Colonial ‘stable’ as economy dips
Colonial Motor Company has remained and continues to be in a strong and stable financial position despite operating in a recessionary environment.
That’s the view of chief executive Alex Gibbons, who says its philosophy of “grow to be profitable, not big” serves it well in such times.
Heading into the past financial year, the likelihood of an economic downturn had been evident for some time, so it was something Colonial had anticipated.
“This did not change our focus on delivering a first-class customer experience, and generating positive outcomes for franchise partners and shareholders,” he says, looking back on 2023/24. “On balance, the management team and I are satisfied with where trading profit has landed in the current economic environment.”
What did change during the 12-month reporting period was the shift away from an environment dominated by supply-chain disruptions, “abundant” demand and a tight labour market.
Colonial’s dealerships have adjusted cost structures to align with new market expectations, “something they continue to do, higher input costs and a lower margin environment”.
Gibbons, pictured, says: “To help thrive in this new world, dealers focus on the basics of lead management, inventory control and, most importantly, not allowing the customer experience to be adversely impacted.
“Despite tougher trading conditions, we are fortunate to have robust processes, strong customer relationships, and a loyal and dedicated team of people who understand how to respond as the market moves through a down cycle.”
The 2024 financial year
Gibbons says it was “inevitable” the current economic environment would arrive because the Covid-19 years of record government spending, low interest rates, rampant demand, border closures and supply-chain shortages “fuelled a wave of domestic expenditure”.
Colonial was well-positioned to capitalise on that period and its dealerships – whether car, truck or tractor – “made hay while the sun shone”. The economy was fuelled by deficit spending and, with it, the automotive industry boomed.
“So too did interest rates – particularly affecting inventory holding costs, labour-market pressures with wage growth and a desperate need for manufacturers to increase supply capacity. The cost of doing business grew, but margins and demand stayed one step ahead.
“Eventually the crunch would arrive, but exactly when was the unknown. Both politically and economically, we have seen a regime change focused on reining in the economy in an endeavour to tackle inflation.
“Government spending has been slashed, and a message of restraint has been hammered home to consumers, the public sector and business alike.
“While demand can turn on a dime, supply chains, interest rates and operational costs will lag some time behind. The market we find ourselves in today is in stark contrast to that of the previous three financial years.”
Despite the recession, Colonial continues to be in a strong and stable financial position. Sales and service revenue remain “robust”, aided by the long-awaited arrival of heavy-duty trucks to meet a backlog of orders.
“Substantial capital investments have been made in recent years via franchise-related facility upgrades and strategic property acquisitions,” adds Gibbons.
“Investment in Ford and Mazda dealerships demonstrates the company’s commitment to our long-standing partnerships. Work continues in the establishment of JAC Motors in New Zealand.”
Colonial’s car dealerships
The combination of entrants into the new-vehicle market and supply chains operating at near-normal levels added significant pressure to an already subdued market with that sector dropping by 26 per cent in the six months to June 30.
“The lessons of managing supply and maintaining a relative degree of scarcity are easily forgotten,” notes Gibbons. “Our car dealerships are under pressure to balance a need to remain profitable while tackling high operating costs, weakening margins and subdued new-vehicle demand.
“Artificial stimulus provided to the battery electric vehicle [BEV] market disappeared with the removal of the clean car discount [CCD] from January 1, exposing how distorting government interference in the automotive market had become.
“Sales of BEVs overall plummeted and have yet to recover. The cost to the consumer is now often lower than when the rebate was in effect. “
The impact on residual values of BEVs has significantly affected the used-car market for these vehicles and has negatively affected the total cost of ownership for buyers, opines Gibbons.
He adds sales of hybrid vehicles and plug-in hybrids have been less affected by removing the CCD. “They appear to strike a more practical balance of range, fuel economy and convenience that works for the average Kiwi motorist.
“EVs in their various forms will play an increasingly important role in our industry. However, ambitious and unrealistic targets and attempts to manipulate consumer choice have done considerably more harm than good.
“The removal of the CCD also had a profound impact on internal combustion engine [ICE] vehicles. Overnight, retail values of these vehicles dropped, having a marked impact on residual values and triggering the revaluation of used inventory.
“While this change could be anticipated, in some instances existing inventory and commercial arrangements were still negatively impacted.”
As for the clean car standard (CCS) – the import tax on a vehicle’s carbon-dioxide emissions – it has been adjusted and the long-advised application of road-user charges (RUC) to EVs has been introduced.
“The positive outcome is common sense prevailed and New Zealand now has an approach that broadly aligns with Australian emissions standards. The hope is this will provide consistency in decision-making, and stability for the industry to plan for a lower emissions future at a manageable and realistic pace.
“The CCS challenges importers to balance their vehicles’ emissions portfolio to meet continually reducing average fleet emissions levels. This alone will continue to incentivise a reduction in emissions for vehicles entering New Zealand.
“If there’s an upside for the consumer in the current environment, we now operate in a buyer’s market and, for those in a position to do so, it’s an opportune time to negotiate your next vehicle purchase.”
Truck & tractor dealerships
Heavy-truck supply was significantly impacted as the world responded to Covid-19 and the ramifications of that impact are still reverberating their way through the system, says Gibbons in his annual report for 2023/24.
“Consequently, Southpac experienced a significant bulge of long-awaited truck arrivals. That pushed truck inventory to record level and was one of the predominant contributors to the company’s increased borrowings and interest costs.
“While some customers had been waiting up to three years for trucks to arrive, local bodybuilding capacity could not be upscaled to meet such a spike in demand – not just from Southpac but numerous other operators as well.
“The team at Southpac found ways to modify processes and increase productivity where possible, although dealing with such a quantum of trucks is inefficient and comes with substantial holding and processing costs.”
Despite supply-chain challenges, Southpac experienced a strong trading year and remains on track to continue reducing inventory to more sustainable levels.
While it maintains a strong market share, Colonial’s tractor and agricultural equipment dealership, Agricentre South, continues to operate in a depressed market.
National tractor sales dropped by down 28 per cent for the current calendar year to June 30 with the South Island market down more than the national average. During this time, the Agricentre team has focused managing inventory and supporting an agricultural community “doing it tough” in the Otago-Southland region.
Property & strategic direction
Colonial has reprioritised several developments have been response to the changing economic conditions.
Considerable investment has been undertaken in recent years to rebuild and refurbish dealership facilities to meet the latest brand standards, with Fagan Motors’ new showroom in Masterton scheduled for completion in early 2025.
“Facility development and brand representation is a constant evolution,” says Gibbons. “We continue to work closely with franchise partners on long-term planning to ensure we support each other to achieve mutually beneficial outcomes.”
The company plans to proceed with its significant greenfield property development in Palmerston North to support Southpac’s heavy-truck operations across the lower North Island.
While this is capital intensive and a multi-year development, the associated service and parts warehousing facility will be located by the proposed future inland port that will service the region. It’s viewed as “critically important” to support what is a growing customer base in that region.
Colonial has acquired a dealership property in Nelson across the road from its MS Ford leased facility. Gibbons says: “While not ideal timing, acquiring suitable properties in Nelson has historically proven to be elusive and this was an opportunity to gain a foothold in the area for the long term.”
As for the launch of JAC Motors, this is well under way. Colonial’s importing and distributor subsidiary, New Zealand Automotive Ltd (NZAL), has been undertaking product testing locally and fine-tuning vehicle specifications with the factory in Hefei, China to ensure the right models at the right price are delivered for the Kiwi market.
“We see the partnership with JAC Motors as complementary to our existing automotive operations. It will take time and a long-term commitment from both parties to grow these new shoots.”
Looking to the future
“It appears there will be a continuation of negative market headwinds during the first half of this financial year,” says Gibbons. “While it would be preferrable to have more positive news, the reality remains that the weak economy will dominate the direction of retail markets this year.
“Unemployment remains high, particularly among the young, and business and consumer confidence are not forecast to rebound in the near term. The recent beginnings of interest-rate relief are welcome, but the higher cost of living will continue to dampen discretionary spending in the immediate term.
“Our expectation is new-vehicle demand across all segments we participate in is likely to remain subdued, with the potential for demand to soften further in this half year.”
Gibbons says Colonial’s Ford dealers, together with Ford NZ, have maintained the strong brand awareness, loyalty and customer base that has been evident for many years.
In addition, the Ranger has retained the number-one position on the sales charts, and the Everest is now in the top 10 of passenger and SUV models.
“The Mazda brand continues to realign its product range to a new position to meet the market. It sole commercial product, the BT-50 ute, was recently withdrawn from the New Zealand market to allow it to focus solely on the SUV and passenger segments.”
Colonial’s dealerships are “well prepared” to endure current headwinds, and its service and parts business “remains second to none”.
“We keep in mind that, in an oversupplied and declining market, competition will always be fierce and no brand is immune to the resulting impacts,” says Waugh.
“The Agricentre tractor business is inevitably tied to the fortunes of the wider agricultural sector. Sticking to fundamentals will hold the business in good stead as the dealership positions itself to rebound when market conditions improve.
“Southpac will benefit from the remaining pipeline of orders steadily working through the delivery system. The business expects to see its inventory levels continue to fall as these trucks make their way to customers.
“The current financial year will bring the group’s businesses their individual challenges. The fundamentals of our overall business remain strong. Our dealership teams are well-positioned to capitalise on opportunities as and when they arise.”
2023/24’s revenue & profit
Colonial’s revenue for the year ending June 30 was $1,012.9 million. This was a 1.6 per cent increase on the previous year’s $997.2m. It compared to $1 billion in 2022 and $901.2m in 2022 and 2021 respectively.
Trading profit after tax was $17.9m, down by 41 per cent on $30.3m in 2022/23, which reflected pressure on vehicle margins and the higher interest costs associated with holding inventory.
Trading profit after tax is not specified under generally accepted accounting practice, the company says. However, it is a consistent measure of the group’s underlying trading profitability before valuation changes of assets and deferred tax movements. It is also the reference point the board uses when considering dividends.
Profit for the year attributable to shareholders was $4.5m compared to $27.8m in the previous reporting period.
The directors’ report states this reflected the one-off, non-cash adjustment of $12.7m made to deferred tax following a change in rules regarding the ability to claim tax deductions for depreciation on long life buildings.
Financial position statement
Total assets increased to $598.5m at year end compared to $548.4m in financial year 2023. Inventory increased by $44m reflecting a normalised supply chain post-Covid, but reduced demand in the latter part of the year.
Additions to land and buildings focused on the purchase of a new property in Nelson, the refurbishment of existing sites in Gore and Dunedin, and initial planning costs to develop a land holding in Palmerston North.
The annual independent revaluation of the group’s property portfolio brought about a total increase of $1.7m of which $2.4m increased the revaluation reserves. At the reporting date, shareholders’ equity was $296.4m compared to $310.8m in 2022/23.
Dividends paid in respect of this financial year will total 35 cents per share, down from 57c in the previous financial year.
An interim dividend of 15c was paid on March 25 and a final dividend of 2c cents will be paid on October 7. The dividend will carry the maximum level of imputation credits.
The value of the distributions for this financial year will be $11.4m versus $18.6m in 2022/23, which represents 64 per cent of trading profit after tax compared to 61 per cent in 2023.
In addition, this year is the first time Colonial has produced a climate statement as required under the climate-related disclosures standards.
“The management team and board already undertake a robust risk management process that feeds directly into the company’s strategic-planning framework,” states the report. “Any climate-related risks and opportunities identified are incorporated into this process.”
Staff movements
Six new dealer principals have been appointed in 2024 with all having worked their way up through various Colonial dealerships.
They are Tim Paul of Energy Motors BYD & JAC, Jason Robb of Southern Autos, Nick Hutchinson of Timaru Motors, David Lavington of Dunedin City Motors, Paul Fiebiger of Southern Lakes Motors and Jimmy Banks of MS Motors.
The company has farewelled a couple of “exceptional leaders” who have served it well. Robert Bain started with the group in 1984 and stepped down as CEO/DP of Dunedin City Motors after 40 years of service. David Wills, CEO/DP of Ruahine Motors, is leaving December after 13 years at the helm.
Dr Ian Forbes Michie, who turns 100 on September 24, is possibly Colonial’s oldest shareholder.
“Ian has been a significant CMC shareholder for longer than even he can likely remember,” says chief executive Alex Gibbons. “He lives in Kent in the UK but has many family connections to New Zealand and CMC over generations, beginning with all his grandparents.
“His shares were purchased around 1918 by his maternal grandfather, James McLean. Ian inherited his CMC shares from his mother, Marybel McLean, as did his three sisters. He has maintained a close, personal attachment to the company and the country ever since.
“His mother told him that whatever else he does never to sell his CMC shares. He never did, has – we are told – never regretted it and passed on that sound advice to his children, who all own CMC shares.
“We offer Ian our very best wishes and heartiest congratulations on reaching this milestone and, just in case he is wondering, his dividend is in the mail.”
