Chairman’s address to 2021 Annual Meeting

___________________________________________________________________________

PO Box 6159 Level 6 Telephone 04 384-9734 E-mail cmc@colmotor.co.nz
Wellington 6141 57 Courtenay Place Facsimile 04 801-7279 Website www.colmotor.co.nz
NEW ZEALAND Wellington 6011 DX SP21009



CHAIRMAN’S ADDRESS TO THE 103
rd
ANNUAL MEETING

Ladies and Gentlemen,


This will be my last address as Chairman of this Company, I retire from the board at the
conclusion of this meeting. I have been with the Company for 47 years, since 1974 which
spans some good times and some very tough periods. I have been a director for 29
years, since 1992, comparing that year with this shows a massive improvement. I have
been Chairman for the last 11 years, a period of almost continuous growth in the trading
profit. I have benefited from the accumulated efforts of a lot of good people, and very
fortuitous timing.

The last 18 months has seen some very big swings, periods of despair and worry, periods
of success and elation, some very good months, some plain awful.

So, I will start with the good news. The twelve months ending 30 June 2021 added up to
an exceptional year, surpassing the previous record year in 2018. The Trading Profit After
Tax, our preferred measure of performance was $27.9m, up 13% on the previous record
year, 2018; and up 61% on last year. However, there was a component of luck involved.
Our financial year happened to start after the 2020 level 4 lockdown had ended and
before the 2021 level 4 lockdown started.

True to today’s theme, a record year was never predictable, but gradually month-by-
month, it all added up, actually it got better in the second half. The initial expectation in
July 2020 was that we were experiencing a short-term bounce, that demand would soon
taper off; but instead good export prices and massive economic stimulation created a
frothy market.

The next problem was supply. Initially it was cancelled production as assembly was
cutback in the first waves of Covid. Initially that was seen as a good thing against the
worry of large volumes of inventory arriving and having to be funded, a repeat of the
problems at the start of the Greater Financial Crisis in 2009. Very quickly, the reverse
happened, supply became a constraint. Micro-chip shortages were the first to hit the
headlines, but gradually the whole interconnected international supply network unwound.

The new vehicle market is now dominated by supply problems, with no end in sight.
Normally when we as dealers run out of inventory, or the expectation to be able to supply
very quickly, customers might wait for with us for a short time, but more likely they will go
somewhere else. But what was considered normal has now changed, everyone has the
same problem and consumers are now prepared to wait.

The used car market is also experiencing supply shortages. After an initial burst there are
now few ex-rental cars available and less trade in’s. Used car yards look empty simply
because vehicles are sold before they get onto the yard.

Now, sales and ultimately profitability in any given month is not a reflection of that month’s
activity, instead it’s a measure of that months shipping arrivals. It is very uneven between
specific products, different brands, different months. The delays make the headlines, and
in the first round, it slows our business down. But as time goes by some of the delayed
production does arrive. In simplified terms this month’s arrivals get delayed, but the
delayed supply from some months back finally arrives.

The lockdowns that began in August this year add further complications. At level 4 the
dealerships have to close and we take a significant financial hit. But the medium-term
impact is very difficult to precisely quantify. Does consumer confidence hold up, does the
supply of vehicles keep coming? The impact of lockdowns in 2020 was severe, both
financially and mentally. Second time around in 2021, while still difficult, was far more
nuanced.

In August the wage subsidies were claimed individually by the dealerships while they were
fully closed under level four. During that time all employees received their usual pay.
Under level three dealerships did not claim the wage subsidy, even when they qualified.
In Auckland, wage subsidies were claimed for the longer period of full lockdown level four.

Lockdowns and very lumpy supply have had a major impact, especially when looking at
short time frames, but behind those headlines, demand has remained strong.

We are in a very different market to 18 months ago. Lumpy supply, and suddenly
changing restrictions puts unpredictable stresses on the people in the dealerships,
especially those directly facing customers and management. Their effort and commitment
makes a huge difference and must be recognised. Everyone is directly effected by
lockdowns and has to cope with the inevitable stresses from home, but on top of that the
management in the dealerships have had to cope with the significant stresses at work.
The successes of this Company over the last 18 months can in large measure be
attributable to the extra effort and commitment from the management at all levels of the

organisation. The management in the dealerships is experienced and very capable; they
have responded and adapted to the constant changes and uncertainty exceptionally well.

Succession
At last year’s AGM it was announced that Graeme Gibbons would be retiring from his
position as CEO in the next year. In May of this year a letter was sent to shareholders
confirming that Graeme would be retiring on 30 September 2021, and announcing the
new management team of; Alex Gibbons, CEO; June Gibbons, Group Manager People,
Process and Technology; and Paul Stephenson, Group Manager Finance. Graeme had
been CEO since 1990, 31 years, and so not surprisingly, succession after that length of
time is a more complex job than just putting a new person into the office. Over his
31 years in the job Graeme successfully guided the Company through good times and
bad, and naturally developed a huge depth of experience and judgement. One of the
things that is hard to replace is the accumulated experience around what to follow up on
and what to ignore. Transition to a new team included a review of the work done by CMC
Group Office and what it did not do. Succession included engaging a new younger
generation with a different outlook and very different computer literacy. An early decision
was to not attempt to replace with one person, but to spread the work around a small
team. The four months between the announcement and actual changeover were always
going to be very busy, which was further compounded by the August level four lockdowns.

At the board level, the annual planning meeting was expanded to integrate the hopes and
aspirations of the new team with the experience of the old. The Company’s broad
strategic direction is outlined in the annual report, page 5. The purpose of the board
planning meeting was not to rewrite this, but to explore with the new management how it
might be implemented. This Company at its core is a specialist franchisee operator. Being
a franchisee brings opportunities and constraints, we are in partnership with someone
else who owns and controls the brands that we sell. The planning session identified the
areas that we need to focus on to maintain our existing business, it identified where
opportunities to grow could be found and graded them by complexity against potential
reward. We need to keep our focus on maintaining our strengths, evolving and adapting
to change and at the same time, be able to identify and grow opportunities. The new
team actively contributed to this in July, August, and September.

In the first week of October, the period of transition ended, Graeme went on holiday, and
the new team took over. It has been a successful transition. From my perspective as
Chair, the new team know what they are doing, they are well grounded in the
fundamentals of this business and are addressing matters that arise. Most importantly
they bring fresh energy and ideas. They have a plan. The future under the new team
looks good.

The mid-term economic future is uncertain. The stresses and uncertainties opened up by
Covid in the last 18 months will continue to deepen. The last time there was this level of
macro level uncertainty was back in 1990 when the NZ economy went through a lengthy
period of structural reforms. But a period of uncertainty is a good time for a new team to
take over. It will be stressful, it will be difficult, but it’s the right time for a fresh new team
to begin. Many of the big picture risks and challenges are totally beyond our control, what
we can control is to have a management team that have the capacity to respond and
thrive.

Developments
The building industry is suffering from severe constraints and delays, which is having an
impact on the various projects that are under way. In simple terms, they now cost a lot
more than initially budgeted and they take a lot longer to complete than initially expected.
Two long running projects, Capital City’s new hub in Lower Hutt and Team Hutchinson
Ford’s greenway project, are nearing completion. Both have extended over several years
and ideally should have been completed many months ago. The rebuild of MS Motors
Ford workshops in Nelson is also nearing completion. This follows the fire there in
January 2019. It’s a leased facility, but the impact on the business from delays is the
same. The pipeline of development projects, small and large, now face major cost
increases and delays. The Company needs to maintain its profitability to keep up with the
cost increases of these projects. Some are centred around expansion, some renewal and
upgrading, others are brand identity upgrades.

The franchise model
The basic franchise model has been around for decades, and it’s always under review;
can the supplier expand its own profitability by taking out the franchisee, or is there a
better way to deliver the product to the customer.

Tesla is a brand that makes a point emphasising that it does not need dealers, instead
customers order on line and in due course the vehicle is ready to be picked up at a

warehouse near you. This can work while the product is sufficiently unique with no
competing alternatives. But what happens when there are equal or better alternatives,
available very quickly. What happens when the product is in the second half of its life
cycle and no longer unique. Over a broader period of time, spanning product life cycles,
dealers fulfil a necessary role.

Toyota in New Zealand, and in Australia, Mercedes, have altered the traditional franchise
business model to what is known as the agency model. This is driven by the desire to
have a fixed price and fixed margin. At first glance it appears to be a desirable business
model, but it’s very centralised and prone to bureaucratic control. There is a need for
dealerships with this model, but their investment is less, their engagement is less. The car
companies risk losing the outlets if there is insufficient returns to the dealer.

We exist because we are needed, we connect the customer to the supplier. In a perfect
world we are not necessary, but it’s not a perfect world.

Future products
We are a franchisee company. We can express our hopes and desires, but the reality is
that we can only sell what is available to us. Good franchise relationships are long term
partnerships, where both respect the contribution of each with neither party only cherry
picking the best from the other. This applies to products, some are easy to sell, others not
so easy. All of our major suppliers are investing heavily in future products, but they come
at it from different backgrounds and different strategies. There are a range of
technologies that have better emission outputs than what we have now, but the headlines
revolve around full electric vehicles, or BEV’s as they are known.

Some countries have made headlines with announcements that imply they will be fully
electric at some not too far off future date. In this context the NZ government has
announced two separate schemes, the Clean Car Discount and the Clean Car Standard.
There will be change, but it’s a bigger subject than just substituting BEV vehicles in place
of petrol.

New Zealand has a large fleet of private vehicles, with one of the highest densities of cars
per thousand people in the world. A feature of the NZ fleet is the age, the average age is
over 14 years and it’s getting older as we keep old cars going rather than scrapping them.
Half of the vehicles coming into NZ now are new, and half are second-hand imports from
Japan. The macro policy setting ensures that most people can afford. In the last few
years housing has become very expensive, with that in mind what would be the social
consequences of eliminating cheap vehicles, replacing them with expensive high
technology vehicles.

Electric vehicles do some things better than conventional engine vehicles, but it’s not a
seamless swap converting from petrol to battery. They are ideal as a second vehicle for a
person living in their own suburban home with good off-street parking, where daily
distances are not large and recharging while parked up is available. It’s different in rural
New Zealand.

Future products must have lower emissions than what we are have now. The profile
products are fully electric BEV’s, but as outlined above they do not fit every requirement.
What is better, to stay with old high emission vehicles because full battery electric vehicles
don’t do what is required, or bring in better but not perfect products. It will take time for
the necessary social changes to work through.

The governments Clean Car Discount scheme, better known as a ‘feebate’, is a scheme
that will encourage consumers to buy lower emitting vehicles. The framework is simple to
understand, consumers will know what they are paying. The scheme is open to criticism
with the implementation details, but consumers will know the emission tax or rebate that
applies to their choice.

The other scheme however, the Clean Car Standard, is fundamentally flawed. Given our
distance from the point of manufacture, the large number of second-hand imports, and the
complexity of product development timetables, it’s simply incredulous to expect importers
to be able to balance their sales over 12 months to meet pre-determined and rapidly
falling averages. They will have to build in pricing reserves to balance the risk. The result
will be arbitrary and unpredictable price movements, resulting in confusion and
resentment.

Ford and Mazda have a range of new product coming through, full battery electric, plug in
hybrid, petrol hybrid, mild hybrid.

Outlook
The last year, to June 2021, was very good. It spanned the gap between two major
lockdowns. When the results for the year were announced in August the outlook was
positive; a couple of days later we went into a national level four lockdown. In September
when the CEO’s report was written, Auckland was still in tight lockdown and the outlook
was uncertain. Optimism and pessimism swap almost daily. The month-by-month swings
are considerable. The underlying demand for vehicles, especially light and heavy
commercial vehicles, is strong. Forward orders of heavy trucks are robust, reflecting
confidence in the underlying economy. But the expectation of more disruption is also
strong. The first quarter this year is ahead of the same period last year. If there are no

further major shocks, then we can expect to see a strong run for the short to medium term,
with a little extra push coming from the desire to buy ahead of the April 2022 taxes.

One last comment
Before I step down I want to say a few personal words. The Company has been a large
part of my life for a long time, obviously I have enjoyed working here. I am not a car
person in the sense of a collector or motor sport enthusiast. What I do enjoy is the
network of people that I have worked with. For me it’s the people rather than the product
that I find fascinating. It’s a people business.

I also want to thank Diana, we met and married while at university. She has been with me
all through this journey, she has kept me grounded when success came easily, she has
supported me when the opposite occurred.


J P Gibbons
November 2021