Colonial Motor : Chairman's address to the 98th annual meeting

CHAIRMAN'S ADDRESS TO THE 98thANNUAL MEETING

Ladies and Gentlemen

The Company has had an exceptional year with a trading profit after tax of $19.2 million, up 18% on the previous year.

The balance sheet is also in very good shape with strong positive cash flows from operating activities. Despite the increased sales, inventory at balance date was lower than the year earlier.

Dividends follow the trading profit after tax rising from 25 cents per share in 2014 to 40 cents per share this year. The Company pays out around 70% of its trading profit after tax as dividends each year with the increased profit flowing through into dividends. The increasing dividend has been one of the drivers in our share price. Over ten years the gross dividend yield as at 30 June each year has been remarkably steady, averaging 10.2 %. The average gross return over ten years, combining the dividend and share price movement, has been 14.1%. This ten year average includes the 27% share price fall in 2009. The Company has had a very good year. It has also had a very good decade.

This time last year I was predicting caution with respect to the full year 2016 result. Taking the year as four quarters;

• The first quarter, July to September, tracked close to the previous year and formed the basis of the opinion at last year's AGM.

• The second quarter, October to December, had a distinct lift, resulting in a six months result that was 13% up on the previous year.

• The next two quarters, January to March 2016 and April to June 2016, were exceptional. The distinct lift reported for the end of calendar 2015 just carried on.

  So what is driving our current profitability?

  First. The new vehicle market continues to grow, as it has for the last six years. Year to date October 2016 is up 8.3% on last year. September at 13,884 registrations was just 100 units short of the record set way back in 1984 when Muldoon called a snap election. October 2016 at 14,709 exceeded that 1984 record. It's much easier, but certainly not guaranteed, to be profitable in a growing market.

  Second. Within this growing market, some segments are growing more strongly than others. The growth is in light commercials and SUV's. Sales of passenger cars, the traditional sedan, station wagon, and hatchback, are not growing. This changing segmentation benefits some brands more than others, with both Ford and Mazda gaining by this segmentation shift. Ford with the Ranger in the light commercial segment, and Mazda with CX5 and CX3 in the SUV segment. The refreshed Ranger has increased its lead as the most popular new vehicle this year. The Ford Mustang deserves special mention. Its impact has been phenomenal, with unique appeal matched with an attractive price. Having desirable products in growing segments, in a growing market, is a very desirable place to be.

  Third. Rising revenue alone does not result in profitability, sometimes the reverse happens. We have experienced, capable, dedicated people in the dealerships. Our Dealer Principals have to continuously balance the sometimes conflicting demands of customer service, more sales, and

  profitability, all of the time. They do it very well. We have experienced, committed and capable Dealer Principals.

  To summarise:

  • The overall market is rising.

  • The segment shifts within that market are favourable to us.

  • We have desirable new products that are attractive to customers.

  • We have experienced management who can balance conflicting demands.

  • The result is a profitable company.

Developments

South Auckland. In January we opened the new service centre near the airport for South Auckland Motors. This is a large facility with 7 service bays. Now we are negotiating to build a new service centre to the south of Manukau at Takanini. This will be a leased facility. Soon South Auckland Motors will consist of a sales hub at Manukau, with a network of service centres at the Airport, Botany, Takanini and Pukekohe. Of the four, only Pukekohe has a full sales function. This hub and spoke arrangement, with one sales outlet and a network of service centres, brings together the convenience of local service with sales volume and choice.

At Queenstown we are working on a new development to double our capacity in the growing Southern Lakes market. We have out-grown the current service and sales facility of Macaulay Motors on Glenda Drive.

Tenders will soon be let on the planned service and parts facility at Te Rapa, Hamilton, for Southpac Trucks. Currently Southpac Trucks has a network of service agents and only two Southpac operated service outlets, in Rotorua and Manukau. The new facility will be a parts and service centre operated directly by Southpac Trucks.

At New Plymouth we have added Isuzu light commercials to the Hyundai dealership and leased some more workshop space nearby. Taranaki now has the Ford dealership in New Plymouth with a branch in Hawera plus the Hyundai and Isuzu dealership.

BMW

In early October we announced the sale of the Jeff Gray BMW and MINI dealerships following the decision by BMW NZ not to renew the franchise agreement. Winger Motors Ltd is buying the North Island dealerships in Wellington, Palmerston North and Hastings and Mathew Barr Motors Ltd is buying the Christchurch dealership. Both sales settle on 30 November 2016. There will be no impact on our ongoing trading profitability. Given that these sales have not yet been concluded, it is not appropriate at this time to go into further detail. There will be further disclosure in our next half year report.

Trucks

Heavy trucks have had a very good year. The heavy truck market has fallen from its peak in 2015 but, at around 2,000 units p.a., is still well up on historical averages. However Southpac has increased its share, countering the impact of the market decline. Southpac, with Kenworth and DAF heavy trucks, has market leading products, and has built a solid reputation for after-sales customer service. The planned Te Rapa truck service centre is an indication of this company's commitment to growing its business.

Car market

All of our dealerships operate in a state of tension as they strive to satisfy three sometimes- conflicting demands. First, they must have satisfied customers, customers who come back to the dealership, better still customers who refer others to the dealership. Second, they have to satisfy the market share aspirations of the distributor or the brand. It's a competitive market and all distributors have brand standards and need to quickly sell all vehicles that come into the country. Thirdly it all has to be done profitably. The inherent tension between the aspirations of a brand for more and better facilities and our need to be able to get a return on those facilities is obvious enough. However the tension between pushing registrations to achieve targets and our profitability is less obvious.

It's normal and healthy to strive to meet targets, especially in the motor industry with its long lead times. However, in the retail motor industry this pressure can lead to excessive self-registration (i.e. a car is registered in a dealership's name, but it is not invoiced to a customer). This means it counts in registration statistics, but it does not have a customer who will pay for it. Self-registration, or 'punching' as it's called in the USA, can reach serious levels and distort the real size of the market. The practice provides a short term gain and, like a drug, it can become addictive. The distributor gains with an additional number but the cost is borne by the dealer and ultimately by customers. The dealers have to fund the extra stock while new, fresh arrivals still cross the wharfs. The registered unsold inventory confuses the distinction between new and used, pulling down the value of genuinely registered freshly-sold vehicles. Ultimately they are retailed, but all too often at a loss to the dealership. Accurate numbers are hard to get, fuzzy lines between needed demonstrators and extra demonstrators is an example of the confusion. Large numbers of preregistered vehicles are a burden to the dealerships, and ultimately the customer of new and near-new vehicles.

The outlook

The market is growing and the general expectation is that it will continue to grow further in the year ahead. For The Colonial Motor Company the first quarter to 30 September produced an excellent result, up on the same period last year, continuing the trend experienced through all of calendar 2016. The outlook is positive, but it does not take much to deflate optimism.