領先汽車配件 (AAP) 2002 Q3 法說會逐字稿

Welcome to the Advance Auto Parts third quarter 2002 conference call.

Before we begin, Eric Margowin (ph) , the company's Senior Vice-President and General Counsel will make a brief statement concerning forward-looking statements that will be made on this call.

Good morning.

Certain statements that will be made during this conference call will contain forward-looking statements that incorporate assumptions, based on information currently available through the company.

These statements discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance including our future free cash flow in earnings per share.

These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to competitive pressures, demand for the company's products, the market for auto parts, the economy in general, inflation, consumer debt levels, the weather and other risks factors listed from time to time in the company's filings with the Securities and Exchange Commission.

Due to changing conditions, should any one or more of these risk factors materialize or any of the underlying assumptions prove incorrect, the actual results may materially differ from anticipated results described in these forward-looking statements.

The company intends these forward-looking statements to speak only as of the time of this conference call and does not undertake to update or revise them as more information becomes available.

I will now turn the call over to Larry Castellani, our Chief Executive Officer.

Thanks Eric.

Good morning and welcome to our call.

With me this morning is Jim Wade, our President and Chief Financial Officer, David Reid, our Executive Vice-President and Chief Operating Officer, and Jeff Gray, our Senior Vice-President and Controller.

The format of our conference call today will be slightly different this quarter, given that we have recently filed a registration statement covering the anticipated sale of approximately 8.6 million secondary shares of the company's common stock with an underwritten offer and consistent of 8.4 million shares we had offered by Sears Roebuck and Company, and 160,000 shares being offered by myself.

The underwriters also will have an option to purchase approximately 845,000 primary shares from the company, and about 13,000 shares of my holdings to cover the over allotments of shares.

During this call, we'll go over our financial results, as well as update you on our key initiatives; however we will not be taking any questions at the end of the call today, due to the fact that we have filed a registration statement.

We thank you for your understanding.

Well let's get started.

First of all, I'd like to thank our team for generating such strong results this quarter.

I truly believe that we have one of the best teams in retail and it is because of this great team, our earnings per share before integration expenses and extraordinary item grew 74 percent to 92 cents compared to 53 cents last year.

We achieved same-store sales growth of 5.5 on top of same-store sales growth of 7.1 last year, and increased our operating margins by 280 basis points to nine percent for the quarter.

Needless to say, we continue to effectively meet our three key goals, which are to one, increase our operating margins; two, continue to successfully executive our integration plan of Discount Auto Parts; and three, use our free-cash flow to pay down our debt.

On the call today, we will elaborate on all of these key goals.

First, Jim Wade will discuss our financial results, and the progress we're making in increasing our operating margins and deleveraging the company.

Then David Reid will discuss our strategy to further integrate the Discount Auto Parts stores located in the Florida market, as well as discuss the rollout of Eight Pail (ph) , our proprietary electronic catalog and PLO (ph) system, and MPT, our stay-away management system.

After David, I'll wrap up the call with a few comments.

Now Jim, how about starting us off?

Thank you Larry and good morning.

Also thanks to everyone on the phone this morning for waiting a couple extra weeks for our earnings release.

As a result of our pending secondary offering, we ask Deloitte & Touche to audit our results for the first 40 weeks of 2002 and we're pleased to say the audit went very well and it's now complete.

Our team members did produce strong results in our third quarter.

During the third quarter, total sales rose 31.7 percent to $788.7 million.

Year-to-date our sales have increased 33.6 percent.

We experienced strong growth in our retail segment, where sales grew 33.2 percent to $772.7 million.

The retail segment as you recall, includes both our DR (ph) line and commercial, our DISM (ph) sales.

On a year-to-date basis, sales of our retail segment grew 35.5 percent.

Wholesale sales from our Western Auto Wholesale Dealer Network continue their expected contraction with a year-over-year decline of 14.7 percent to $15.9 million.

On a year-to-date basis, these sales are down 11.8 percent and now make up less than three percent of our total sales.

Same-store sales grew by 5.5 percent in the third quarter on top of 7.1 percent in the same quarter last year.

An increase in customer account generated approximately 70 percent of the growth in same-store sales with the remainder coming from an increase in average ticket.

We believe our customers' accounts growing as a result of our key initiatives that includes an exciting new store format, our [Inaudible] system and MPT.

We're excited that more customers are choosing Advance Auto Parts for their automotive needs.

Year-to-date same-store sales growth at 6.2 percent compared to 6.5 percent for the first three quarters of last year.

For the quarter, our DR line (ph) same-store sales grew 5.4 percent and our commercial comps were up 5.7 percent.

For the same quarter last year, our DRY (ph) comps were at 7.1 percent and commercial comps were up seven percent.

Year-to-date, our DIY (ph) comps were at 6.5 percent compared to 5.2 percent last year and commercial comps were up five percent, year-to-date compared to over 12 percent last year.

Last year a stronger growth in commercial comps was a result of adding additional programs, as well as increasing the number of delivery trucks in some of our stores.

Our Discount Auto Parts store's also produced strong results this quarter.

Same-store sales rose 6.3 percent compared to 2.4 percent in the same quarter of 2001.

Year-to-date our discount stores generated same store sales growth of five percent compared to 2.3 percent in 2001.

We're excited to announce that we're now 100 percent finished with the conversion of all of the 164 Discount Auto Part stores located outside of the Florida market, including the Mississippi Distribution Center.

These stores are continuing to generate strong results.

In fact they produce comparable store sales gains of approximately 13 percent for both the third quarter and year to date.

We believe our stronger name recognition and greater parts availability have enhanced the performance of these stores.

It's important to note that these non-Florida stores are under performing for Discount Auto Parts, with average sales lower than the company's one million average.

We believe these stores have a tendency to experience above-average, same-store sales growth and to put it's full potential into perspective, we see the current volume as being similar to the average one-year [Inaudible] Advance Auto Parts stores.

We believe that they'll continue to mature on a similar pattern to our average store.

The stores in overlapping markets where we closed stores due to the Discount Auto Parts acquisition continues to experience same-store sales gains of over 20 percent.

However, on a company-wide basis, the closed stores have impacted the total comparable store sales by less than one percent.

Although our strongest same-store sales gains came from the non-Florida converted stores, we also produced solid results at our Discount Auto Parts in the Florida market.

For the third quarter, same store sales growth in our Florida Discount Auto Parts stores was approximately 4.7 percent and year-to-date, approximately 3.7 percent.

It's important to point out that these gains are produced despite the disruption of the merchandise alignment process, which was completed during our third quarter.

Our store system conversion in the Florida market is now in progress and we anticipate this will be completed in early 2003.

Just as a reminder, Discount Auto Parts same-store sales gains will be included in our comparable store sales, beginning in December 2002, which is 13 accounting periods after the acquisition.

We're also extremely pleased with the performance of the stores we acquired from Trak (ph) Auto Parts.

These stores are producing sales gains in excess of 30 percent compared to the same period last year.

It's important to note these stores had a poor inventory in stock position last year and are benefiting now from the advance merchandising staffing and systems.

We're also pleased to report that 55 of the 57 stores we acquired have been completely converted to Advance Auto Parts, and the remainder will be converted this week.

During the third quarter we opened 33 new stores including 22 Trak Auto Parts stores and closed seven, resulting in an ending-store count of 2,393.

Year-to-date we've opened 61 new stores and closed 152, including 130 related to the discount acquisition.

The Discount stores that we closed were primarily in overlapping markets.

During the fourth quarter, we plan to open 49 new stores, including 35 Trak Auto Parts, which will result in total openings for 2002 of approximately 110 stores.

Our pipeline for new stores [Inaudible] strong as we go into 2003.

We've also relocated, or in the process of relocating 40 existing stores in 2002, to continue to upgrade our store locations and take advantage of market changes.

Our new stores continue to open, excuse me, our new stores continue to open at higher sales levels than in the past.

In 2000 we raised our store development hurdle rates to 20 percent and we believe that this new hurdle rate as well as our additional new store development program are driving improvements in return on invested capital.

Our gross margin rose 140 basis points to 44.3 percent for the third quarter.

Retail gross margins, which excludes our wholesale dealer network was 34.9 percent.

Our gross margin improved primarily due to the benefits of enhanced purchasing and distribution efficiencies.

Year-to-date our gross margins has risen 130 basis points to 43.9 percent.

SG&A before integration expenses, declined 140 basis points to 45.3 percent.

We achieved leverage in our store payroll due to our MPC (ph) program, which assists us in using our resources effectively, by having the right team member at the right place at the right time doing the right thing.

Our rent expense has lowered the percents of sales as we realize the benefit of owning more of our locations.

Due to our focus on managing expenses and generating strong comparable store sales growth, we leveraged our total expenses.

Year-to-date, SG&A before integration expenses declined 110 basis points to 36.4 percent.

Our Discount Auto Parts integration expenses for the quarter were 8.2 million bringing the year-to-date total to $26.4 million.

These costs included the remerchandizing of stores and the now in-progress conversion of the stores to Advanced Auto Parts format as well as the full-system conversion.

At the time we closed the Discount acquisition, we estimated $40 million in integration expenses in 2002, and we now believe that these expenses are approximately $37 million for the year.

That three million will not be spending 2003 or a future year.

Operating margins for the third quarter before integration expense, rose 280 basis points to nine percent due to solid same-store sales growth, increasing gross margins and leveraging of our SG&A expenses.

On a year-to-date basis, operating margins before integration expense rose 240 basis points to 7.5 percent.

Operating income for the third quarter before integration expenses rose 90.7 percent to $70.8 million.

After integration expense, operating income rose 68.4 percent to $62.5 million.

On a year-to-date basis, operating income before integration expense rose 95.8 percent to $194.6 million.

After integration expense, operating income rose 69.2 percent to $168.1 million.

EBITDA as adjusted grew 68.3 percent before integration expense in the third quarter to $93.5 million and increased 70 percent to $267 million year to date.

After integration expenses, EBITDA as adjusted rose 53.5 percent to $85.3 million in the third quarter and rose 53.1 percent to $240.6 million year to date.

Interest expense rose to $15 million for the third quarter from $12.1 million in the same quarter last year.

As a result of increased volumes related to the discount acquisitions, offset partially by lower interest rates.

During the third quarter we reaped the full benefits of our repayment of a portion of our term loan, and we're refinancing the remaining portion of our [Inaudible] loan, with a new $250 million [Inaudible] fee term-loan facility, as well as the repurchase of approximately $40.6 million of 12 and seven-eighths senior discount diventures and 10 in the quarter senior subordinated note.

Our tax rate for the quarter was 38.8 percent and we anticipate this approximate tax rate for the reminder of the year.

During the quarter we repurchased three-and-a-half million in senior subordinated note, resulting in an extraordinary charge for the associated debt extinguishment cost of approximately 300,000.

Year-to-date we incurred an extraordinary charge of $8.7 million, which includes the unamortized discount, the deferred loan fees and premiums paid to repurchase loans, as well as the write-off of unamortized preferred loan fees and related financing fees associated with the repayment and refinancing of the [Inaudible] term loan in that period.

In the third quarter, net income before integration expense and the extraordinary item rose 121.3 percent to $33.7 million.

After integration expense and the extraordinary item net income rose 86.2 percent to $28.4 million.

Year-to-date net income increased 144.6 percent to $81.3 million before integration expense and the extraordinary item, and rose 69.7 percent to $56.4 million after integration expense and the extraordinary item.

For diluted shares before integration expense and the extraordinary item rose 73.6 percent to 92 cents.

After integration expenses and the extraordinary item earnings per diluted share rose 45.3 percent to 77 cents.

Year to date, earnings per diluted shares before integration expense and the extraordinary item rose 94.8 percent, $2.26 from $1.16 last year.

After integration expense and the extraordinary item earnings per diluted share rose 35.3 percent to $1.57.

We'll now review the key components of our balance sheet.

Our cash position increased by $38.7 million from year-end to $56.8 million.

From the end of the second quarter, our cash balance increased $17.3 million, giving us more flexibility to repurchase our bonds as they become available.

Our total capex for the quarter was $21.9 million including $8.6 million of Discount Auto Parts integration cap ex.

Capex year-to-date was $68.5 million including $23.2 million related to Discount.

Total capex for 2002 is anticipated to be about $105 million at which $35 million relates to Discount.

Net inventory, which is our inventory less payables is up 30.4 percent to $523.8 million compared to a sales gain of 31.7 percent.

Our accounts payable inventory ratio was 51.4 percent, which compares favorably to 50.1 percent last year.

Inventory at quarter end was one billion, 78 million, up 33.9 percent compared to the same quarter last year and compared to a sales growth of 31.7 percent for the quarter and 33.6 percent year-to-date.

Although inventory grew slightly faster than sales, our ending inventory per store including inventory in our distribution centers in PDQ (ph) warehouses, was flat with last year at about 450,000.

With the completion of the alignment of inventory in the Florida Discount Auto Parts stores at the end of the third quarter, we believe our inventory should grow in line with sales for the remainder of 2002 and should grow at a rate less than sales near the end of 2003.

Total debt has decreased $183 million year-to-date to $772.8 million.

Our net debt decreased $256.4 million from year-end and $18.3 million from the second quarter to $715.9 million.

We generated $22.3 million in free cash flow during the quarter, and $166.9 million year-to-date.

As in every year, the first three quarters of our fiscal year are the most seasonally strong for free cash flow generation.

In the fourth quarter, we'll be a net user of cash but we expect to generate free cash flow of approximately 100 to $110 million for the year.

Our return on invested capital rose significantly 12 percent year-to-date compared to 9.6 percent last year.

We continue to focus on enhancing our operating results, reducing our debt levels and effectively managing our working capital.

Now let me give you an update on our guidance for the fourth quarter and for 2003.

Since we have filed a restoration statement with the SEC., we'll limit our 2003 guidance to the full year.

After the offering is complete, we'll further discuss our quarter by quarter guidance.

Although sales during the first half of the fourth quarter have been slightly below expectations due to the above average amount of rain that most of the nation ahs been experiencing we remain comfortable with the guidance that we gave on our second quarter conference call, where we raised our guidance to a range of 38 to 42 cents per diluted share before integration expenses and the extraordinary item, compared to 16 cents last year.

For 2003, we again anticipate mid single digit same store sales growth for the total company.

When breaking down our comparable store sales growth, it's important to remember that Discount Auto Parts will be in the reported comps for all of 2003.

We anticipate discount store cost will grow approximately 1 percent faster than Advance with the stores outside of the Florida market generating the strongest gain.

This growth will be substantially ahead of the last several years and reflects the additional availability of parts and staffing as well as the strength of the Advance Auto Parts name in the markets outside of Florida.

The Florida stores we'll still be finishing up the store system conversion and doing the market by market fiscal conversions, therefore we have more modest expectations.

We anticipate new store growth of approximately 100 stores net of about 25 closings in 2003, adding about 4 percent square footage.

We expect to open these new stores in our existing markets where we see our greatest market share opportunities and where we can leverage our existing infrastructure.

Operating income we anticipate will grow approximately 20 percent in 2003.

This will come from continued solid comp store sales growth.

Increases in gross margin will be achieved from purchasing synergies, category management and leveraging of logistics calls.

We'll also leverage our SG&A through MPT and growth in our existing markets.

Excluded from operating income is approximately $10 million of one-time integrated expense related to the discount, to the conversion of discount stores.

We anticipate no reported integration expense beyond 2003.

We anticipate our diluted share growth of 25 percent in 2003 resulting from increased operating income and continued interest expense reduction -- due to our strong cash flow.

In 2003, we'll have a 53rd week of sales and that extra week is not included in the numbers I just discussed.

It should positively impact our earnings per growth share growth next year by approximately 1.5 percent.

Capex for 2003 is expected to be approximately $95 million, some relating to the physical conversion of about 120 discount stores in the Florida market to advance.

We anticipate working capital to be approximately neutral in 2003.

Increases in inventory due to store growth will be rising as the accounts payable ratio [inaudible].

As a result, we anticipate free cash flow will be approximately $150 million, which we anticipate will go towards debt paydown.

There is one additional opportunity in 2003 that's not included in this guidance that we want to make you all aware.

All of our outstanding high-yield bonds have call provisions beginning on April 15th of 2003.

They consist of $95.6 million of 12 and seven-eighths senior discount diventures (ph) and $345.3 million of 10.25 senior subordinated notes.

Currently, we anticipate calling these bonds and we anticipate generating these bonds through a combination of free cash flow and borrowings under a $350 million uncommitted tack-on facility included in our current credit facility.

We currently have no commitments from our current lenders or from third parties to fund this additional length term and our ability to obtain the financing will spin on our ability to obtain commitments.

The cost of returning these securities will include a one-time cash flow premium of approximately $24 million as well as the write-off for the remaining non-cash deferred debt cost and unamortized bond discounts of approximately $20 million.

If we were to call all the debt instruments on April 15th of next year, the potential interest savings for the 8.5 months for 2003 could range from 12 to $14 million and 16 to $20 million on an annualized basis.

When calculating the savings, we assume that the interest rate environment next year will be somewhat higher than today.

This opportunity has not been included in our guidance for 2003 because completion is dependent on timing, market conditions, cost of debt, and other factors, none of which can be realistically estimated today.

Lastly, our 2003 guidance assumed no expensing of stock options.

We anticipate that the expense will be approximately 5 to 7 cents per share but it will not be implemented until more definitive rules are issued.

Now I'd like to turn the call over to David Reid.

Thanks, Jim, and good morning.

I'd like to take the time to update you this morning on the progress we're making as well as the next steps we're taking to convert the Discount Auto Parts stores in the Florida market.

As well as update you on APAL, our proprietary electronic catalogue and point of sale system, and MPT, our labor management program.

We're pleased with the 6.3 percent comp store sales gains we achieved in the third quarter in the Discount Auto Parts stores.

As Jim mentioned earlier, all of the 164 stores outside of the state of Florida have been completely converted and are performing strongly as Advance Auto Parts stores.

As a group, the sales in these stores, when they operated at discount, underperformed that chain's average of approximately $1 million per store.

However, we believe that these stores can now grow to our company average of $1.3 million per store over the next few years.

Thereby generating above average comparable store sales growth.

Now that the stores outside of the Florida market are completely integrated, we are focusing our energy on the Florida market.

In fact, as of the end of the third quarter, we had already converted 16 in-state stores, completed the entire remerchandising of all of the Florida stores and began the rollout of APAL.

We now have completed over 100 system conversions in the Florida market.

We anticipate completing the entire Florida market systems conversion in 2003.

Since closing the acquisition in November of last year, we began cobranding our ads with the message, "Two great companies coming together."

These ads set the stage for the transition that we're making from Discount Auto Parts to Advance Auto Parts in our nonFlorida markets and to Advance Discount Auto Parts in the Florida market.

As we previously discussed, we have chosen to brand the stores in the Florida market "Advance Discount Auto Parts."

It is not a new logo, it's the Advance Auto Parts name adapted to maximize the brand equities that Discount Auto Parts has built in Florida.

We believe that this name conveys the strength of the Discount Auto Parts brand, yet takes the next step by advancing the stores to the next level through our enhanced customer service, improved inventory selection and our state of the art store system.

Over the next three years, we will convert the Discount Auto Parts stores in Florida market by market.

By the end of 03, we will have converted Jacksonville, Tallahassee, Gainesville and Orlando.

As we convert the Florida stores market by market, we're launching our targeted marketing plan.

The success of our store conversions has been augmented by our media plan.

As I mentioned earlier, during the preconversion, we cobranded our advertising, in affect, telling our customers that we were transitioning the Discount Auto Parts brand to Advance Auto Parts.

Once the physical conversion of the market is complete, we realized the market was a strong grand opening campaign including radio and print advertising, as well as special promotions and events.

Throughout the process, we reaffirmed our message that we are building a better way to buy auto parts, parts being the key word.

We are accentuating our national brands as well as our deeper and broader selection of high quality auto parts.

We are making every effort to be sure our customers know about our greater inventory selection and availability.

This will help us expand and extend our ability to say yes to more customers, more often, as well as give us the opportunity to enhance our reputation for being the premier retailer of quality auto parts in Florida.

To date, we have seen this enhanced inventory selection improving our comparable store sales and gross margin through a positive shift in our mix.

Our Discount Auto Parts team members have been key to the success of this integration.

We are proud to report that we continue to have strong team member retention.

In fact, we have been able to retain over 90 percent of our store managers and over 95 percent of our division managers.

We would like to thank these 10 members as well as the advance team members who have worked so tirelessly to make this integration the absolute success it has been so far.

Without the dedication of our merchandising, store set-up, systems, accounting and operations teams, this process would not have gone as smoothly as it has thus far.

Along with the Discount Auto Parts store conversions, we're also rolling out APAL, our state of the art electronics parts catalog and point of sale system throughout the company.

At the end of the third quarter, 866 stores or about 36 percent of the chain had the new store system.

As of the end of last week, the number had grown to 1,047 stores, or 44 percent of the chain.

We continue to believe that this system will give our team the tools they need to serve our customers better and more effectively.

Focusing on selling the total project, not just the part.

APAL is just one of the systems that's helping our team members serve our customers more effectively.

Management planning and training is helping our store managers manage their labor resources more effectively and efficiently.

As of the end of the third quarter, phase 1 of M.P.T. was rolled out in all of our stores except for the Discount Auto Parts stores in Florida.

We plan to roll out the Florida stores by the end of the first quarter of 03.

Phase 2 of the program will begin rolling out in 2003, where we're automating the program and adding E-scheduling.

M.P.T. is all about having the right people at the right time doing the right thing all the time to better serve our customers.

Now let me turn the floor back over to Larry.

Thanks, David.

We're operating on all cylinders at Advance Auto Parts.

We're achieving strong results and are building for the future.

One area that we are focused on is enhancing our board of directors.

It is certainly our intention to have a well qualified board that's multidimensional in experience and that will continue to challenge the management team to maximize shareholder value.

Assuming that Sears Roebuck completes the sale of the shares under the pending registration, our board of directors will change.

Paul Lister (ph) and Glen Rikna (ph) from Sears will be stepping down from our board.

Bill Salter (ph), the retired president of Sears special retail division will remain as an independent member, continuing to enhance our board with his retailing expertise.

Recently we announced that we were adding another new independent board member, Francesca Spinelli, Senior Vice President of people at Radio Shack.

She has a strong background in human resources and organizational development at Radio Shack, and prior to that, at Wal-Mart.

Along with being a member of our board, she will also serve on the compensation committee.

We look forward to her many contributions.

Our corporate governance and nominating committee is leading the search for another new independent board member who will meet the new financial expertise requirements imposed by the New York Stock Exchange.

As we move into 03, we anticipate that in accordance with the New York Stock Exchange new rules, our board will have determined that six of our 10 directors will be independent, providing us with a majority of independent directors.

On, the remainder of the call, I'd like to talk to you about the impact that category management is having on our results.

In fact, we were just beginning to feel the results from our category management initiatives.

We've only been through about 20 percent of our product lines representing slightly over 50 percent of our total sales.

As we are just finished the Discount Auto Parts merchandise conversion process, we believe we will be able to accelerate our category management initiatives.

In fact, by mid 03, we believe that we will have thoroughly reviewed at least 50 percent of our categories representing approximately 75 percent of our total sales.

The initiatives will result from our category management process should impact our sales and contribution margins positively.

One example where we made a significant impact to the category management process is the battery category.

As a result of this category review and working hand in hand with our suppliers, we have achieved a significant increase in market share as well as a significant reduction in warranty expense.

We anticipate that over the next two to three years, our category management initiatives will result in a 100 basis point expansion in contribution margins, augmented by a further 100-point expansion due to enhanced purchasing and better supply chain management.

We hope that you agree that our third quarter results demonstrate our dedication to our three key goals which are one, to increase operating margin, two, to continue to successfully execute our integration of Discount Auto Parts, and three, to use our free cash flow to pay down debt.

Again, we thank you for your participation on this call this morning.

Thank you, operator.

You're welcome, sir.

That concludes our conference.

You may now disconnect.