2017 Annual Report - Dealer US

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

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W W W. AU TO CA N.CARevenue StreamsNEWVEHICLESALES% OF REVENUENEWVEHICLESALES58.9USEDVEHICLESALES% OF REVENUE23.1% OF GROSSPROFIT8.4PARTSSERVICE&COLLISION% OF GROSSPROFIT41.3FINANCE&INSURANCE4.6% OF GROSSPROFIT25.0REVENUE STREAMS13.4FINANCE&INSURANCE% OF REVENUE25.3USEDVEHICLESALESPARTSSERVICE&COLLISION% OF REVENUE% OF GROSSPROFIT23

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

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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