2017 Annual Report - Dealer US

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2017Annual Report

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAWhat’s Inside1WHO WE ARE5Where We Operate9Strategy17Operations21Revenue Streams29Management Discussion & Analysis69Annual Financial Statements

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTOur current multi-location automobile dealership model enablesus to serve a diversified geographic customer base and enjoybenefits not available to single location dealerships.

W W W. AU TO CA N.CAAutoCanada (TSX:ACQ)AutoCanada is a leading North American New vehicle sales; Used vehicle sales;comprised of 27 brands, in eight provinces in Parts, service & collision repair; andCanada as well as a group in Illinois, USA. Our Finance and insurance.multi-location automobile dealership groupcurrently operating 68 franchised dealerships,dealerships generate revenue from the following four inter-related business operations:Our BrandsWHO WE ARE3

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAWhat’s Inside1Who We Are5WHERE WE OPERATE9Strategy17Operations21Revenue Streams29Management Discussion & Analysis69Annual Financial Statements

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAWhere We OperateBRITISH COLUMBIAALBERTAAbbotsford VolkswagenAirdrie DodgeCrowfoot HyundaiGrande Prairie SubaruPonoka ChryslerChilliwack VolkswagenCalgary HyundaiFish Creek NissanGrande Prairie VolkswagenSherwood Park HyundaiIsland GMCapital Jeep DodgeGrande Prairie ChryslerGrove DodgeSherwood Park VolkswagenMaple Ridge ChryslerCourtesy ChryslerGrande Prairie HyundaiHyatt InfinitiTower ChryslerMaple Ridge VolkswagenCourtesy MitsubishiGrande Prairie MitsubishiNorth Edmonton KiaNorthland DodgeCrosstown Auto CentreGrande Prairie NissanNorthland VolkswagenNorthland HyundaiNorthland NissanOkanagan DodgeVictoria HyundaiSASKATCHEWANMANITOBAONTARIOQUÉBECDodge City AutoAudi Winnipeg401 Dixie HyundaiBMW CanbecMann-NorthwayEastern Chrysler417 InfinitiBMW LavalBridges GMMcNaught Cadillac417 NissanMINI Mont RoyalSaskatoon MotorProductsSt. James VolkswagenCambridge HyundaiMINI LavalGuelph HyundaiMercedes-BenzRive-SudHunt Club NissanPlanète MazdaToronto ChryslerWellington MotorsNEW BRUNSWICKMoncton ChryslerNOVA SCOTIADartmouth DodgeILLINOISGrossinger Auto GroupGrossinger City CadillacGrossinger City ChevroletGrossinger HyundaiGrossinger KiaGrossinger Motors AudiGrossinger Motors LincolnGrossinger Motors Mercedes-BenzGrossinger Motors SubaruGrossinger Motors VolkswagenGrossinger Motors VolvoGrossinger Palatine ChevroletGrossinger Toyota NorthNorth City HondaBritish Columbia › 10Alberta › 22Saskatchewan › 4Ontario › 8New Brunswick › 1Nova Scotia › 1AbbotsfordAirdrieNorth ryPrince bec › 6Illinois › 14KelownaGrande PrairieOttawaLavalBloomington/NormalMaple RidgePonokaManitoba › 4TorontoMontrealChicagoPrince GeorgeSherwood ParkWinnipegRive-SudLincolnwoodVictoriaSpruce GroveMirabelPalatineW H E R E W E O P E R AT EGrossinger City Toyota7

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTWe create long-term value for our shareholders with a strategyof disciplined acquisitions, operational excellence and prudentmanagement of capital.

W W W. AU TO CA N.CAWhat’s Inside1Who We Are5Where We Operate9STRATEGY17Operations21Revenue Streams29Management Discussion & Analysis69Annual Financial Statements

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAAcquisition StrategyAutoCanada’s steady growth from its earliest extend the number of OEM relation-days as a public company has been driven byships we have), both in numbers andacquisitions. We benefit from a highly-fragment-to better reflect the national mix ofed automotive retail market where there are anestimated 3,500 franchised automobile dealer-Add to our mix of brands (and ideallyluxury, domestic and import brandsships in Canada and close to 17,000 in the United Diversify our geographical reachStates. AutoCanada is a key consolidator in the Open or deepen our presence in a keymarket, through being a flagship storeindustry, as owners of stand-alone dealerships getand/or part of a dealership clusterolder, and as their need – and cost – for capitalincreases to meet the ongoing requirements from Be accretiveOriginal Equipment manufacturers (OEMs). In ourgrowth, we look for each acquisition to:As we expand our relationships with OEMs, we open more opportunities of potentialacquisitions of dealerships, which in turn allows us to generate further growth.Following an acquisition, we immediately focuson the integration of the store into our network.dealer level to serve their customers, care for theiremployees and grow their business. We install ourmanagement information system at the dealership location as soon as possible. This makesfinancial, accounting and other operational dataS T R AT E GYThis involves working with the leadership at thefor that dealership easily accessible to our seniormanagement. With access to this data, we canmore efficiently incorporate our operating strategy at the newly acquired dealership. Because ourmanagement information system is scalable, wecan integrate new acquisitions without significantly increasing the cost of operating the system.11

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTOperationalExcellenceThe Company’s continued focus on operational excellence results in enhanced dealershipperformance. AutoCanada’s multi-location modelserves a diversified geographic customer andrevenue base while its dealership cluster strategyenables other scalable benefits. Our operationsare decentralized with a centralized administration and strategy. We are able to provide strongsupport to the dealership network through brandteam platforms, which are better positioned tomeet the needs of both our dealers and OEMs.Each of our franchised dealerships operates asa distinct profit centre, which allows our highlycapable dealer principals to make key operatingdecisions within our financial and governanceframework. AutoCanada has made significantinvestments in new technology and improving ourwebsites to better accommodate our customersand improve our marketing and communicationwith potential customers. Our centralized marketing department continuously looks for waysto increase traffic to these sites and improve thefunctionality of the websites and user friendliness.How people buy cars has changed considerablyover the last few years, which means our centralized marketing department will continue to bea driving force in lead generation activities andsearch engine optimization, among other things,for our dealerships.

W W W. AU TO CA N.CABeyond sales support, our size and consolidatedpurchasing power provide both cost and revenuesynergies. Cost synergies include achieving lowerprices for items such as insurance, advertising,benefit plans and information systems. Revenuesynergies include being a preferred provider forretail service and warranty contracts and earninghigher commissions on finance and insuranceactivities.Our organizational structure allows us to providemarket specific responses to sales, service, marketing and inventory requirements while benefiting from the resources provided by an experienced and knowledgeable head office executiveteam. Operating a number of franchised automobile dealerships also allows us to share marketinformation amongst our dealerships selling thesame brands and quickly identify any changes inconsumer buying patterns. We benchmark theother and rapidly implement new and innovativeideas across our dealership group.Effective management of our inventory levelsis critical to our business. Careful monitoring ofS T R AT E GYsuccess of our dealership operations against eachinventories of new and used vehicles and partsby days of supply, both in units and dollar amountleads to increased profitability by minimizinginterest expense incurred from financing ourinventory, while maximizing our free cash flowthrough prudent management of our workingcapital requirements.13

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTPrudent Management of CapitalOur disciplined approach to top line growth ismatched by our determination to maintain costcontrol and balance sheet strength. Our continuous drive for efficiencies also ties into the workingcapital requirements contracted by our manufacturer partners.Our centralized purchasing and shared resources operating structure enableseffective cost management. It reduces costs for dealerships on everything frompayroll to tires. Expense control and operating targets are also integral partsof our business planning – at each dealership and within the network overall.Our dealers are able to effectively manage inventory informed by our network’saccess to market information and analytics like consumer buying patterns.Our bank credit agreements are flexible andefficient, providing enough capacity for bothoperating and capital expenditures and corporate(e.g. acquisitions) purposes.We are prudent managers of capital and continuously assess our capital allocation with a viewto generate the highest return on capital for ourshareholders. This includes acquisitions to growAutoCanada and investment in operations andtechnology to improve our business, balancedwith return of capital to AutoCanada’s shareholders in the form of quarterly dividends. TheCompany also has a Normal Course Issuer Bid tobuyback, when it makes sense to do so, up to fiveper cent of the Company’s issued and outstanding Common Shares.


AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAWhat’s Inside1Who We Are5Where We Operate9Strategy17OPERATIONS21Revenue Streams29Management Discussion & Analysis69Annual Financial Statements

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTOur operations provide a diverse revenue base thatwe believe mitigates the impact of fluctuations innew vehicle sales volumes and gross profit margins.

W W W. AU TO CA N.CAOperationsOur multi-location automobile dealership net-Our franchised automobile dealerships operate aswork is comprised of 77 new vehicle franchises,distinct profit centres where the dealer principalsrepresenting 27 brands at 68 dealership locationsare given significant autonomy within overallacross Canada and in Illinois, United States. Weoperating guidelines. This autonomy, combinedserve a diversified geographic customer base,with the dealer principals’ understanding of theiracross major urban centers, and enjoy benefitslocal markets, enables the dealer principals tonot available to single location dealerships. Oureffectively run day-to-day operations, market tooperations provide a diverse revenue base that wecustomers, recruit new employees and gaugebelieve mitigates the impact of fluctuations in newnew opportunities in their local markets.vehicle sales volumes and gross profit margins.In addition, our expanding geographic footprintOur dealer principals are required to take anis increasingly lowering our exposure to regionalactive, hands-on approach to operating theireconomic downturns and our brand diversifica-respective dealerships. Each dealer principal istion decreases our exposure to manufacturer-spe-supported by a complete management teamcific risks such as brand perception or productionthat provides oversight and management overdisruptions. By operating multiple dealershipsevery facet of the business. While each member– clusters – in metropolitan areas we are able toof a dealership’s management team, other thangain the advantages associated with a “platform”the dealership controllers, report directly to theof dealerships in a single geographic area.dealer principal, they also report to one or moremembers of our head office senior managementteam. The dealership controllers report directly to59% of our revenue, parts & service, and financethe head office finance group. Our reporting and& insurance provide higher profit margins anddealer support structures are designed to facili-collectively account for approximately 66% oftate the sharing of market intelligence, ideas andour gross profit, and have been historically morebest practices throughout the entire AutoCanadastable throughout economic cycles.network.O P E R AT I O N SWhile new vehicle sales generate approximately19

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAWhat’s Inside1Who We Are5Where We Operate9Strategy17Operations21REVENUE STREAMS29Management Discussion & Analysis69Annual Financial Statements

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT


AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTNew Vehicle SalesNew vehicle sales are the driving force behindAutoCanada’s business. While all four revenuestreams contribute to gross profit, new vehiclesales is still the primary focus. In 2017, 59% of ourrevenue was generated from new vehicle sales. In43,773Units Soldaddition to the profit from the sale itself, a typicalnew vehicle sale (or lease transaction) createsother profit opportunities for our dealershipsincluding the resale of trade-in vehicles, sale ofthird party finance products, the sale of vehicleservice and insurance contracts in connectionwith the retail sale, and the service and repair ofthe vehicle during and after the warranty period.1,828 MRevenueNew vehicle revenues include new vehicle salesand lease transactions arranged by our dealerships with third-party financial institutionswhich generally have shorter terms than financetransactions. This results in customers returningto a dealership more frequently than in the caseof financed purchases. We believe that leasing provides a number of benefits to our otherbusiness lines, including customer loyalty to theleasing dealership for repairs and maintenance.7.2%Gross MarginIn addition, leases provide us with a source oflate-model, off-lease vehicles for our used vehicleinventory. Generally, leased vehicles remainunder factory warranty for the term of the lease,allowing franchised automobile dealers to providerepairs and service to the customer throughoutthe lease term.131 MGross Profit

W W W. AU TO CA N.CAUsed Vehicle SalesUsed vehicle sales are a key contributor to theoverall success of AutoCanada. Our new vehicleoperations provide our used vehicle operationswith a large supply of high quality trade-ins andoff-lease vehicles, which are the best sources19,379Units Soldof attractive used vehicle inventory. Our dealerssupplement their used vehicle inventory withpurchases from auctions, daily rental companies,and wholesalers. Used vehicle sales give us anopportunity to further increase our revenues byaggressively pursuing customer trade-in vehicles,increase service contract sales, provide parts andservices required in the maintenance of the vehicle, perform reconditioning work on trade-ins and716 MRevenueprovide financing to used vehicle purchasers.We actively manage the quality and age of ourused vehicle inventory and monitor our usedinventory appraisal values, reconditioning costs,pricing, online marketing, stocking levels, turnover, and return on investment. We believe thatmonitoring these various processes results inmately a greater return on investment.Gross MarginManufacturer certified pre-owned vehicles typically sell at a premium compared to other usedvehicles and are available only at franchised automobile dealerships. We believe that the manufacturer’s warranty that comes with these certifiedvehicles increases our potential to retain thepurchaser as a future parts and service customersince certified warranty work can only be performed at franchised automobile dealerships.44 MGross ProfitREVENUE STREAMSgreater sales volumes, higher turnover, and ulti-6.1%25

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RTParts Service &Collision RepairParts, Service & Collision Repair is an importantpart of our overall business. It not only provideshigh-margin revenue but also supports our overall870,616Service Ordersapproach to customer service, leading to customer retention and vehicle sales. Parts and serviceactivity is generally considered counter-cyclical.In a downturn, consumers buy fewer new vehicles, but their older vehicles require more service.A significant number of our customers return toour dealerships for other services after the vehiclewarranty expires. Each dealership has systems inplace to track customer maintenance records and417 MRevenuenotify owners of vehicles purchased at the dealerships when their vehicles are due for periodicservices. Parts are either used in repairs made inthe service department, sold at retail to customers, or sold at wholesale to independent repairshops and other dealerships.Our profitability in parts, service and collision repair can be attributed to our comprehensive management system, including the use of variable rate51%Gross Marginpricing structures, cultivation of strong customerrelationships through an emphasis on preventivemaintenance, and the efficient management ofinventory. We manage our parts inventories to atarget of 45 days’ supply on hand in order to beresponsive to our customers’ needs while managing our working capital.214 MGross Profit

W W W. AU TO CA N.CAFinanceInsurance & OtherEvery vehicle sale presents us with an opportunity toincrease profits through the sale of additional productssuch as third party financing or lease arrangements,141 MRevenueextended warranties, service contracts and insuranceproducts.The finance and insurance products our dealerships currently offer are generally underwritten and administeredby independent third parties, including the automobilemanufacturers’ captive finance companies. In return forarranging third party purchase and lease financing for ourcustomers, we receive a fee from the third-party lenderupon completion of the financing. These third-party lend-92%Gross Marginers include the automobile manufacturers’ captive financecompanies and warranty divisions, selected commercialbanks and a variety of other third party lenders, includingcredit unions and regional auto finance lenders. Underour arrangements with the providers of these products,we either sell these products on a straight commissionbasis or participate in future profits, if any, pursuant to aretrospective commission arrangement.of the retail vehicles we sold in 2016. In addition to financecommissions, opportunities are created to sell other profitable products, such as warranty and extended protection products with purchases of new and used vehicles,including: service contracts; auto protection insurance;life, disability and dismemberment insurance, as well aslease “wear and tear insurance”; and theft protection. Oursize and volume capabilities enable us to acquire theseGross ProfitREVENUE STREAMSWe arranged customer financing on a significant portion130 Mproducts at reduced fees compared to the industry average, which results in competitive advantages.27

AU TO CA N A DA – 2 0 17 A N N UA L R EP O RT

W W W. AU TO CA N.CAWhat’s Inside1Who We Are5Where We Operate9Strategy17Operations21Revenue Streams29MANAGEMENT DISCUSSION & ANALYSIS69Annual Financial Statements

䡵 Table of Contents1.Reader Advisories211.Outstanding Shares302.Executive Summary312.Dividends303.Outlook513.Free Cash Flow314.Market614.5.Selected Annual Financial Information10Critical Accounting Estimates and Accounting PolicyDevelopments346.Selected Quarterly Financial Information11Disclosure Controls and Internal Controls overFinancial Reporting347.Results of Operations1216.Risk Factors358.Same Store Resu

with the dealer principals’ understanding of their local markets, enables the dealer principals to effectively run day-to-day operations, market to customers, recruit new employees and gauge new opportunities in their local markets. Our dealer principals are required to take an active, han

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