62 per share $0.33 on an adjusted basis both up from the same quarter of 2016.

In summary, 2017 was a good year and ended very well. That in turn helped deliver strong results across all segments of our business giving a reason to be confident about 2018.

And with that, I'll turn the call back over to Steven.

Thank you, Chris. Last month AutoCanada's Board of Directors declared a dividend for the quarter of CAD 0.10 per share payable on March 15 to shareholders of record on March 1.

A number of factors go into the board's decisions on dividend including management team’s analysis for the board's consideration. The goal is to efficiently allocate capital to fuel AutoCanada’s future growth while at the same time rewarding and sharing the company's success with our shareholders.

Next, I'd like to pick up on Chris's comments regarding the market and where things are looking at for 2018. Early projections for 2018 indicate a continued strong Canadian market.

The economy is doing well, interest rates continue to be low, albeit are expected to increase this year marginally. We are in a strong economy with low unemployment and for AutoCanada this provides a healthy macro environment.

The preference for trucks and SUVs also bodes well for us given our current product mix. New vehicle sales continue to be our initial touch point with the customer and from there we begin a long-term relationship with our customers through FNI, Parts and Service and when the customer comes back to trade in that vehicle for another new one and the cycle continues.

And as you’ve heard from Chris, each of these business segments have seen growth in the fourth quarter and throughout the whole year of 2017. The exception was a very slight downturn of used vehicle sales over the year and that's due to our inverted relationship between the new vehicle sales and used vehicle sales.

Now as we move forward we’ll remain focused on our level of operation – our lever, sorry of operational excellence. This has already resulted in enhanced dealership performance in 2017 and it will continue to lead with further improvements in 2018.

And I would like to give a thank you or a shout out to our COO, Mark Warsaba and all of our AutoCanada dealers coast to coast for an outstanding 2017 performance, and our multi-location model service as well. We continue to diversify our geography and demographic, we continue our cluster strategy enabling us with scale benefits.

Our operations are decentralized, however, with a single point of administration and consistent strategy and goal posts from our head office. We are able to provide strong support to our dealership network and we do that through our brand platform teams.

And this way, we are able to meet the needs of both our dealers and our OEM partners and in 2017 was our first year with this team platform approach and we saw immediate results from this approach and our same store sales and profitability both increased in 2017. As of the end of the year, we earmarked $142.7 million for planned future capital projects over the next five years including new dealership construction and expansions.

Now our second lever is strong growth. Acquiring new dealerships and effectively integrating them is key to our long term success.

We are actively looking to replace the volume in net earnings from our recent GM divestitures through acquisitions of the same manufacturer as well as other brands. The acquisition pipeline remains quite strong and we continue to critically evaluate our opportunities which are both strategic and accretive.

Clustering our grouping strategy remains in place and we look forward to the addition of new stores in metropolitan areas, building outer platforms. As always we continue to work with all manufacturers including those we don't currently retail for in efforts to develop relationship as well as to diversify our portfolio.

We think the auto industry is at a critical juncture. Some of the trends and innovations and disruptions will only accelerate in the years ahead.

These are the trends driven by technology like electrification, artificial intelligence, driverless cars, advanced robotics and we embrace it at AutoCanada and we intend to play as a significant role in the retail space as it does change over the next 10 years. This will allow us to adapt our business to the face of complex dynamics in a changing industry.

So with that, we’d like to open the line to questions.

I guess my first question just on the mechanics of a couple of things in the quarter. I don’t know who wants to take this one.

But first of all, can you explain the gross margin unused was very, very low relative to previous quarters. So just some more color around maybe what might be going on there?

And can you also talk about your operating expenses, some of your variable operating expenses were a little bit high, just trying to figure out if how much of that was related to perhaps some of the work you are doing with some of the transaction agreements with GM?

In terms of in terms of used vehicle margins in the quarter you’re right, there was a softness in those margins. I think as we move through the quarter as Steven said earlier, there is a bit of a counter cyclicality kind of inverse relationship as customers move between both the new and used car segments.

Also in there would have been some inventory management kind of flowing through in the quarter where we look to kind of right size and make sure that we’re in the exact right position where we need to be as it roll into the new fiscal year. So, were we selling cars, taking fair margins in the quarter?

Yes we were. But we’re now in a very comfortable position, where our inventory is exactly what we need it to be as we rolled into the next fiscal year.

I think that I would caution you that it’s not the - the margin results on used cars are not the new normal from a predictive standpoint. This is a Q4 impact localized.

In terms of your second question on variable operating expense, definitely there is, there is cost inside variable operating expenses that were incurred throughout 2017 related to acquisitions, related to transactions, related to working through as you said and you’ve asked around the PCMA contracts for sure, again kind of more, more localized to the 2017 year. I think we’re up 1.3%, 130 basis points and I would, I would state views that, about half of that is related to kind of those, those contractual negotiation costs this year.

Just moving on, quick question on inventory, the actually inventory numbers you talked about maybe some aggressive inventory management in used car. But even looking at days inventory, I guess a couple of pieces of this - should we be expecting that the inventory trends that we’ve been seeing continue into 2018.

And I guess a piece of this is, there is always some seasonality. But I guess even on a seasonal basis we should be expecting to see continual improvement into 2018.

And I guess the other way to look at this is, are there any models or brands that you're actually a little thin in terms of the inventory levels that you want to be available for you - just to maintain your sales pace?

Well why don’t I take the first piece and I'll turn it over to Steven to talk about models and brands. From an inventory management perspective, we are very focused on inventory perhaps one of the largest assets on our balance sheet and therefore one of the largest carrying costs behind that as well.

Definitely our focus is to have the right number of days sales and inventory sitting on ground typically for us that’s around a 90 day type of metric. We do obviously this year and have a little bit more inventory moving into the 2018 year.

Not worried about it, it's kind of the inventory where we'd like to be at this point. As I said we kind of - we're happy both from new, used inventories that are sitting on ground right now.

In terms of models, I’ll let Steven respond.

The used vehicle industry is actually one of focus for us and in balancing the inventory that we currently have we try to keep below 90 day supply on used vehicles in general and then we look at by brand and by dealership where the used vehicle industry is and how do we maximize our gross margin with used vehicle sales going forward. And that’s - we're not, I would say we're not short particular brand but there is a move and in a push from the OEMs to have the certified pre-owned vehicles which falls under used vehicles and with the high level of leasing and markets like Montreal and Toronto there is a larger inventory of CPO or certified pre-owned that actually benefit and provide a great allocation to use vehicle department and then for us to have a marketing plan to move those units in less than 30 days.

So that we can keep our inventories down because the expense of holding the inventory is quite directly related to how quick we can turn our used and our focus in 2018 is turning used quickly.

I think the intent to my question was just try to understand, are there any particular models I know we had talked about, issues with availability of things like truck. Do you feel like you got the adequate inventories you need in order to just to be able to be your 2018 objectives?

As both on new and used because we - last year or two years ago I think it was that we wind a little bit I think about not having enough Ram trucks but our dealers inventory on Ram new is good. And I think with the launch of the new Ram, this first quarter, it's going to provide the healthy nearly new or two to three year old used Ram truck for our inventories that we're looking for, we want to maximize that opportunity.

If I can just squeeze one more in, Chris gave us some numbers around the GM stores of relieving; I think the number just to make sure I’ve got this right, roughly $370 million in revenue, $58 million in gross profit. Can you also give us a breakdown if you have it on of how that should impact the non-controlling interest line in terms of the earnings from those parts?

I know where you're going here. So we don't typically talk below the gross profit line especially on the store-by-store basis.

But what I would say and how I would characterize those four stores is that the ultimately the earnings profile of those stores that have been divested would be similar and consistent with kind of the group averages. If you were trying to look at what the impact of those stores actually is I think that the profile of that will obviously have an EPS impact in the quarter.

Does that answer your question, Chris?

Yes, I think and I guess sort of the next follow-on to that is that would it be fair to think that the contribution from those stores that you are going to keep as opposed to being in non-controlling interest that will move above the line so your total non-controlling interest numbers should also come down?

Correct. Overall as a percentage, the non-controlling interest will drop substantially.

There's very few stores remaining within our portfolio that have significant or meaningful minority positions, minority equity stakes.

I wanted to start with the broader market. So the market is at somewhere near a cyclical peak potentially certainly it's at record levels.

Should auto industry sales slightly contract, does AutoCanada itself have enough internal levers to continue to grow?

The short answer is yes. The 2 million industry to me is just a large sandbox and that we plan.

And for our new volume, which is the largest new volume in Canada for an auto retail group of 43,700 units and we still have a lot of runway, and a lot of a lot of growth still to go. So even as the total industry of 2 million comes down to 1.9 million or even 1.8 million, we don't even need different levers although we have them.

But the really nice balance of new and used is one, but the actual as you know the actual margin on new and used is somewhat limited. The real opportunity is in service and parts, and that's where the margin, we can develop increased and improved margins that could significantly benefit our bottom line.

Matt, if I can jump into, I think the other piece of it is as Steven referred to earlier is 2017 had kind of the introduction of the platforms within our portfolio, and I think that with the introduction of the platforms, it gives us the ability to continue to increase market share in our stores and in our locals and geographies even in the event that the overall broader Canadian market were to contract below that 2 million mark.

And then in terms of that service and parts opportunity is that just thinking that in some of your dealerships you under index in those categories and if so what is the plan to get volumes up there?

It's more directed toward marketing and driving more vehicles to the service drive, especially cyclical times of the year like now to get your snow tires off in November to put your snow tires back on and usually upsell comes along with that, when our customers come back into the dealership for that type of work.

I also want to ask on margins, so sales growth in 2017 was really good; EBITDA margins were actually flat on the year. So just wondering what held back the margin expansion in 2017 and do you expect operating leverage in 2018?

Yes, I think the sales operating margin was flat as you've alluded to Matt. I think that there's a few things in there.

2017 was the – was the rollout of the platform teams kind of in the second quarter is when those really came into being and then throughout the past nine months working and really tweaking on what those platforms look like, how they operate. Now I think we're in a situation where you'll start to see some operating leverage improvements definitely as we've said before our goal is to get back to where we've been historically which is above 4.

We're not there yet. We think that there is some opportunity to move to move into the high 3s and start to see some of that torque and some of that leverage in the operating performance of the company.

But I think that 2017 was year one of the new management structure and style and I think 2018 will start to see improvements.

Thanks and just one quick one on accounting. Cash, cash taxes came in lower than tax expense for this year.

How do you expect that to play out next year?

I mean, I think when you look at, when you look at our effective tax rate, Matt, I think that to pay on where we, where we kind of expected it to be, so I would expect that to just look back kind of consistent with, with previous norms.

I was just wondering if you guys can talk a little bit about, we saw margins coming in a little bit at the parts, service and collision. I was just wondering if there's any trends that you're seeing there that have caused the margins to decline a little bit here in Q4?

No, I think that the margin on the on PSC on our parts, service, collision in Q4 definitely where we expect to be kind of in that 51.5% to 52.5% in the quarter, I think it was 52.8% on the year kind of 51.8%. So pretty much where we expect it to be.

It was comping against a very strong number in 2016, but for 2017 it's, it's where we expect it to be and kind of a repeatable run rate.

And then just switching gears, just your commentary on potential acquisitions with – what looks like to get focus on GM acquisitions in 2018. Just wondering if you could talk a little bit about your balance sheet, if we exclude the floor plan, we get to around 2.5% adjusted net debt-to-EBITDA, just wondering where you'd be comfortable taking that leverage in the event that some accretive opportunistic acquisitions did come up?

Definitely, we would, we would increase operating leverage, if the – if the right opportunities presented themselves. As everyone on the calls knows, there you can only buy what is available for sale and sometimes out of those a little bit lumpy and chunky and problematic to try and forecast.

You know in that vein, if there were opportunities that we’re you know made senses from our strategy that were accretive to our business, we would absolutely look at those, and would reflect leverage nor so where we're at today by at least a turn. Yes, we would, but they would have to be very, very meaningful very, very strategic very accretive for us to move to you know 3.5 times or 4 four times.

Just back on the question around the gross margin. I'm wondering if you're able to sort of quantify the impact that the used car isolated Q4 softer margin, may have had, but if you were to normalize for that what would these margin look like in the quarter?

I think that have we - had it been a normal run rate. You see a 20 basis points to 25 basis points more on the overall company related to the softness in the margin specifically in used in the quarter.

And then just maybe a bit of a longer term question. I've noticed, and I think it's been commented in past calls, that your average price per service in the service division has been picking up over time.

And you know certainly hearing a lot about new technologies being out in cars, and the impact that has on servicing those vehicles in terms of being increasingly expensive, and more technical. Is there a view at some point that you'll have to revisit the equipment, and I guess the expertise that you have in your service departments in order to be able to continually service those vehicles the new vehicles that are coming out?

It's a good question on the technical part of the vehicles. They are getting more complicated and they do require in some cases equipment that is specific to the each of the OEMs.

That's not new that's been around for a while. It does get expensive, it's all part of the capital budget that we have for each of the dealerships.

The strong point on that is as the vehicles get more complicated, the owners, it's more difficult for owners to take them to third parties or jobbers and they really are forced to come to the OEM to get a lot of this new complication fixed and the OEMs are really, really good in general with trained technical - having trained technicians in the dealership. So they all provide technical training across the country that our technicians go to on a very regular basis.

So it's a - while it’s unique it's also very, very scoped into our own dealerships.

And then just following on some previous questions around sales, I'm just curious you've got the new Ram truck coming for spring summer 2018 and you've got some good momentum in your business now over the last three quarters, that your organic sales profile has definitely been improving. So I'm wondering if you can just give us a bit of sort of what your expectation is heading into those peak selling seasons this year?

In terms of sales volumes?

Yes. Like have you seen good momentum, have you had any customer feedback in terms of what the new Ram looks like and all those sot of things?

I saw the Ram at the Toronto auto show and a lot of our dealers have seen it at regional training or show and tele meetings as well. And I think that the truck itself is going to make a difference in the marketplace and even when GM in the last two years came out with their new truck, it always - trucks always make a difference especially with the big three.

And so you can't really make a call on what it does to actual sales or I can't anyway on - but from a momentum standpoint it feels really good right now, I mean we just - like you've mentioned, we were coming off of the 2017 with a lot of our wheels working in the right direction both financially and operationally. And so as we go into the, our key selling months are March to October and we're getting into that period right now, making sure our inventories are there.

So I look forward to a really strong 2018.

I just wanted to follow up a little more on the question of acquisitions and acquisition pace. I think you’ve talked earlier about the pipeline being quite robust, you've had to divest four GM dealerships, I guess net one after minority interest, but still you've got room to add there.

And you’ve indicated a willingness to use your balance sheet. So, what exactly is missing to make these transactions happen and what is a reasonable number you think is achievable for this year.

Could you do five or six acquisitions this year, is that possible?

We have a very diligent now acquisition process as you could see in the last couple of years, we just did a couple each year. But I can answer your question, and I think in terms of can we do five or six this year for sure?

Absolutely. And our pipeline is indeed pretty thick.

And because of the amount of due diligence that we do, it takes a little bit longer, but I think in 2018, we’ll certainly will be in our growth and expansion mode now that our fundamentals and foundation are where we want them to be.

When we look if there is $90 million of cash in the balance sheet, over a $100 million available on the revolving credit. To Steven’s point, could we finance acquisitions at a faster pace than we've done in previous years?

Yes, we can. And we’ve taken a pretty hard look at a few acquisitions over the last number of years for sure and we've indeed walked away from deals that that didn’t make strategic sense.

They weren't large enough. They weren’t in locations we wanted to be, but most definitely, we've got the financial wherewithal and liquidity to continue to acquire and potentially increase the - and accelerate that pace in 2018.

And as a follow-up, what are you seeing with pricing on acquisitions and is there any differences across the market by different categories of brands or locations, what's pricing looks like?

It certainly changes by brand and in terms of the multiples paid for dealerships. And so that becomes averages that you sort of get used to in terms of the brand and what a multiple might be.

The geography, sometimes makes difference, makes a difference depending on location, net earnings with the dealership plays an important role as well. But the real variable is the one you can't control and that's the seller's expectation of the value of their assets.

And that can come from them and that's kind of a wide range on it.

And if you had to compare it to where you were say a year ago are you up down sideways?

Well I think from a year ago today we have many more opportunities that are realistic to us.

Okay. Does that imply pricing is more attractive?

No. Well pricing is a difficult number I guess there's so many variables we put in our process, but I would say the pricing, yes probably a little bit different, because I think the number of transactions have slowed down a bit and in general in total but not enough for us.

Thank you, Operator, and thank you very much everyone for attending the call. We look forward to hosting you on our next quarterly call and our Annual General Meeting, standby don't hang up yet, because it’s a new location.

We will be hosting you and hopefully you can come on May 4 in Toronto, at the Toronto Stock Exchange building where we will have the boardroom available and look forward to hosting everyone there. Thank you and have a great weekend.

Happy St. Paddy's Day.