Asbury Automotive Group Inc (ABG) 2008 Q3 法說會逐字稿

Please stand by. Good day, everyone. Welcome to this Asbury Automotive Group Quarterly Earnings Results conference call. Just a reminder that today's call is being recorded. At this time, for opening remarks and introductions, I would to turn that call over to the Vice President of Financial, Mr. Keith Style. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us today. As you know, this morning we report our third quarter 2008 earnings. The press release is posted to our website at www.asburyauto.com. If you would like a copy of the release sent to you, please contact [Michelle Ramsmooge] at our corporate office. Michelle can be reached at 212-885-2535.

Before we start today, I would like to remind everyone that the call today will include forward-looking statements that are subject to certain risks and uncertainties, which are detailed in the Company's 2007 10-K report as well as other filings with the SEC. The purpose of today's call is to discuss Asbury's third quarter results. With us today is Charles Oglesby, our President and CEO, and Craig Monaghan our CFO. Following their comments, we will be happy to take your questions. Now I would like to turn the call over to Charles Oglesby. Charles?

Thanks, Keith. Good morning, everyone, and thanks for joining us today. As you know, Asbury and the auto retailing industry have been facing significant headwinds throughout 2008 and the challenges in our retail business intensified further in the third quarter. In fact the retail environment deteriorated substantially as the quarter progressed. And in September, we saw the first sub-1 million unit sales mark in the US since February 1993. It's important to note that all automotive brands, including the luxury and the midline imports, were down significantly in September.

From a consumer perspective, household wealth in America was already under pressure from declining home values and additional pressure has been applied by the recent sharp declines in the world's equity markets. Consumer borrowing power has weaken materially as home equity financing has evaporated, credit card lines have been reduced and many auto lenders, both captives and independent banks has significantly tightened their lending standards.

At this point, we don't know, no-one knows how deep this automotive recession will be or how long it will last. In automotive retail, especially during difficult markets, cash is king. Therefore, we are making the difficult but necessary decisions to preserve our capital and reduce cost. We are acutely aware of the impact these decisions will have on our many stakeholders but also believe they are essential to ensure the longer-term success of our company.

With respect to capital preservation, we are taking action on all fronts. As announced in our release this morning the Board of Directors has selected to suspend the dividend. In addition, we have put our acquisition strategy on hold. Finally, we will reduce our capital spending to maintenance levels in 2009, which is approximately $10 million a year.

In terms of cost reductions, we have substantially broadened the scope of our restructuring plans and store level productivity initiatives. These efforts are designed to deliver annualized savings of $25 million by the second half of 2009. Our corporate regional restructuring programs are consistent with the planned evolution we had envisioned for Asbury.

However, all these errors have been accelerated in response to the current operating environment. I am pleased with the progress we have made with the move of Asbury's headquarter to Atlanta and we begun the transition -- as we begun the transition, we have identified addition cost saving opportunities.

We have also announced the consolidation of our regional management teams from the four existing regions into just two. I am pleased to announce that Michael Kearney, who is in the room with us today, former head of our Mid-Atlantic region, is now CEO of our East region and Tom McCollum, former head of our Texas, Arkansas and California operations, is now CEO of our West region.

Finally, under our store level productivity initiative, we have intensified our efforts to improve all aspects of our cost structure, including aligning our personnel requirements with the current market conditions, reducing advertising budgets, improving inventory management and enhancing our technology to increase efficiency.

Before I turn the call over to Craig, I would like to touch briefly on the performance of our four business lines. Our new light vehicle unit sales were largely in line with the national trends of 21% for the quarter on a same store basis. The strength of our brand mix was overshadowed in some cases by the pronounced weakness in certain local markets, particularly in our key Florida and California markets.

Our used vehicle performance was in line with the declines we experienced in new vehicles. We have continued to make progress in reducing our vehicle inventories. As of September 30th our new light vehicle inventories were down approximately $50 million and our used vehicle inventories were down an addition $10 million from the end of the second quarter.

We will continue to drive this inventory down in the months ahead. Despite significant weather disruptions from a tropical storm in Florida, hurricane Ike in Texas and severe gas shortages in Atlanta, our parts and service business remained relatively stable.

The same store gross profit down just 3% and customer paid business down only 3%. And finally, F&I continued a strong performance with slight increase to $959 on a [PVR] basis. Now I would like to turn the call over to Craig to review our performance and financial position in greater detail. Craig?

Thank you, Charles. And good morning, everyone. I have a number of topics to review today but I would like to start with the recap of our financial performance for the third quarter. We reported income from continuing operations of $0.22 per diluted share compared to $0.58 per diluted share a year ago.

As Charles mentioned, we are in unprecedented times and facing an extremely difficult automotive market, but despite this challenges we continue to invest in our future. In this regard, our results for the quarter include $1.7 million pre-tax charge or $0.03 per share associated with terminating our prior credit facility, a $1.7 million or $0.03 per share in pre-tax restructuring costs and continued dealer management system conversion cost.

These costs were partially offset by $1.1 million tax benefit associated with our corporate restructuring. As Charles noted, severe weather also impacted our business in the third quarter and while it is difficult to quantify, we estimate hurricane Ike and the tropical storms in Florida cost us in additional $0.03 per share.

Next, I would like to provide an update on our goodwill impairment test. We conducted our annual test and determined that no impairment of our goodwill existed at the end of September. However, should our financial performance decline further or the market value of our stock remain depressed, we could become impaired. It is important to know that an impairment charge would not have an impact on our debt covenants.

However, it would impact our ability to return capital to our shareholders in the future. Covenants and liquidity are obviously areas of concern and I would like to address those topics next. Attached to our press released you will find a summary of our two key covenants, those on our revolving credit and major mortgage facilities.

As you will know, we easy cleared all covenants in the third quarter despite the fact that we had drawn $40 million on our revolver to temporarily fund a portion of our new vehicle floor plan needs. Likewise, we had more than ample liquidity. And while we can't predict where US auto sales or the impact of an extremely weak market could have on our ability to continue to meet our debt covenants, we can share with you the action we are taking, which we're confident will enable us to weather the storm we are currently facing.

Our strategy includes three components -- first, as Charles mentioned, we aggressively taking out cost. Second, we are working to generate cash from our balance sheet. And third, in conjunction with our banking and manufacturing partners, we have put new borrowing facilities in place to strengthen liquidity and enhance financial flexibility.

Let me give you a little more color on each of these initiatives, starting with the cost. We have significantly expanded our ongoing restructuring efforts and are now targeting $25 million in annualized savings by the second half of 2009. Our corporate restructuring efforts are now expected to produce $4.5 million in savings up from our previous estimate of $3.5 million, as we have identified additional savings associated with our move out of New York.

Our regional consolidation should save approximately $8 million, driven primarily by savings associated with closing our Florida regional office, significantly reducing regional staff and moving many of the regional finance functions to our Atlanta office. And finally, our intensified store level productivity initiatives are targeted to generate annual savings of about $12.5 million. The majority of these savings should be realized by March of next year.

We also expect to incur approximately $7 million in additional expenses related to these various initiatives over the next two quarters. Turning to the balance sheet, our store and regional management teams are working across numerous fronts to free up cash. We are reducing contracts and transit and used inventory levels and working to minimize the cash tied up in loan or vehicle programs and dealer trades.

Likewise, we are pursuing the sale of our [captive] financial company, non-strategic dealerships and excess property. Altogether we believe these efforts could generate in excess of [$50 million] in cash over the next six months. Our recently announced $600 million floor plan and $200 million revolving credit facilities have significantly enhanced our financial flexibility. Not only are the new facilities significantly larger than the prior facilities, they also provide attractive interest rates and more lenient covenants.

Over the past week, we have secured more than a $100 million in additional inventory-based financing. A $75 million used vehicle borrowing facility led by JPMorgan and a $29 million in new floor plan financing provided by B of A. The fact that our lending partners are standing behind us with these new highly flexible lines of liquidity shows their confidence in Asbury.

We have evidence that our initiatives are producing results. At the end of September, we had a $19 million revolver balance net of cash. Today our revolver is not drawn. Neither is our used vehicle line. And even though industry wide sale in October have been extremely soft, last night we had over $40 million in the bank. Our relentless focus on cash is working. With that, I would like to turn the call back to Charles.

As Craig noted, our efforts to [drop] cash out of the balance sheet and improve our liquidity have already produced significant results. Combined with our plans to reduce cost, we believe we have the financial flexibility necessary to navigate through this period of weak retail sales.

At the same time, we continue to invest in Asbury's future, aligning the management structure in the most effective and efficient manner in implementing systems and technology that will allow us to leverage our scale and serve our customers better. In many respects, we are actually disassembling and rebuilding our company. We will have the best of both worlds.

Efficiencies derived from the centralization of our IT and financial systems coupled with the competitive advantage of having entrepreneurial general managers making decisions in their local markets. The actions we are taking today will not only help us weather the current environment but will also position us to more effectively leverage our growth opportunities when the economy eventually improves. Now I would like to turn the call back over to the operator and we will take your questions. Operator?

(Operator Instructions)

And we will take our first question today from Rod Lache of Deutsche Bank.

Good morning, everyone.

Good morning, Rod.

Hi, Rod.

A few questions. Thanks for the color on the leverage covenants and the plans to address that. Just wondering if you could just give us a little bit more color on the extent to which you can bring used inventory down, because I think that that actually does affect the covenants, right? Because that was in your -- that was being funded by your revolver or am I wrong on that?

No, that's true. Used vehicle inventory was, with [base rate], essentially 100% financed out of working capital.

Yes. So what is the flexibility on bringing used inventory down at this point?

Bringing used vehicle inventory down is one of our objectives. We are still running in the mid-40 day levels. We have got an objective of getting down into the 30s that would produce additional cash.

Yes. Okay.

One of the things that we are doing with that, Rod, as I mentioned, we decreased our used vehicle inventory by $10 million. But as you recall, we were very heavy in the subprime business in the past and so, as we reposition the inventory in that market -- basically has moved away from the industry right now, that as we continue to bring the inventory down, our days supply still remaining about where it has in the past. So -- but we will continue to drive it down and our focus is to get the day supply down to 35 days.

Okay. And how comfortable are you with the ability to execute asset sales in this environment? Is this something that is pretty advanced at this stage or is this something that, in your mind, still has some risk?

Yes, Rod. We have got a lot of activity. We are talking to people who have the wherewithal to execute these transactions. Some of the activities around dealership, some of it's around dirt. We have got a pretty high level of confidence that we can get this stuff done. It may take us six months to get through the list that we put together but we feel pretty good about it.

All right.

Yes. There are more sellers in the market right now than there are buyers and as we look at our portfolio, we are looking at it strategically as well as the returns on our investments.

All right. And on credit availability and just F&I per unit, any changes there on the outlook and can you give us any color on the extent to which the weak is being driven by the availability of credit as opposed to just traffic?

Early in the year, there was a demand issue. Meaning, when the SAR was 14 and 15 or so and as the year has progressed, that the foot traffic has absolutely slowed down. The consumer confidence has gone to, as you know, all time lows. And in conjunction with that, the lending sources have tightened their lending requirements up.

We are very fortunate that with the captive finance companies that we have that they are, they are still well funded and they are all making loans. They have tweaked their requirements a little bit and as an example with the higher credit scores, lower advances, more cash from the customer. So we are actually working deals like we did back in the '80s, as cash is king from getting the deal approved as well.

But I would say with our mix and certainly the more we move toward domestics, financing is more an issue. Some banks are in the business to see the opportunity and others have no [data] but basically, with our portfolio mix, the lenders that we use -- Toyota Financial Services, Honda, [Nemac] are still lending money and see this is an opportunity for them to gain that -- to help them gain market share.

And the F&I per unit, that you feel comfortable is something that is not going to be affected in this environment?

You, we have held steady and in this environment, I think that there are a number of reasons for that. There are more financing rather than leasing and whenever you finance a car with a loan, there is going to be a little more reserve on it. Plus, as you -- you are a little more open to a service contract because if you are going to own the vehicle, you may want other products on that car as well. So we feel very comfortable that we can maintain the level where we are right now.

All right. Thank you. Just one last one, any thoughts on where SG&A to gross any kind of targets as you look at the next year. It looks like a pretty significant amount of savings coming out but is there some kind of metric that we should be looking out for?

Rod, I struggle to give you a direct ratio. What I can tell you is we have got very specific action plans in place to get that $25 million. I think the ratio will probably be more a function of what happens on the revenue line.

Yes.

But $25 million, you can add in.

Great. Okay. Thank you.

Okay.

Up next, we will take a question from Rick Nelson, Stephens, Incorporated.

Thank you and good morning.

Good morning, Rick.

Good morning, Rick.

September was a very tough month for the industry. You mentioned, it's up 1 million units. Was Asbury profitable in the month of September?

Rick, we have not broken out monthly profits. I think we should stick to the quarter but, like you heard us mention earlier, we were fine and we have got a lot of confidence in our ability to work through this -- this difficult market.

Okay. How about economy expense [tied]. How much of the expense reduction that you talked about this morning, showed up in the third quarter and how much would you think would show up here in the fourth quarter?

There was virtually no benefit of expense reductions in the third quarter. I think we will just begin to see some of those benefits in the fourth quarter. I think it will be the first quarter where we start to see them in any material way. But we will be incurring the cost and I think we need to emphasis that. We took about $1.7 million of cost in the third quarter and we are going to have cost probably in that same vicinity in the fourth quarter as well.

And question on that dividend -- I am curious why you decided to suspend the dividend rather than cut it to a minimal level?

Rick, the Board considered all options and this was not an easy decision; but it was determined that it was prudent, in best interest to all of our shareholders to suspend entirely given this environment. But the Board always revisits this quarterly, as we have every quarter.

Okay. Thank you very much and good luck.

Thank you.

And next, we'll hear from Rich Kwas, Wachovia.

Hi, good morning, guys.

Good morning, Rich.

Hi, Rich.

Craig, on the leverage ratio with the pay down under the revolver at this point, it didn't seem like there's a lot more you can do on the debt side. Is that accurate?

Well we did pay off the revolvers. So when you look at the schedules that we have attached here with this release, and you are looking at that calculation, there is $40 million of revolver debt in there that is gone.

Right.

So we have had that improvement but there's nothing that prohibits us from buying back that in the open market.

Okay.

So that would be another option.

Okay. Okay, and then in terms of CapEx, the $10 million, is that in all in numbers now assuming that it sounds like you are not going to be expanding facilities and, as you said, you are not making acquisitions. Is that really an all in number for next year?

Yes, that would be in all in number, Rich, or less.

Okay. Okay, fair enough. And then in terms of the used vehicle market here in wholesale prices have stabilized for trucks. What are you seeing in terms margins really were -- seemed to have stabilized a bit here. Is that kind of the good assumption to use going forward?

You know, Rich, we have got Michael Kearney in the room with us today and he is got some local color on that. So I am going to ask him to answer that.

Rich, that's a good question. The used car market at the wholesale level is how -- I think, I will answer that. At the wholesale level there is a lot of product that is backing up at auctions today.

So what we see going over the next 30 to 60 days particularly is that will have to free up -- the vehicle will be sold and the prices will then at the wholesale side get a little bit cheaper, which is at double-edged sword for us and that when we take cars, we might have to take a little less at the wholesale side. But we buy cars a whole lot cheaper as we go into the back part of this quarter and then to first part of next year, we will be able to have inventory that we have been able to buy below market.

Okay. So it looks like it's still another quarter where there is some volatility and then maybe in the first part of '09 some more stability.

That's the way that we are seeing it and, as you noted, Rich, our margins have held pretty good, over 11% for the last couple of quarters. So, we feel that we know how to retail these cars that we have in our inventory.

Okay and then could you -- Charles, could you remind us on sub-prime mix, I know that you had been working to get that down as a percentage of the used unit sale, I think it was down around 20% or so the last quarter. Did that move down again?

Yes. I will tell you the market is helping us move that down even more, Rich. But yes, that's -- that that market is still there and it is a mature model that the subprime lenders really got away from and with the cheap money and letting anybody buy. And that those days are over.

And I do believe that whenever the -- when the credit markets start to free up that those lenders will be able to come back in the market. They won't be as free as they had been in the past. But that's a huge market that is still out there, but it is probably about 15% of our business right now.

And finally, trends in Florida, I know it is still pretty difficult there. Any signs of improvements or I should say signs of stabilization that you are seeing at all?

Michael, I will let you -

Rich, it is a very challenging market. I think it is stabilizing. I couldn't begin to tell you how long it will stay at the level. But I do see signs of stability. As we mentioned earlier on it, we progressively approached cost in all of our markets and I think we will see the benefits to that very quickly in there. But in terms of retail sales, units, the customers coming into the showroom, I think it has stabilized. I assume it's -- we are walking along the bottom, just don't know how long we are going to walk on the bottom.

Okay. So generally things are getting less worse.

That's a nice way to put it.

Okay. All right. Thank you.

Thank you.

(Operator Instructions)

Up next we will go to Matt Nemer, Thomas Weisel Partners.

Good morning, everyone.

Good morning, Matt.

My first question was, I apologized if I missed this. But on the floor plan, the new floor plan lines, can you just give us little more detail on what transpired during the quarter with your floor plan financing and then maybe what you have arranged to replace it and if you can go into some detail on what sort of rates you were able to get on that financing.

Well, that's an involved question. Let me start -- I think your question really revolves around structure, is that correct?

Yes.

The prior facility was a syndicate that had numerous bank participants as well as captives, 17 or 18 in total. And that was to fund both floor plan and the revolver. In the facility that we put together, we, to a large extent -- we have given the floor plan back to the respective captives.

In return for that, we asked the captives to support us with a revolver and to allow us to strip out our used vehicle collateral so that we can set up a separate used vehicle line, and that's what you see today. With respect to rates, the rates that we are realizing on the revolver are very, I would say, very similar to the rates that we have seen in the past, although they are based on utilization as opposed to, I think, in the past it was more of a ratings-based pricing.

The floor plan rates with the luxury and the imports stores are very attractive and I would say libor plus 125 range. The floor plan rates with the domestics are significantly higher, more than 100 basis points higher.

Got it. Okay, that's helpful. And then I was wondering if you could give us a little bit more detail on what you are seeing in parts and service at least during the quarter and what was the mix of business between warranty and customer pay and how did those trend?

You know, warranty was up 5%, which is the second quarter that we have seen that, and our customer pay was down slightly. We are finding, although last quarter was very difficult for us because we had the tropical storm in Florida, with the floods and the rain disrupted our business there about four days. We had hurricane in Texas and you know the results of that. And then in Atlanta we had almost a severe gas shortage.

We had as many as 50% of our service customers that we follow up with our BDC, cancel appointments. So we feel very comfortable that this part of our business is still operating stable. The brand mix we have, these are the growing franchises -- more [UIOs] in the market with the franchises that we have.

So looking out, as those new aisles are growing, that will again support stabilization of the business plus the service contracts that we have sold for the last couple of years as well may -- keeps that customer tied to us as well. So there's a number of events going on that is stabilizing that business. We do know that the customer is -- a number of customers are pushing out any of the extensive work, if they can put it off, they are right now. But at some point in time, that work would also have to come back in.

Got it. And then on the cost reduction plan on the piece that's related to store productivity, is that basic elimination of labor expense related to the lower gross profit or is there actually some structural change that you have made in the stores in terms of the way they operate, i.e. - taking out a function or combining functions.

Yes, all of that. Advertising, we are scrutinizing advertising. Right now, we are redirecting that more to internet, more specific needs at this point, although we still want to keep up our brand names out there.

It would involve cutting inventories, managing the inventories better, putting compensation plans competitive in the marketplace but making sure that they are the appropriate compensation plans, in some areas where we can have less costly health plans. The third part is software providers --all the things that you just said is what we are looking at on these cost reductions, Matt.

Okay. And then lastly, I missed the CapEx guidance for next year. I thought I heard you said $10 million. Can you just confirm that?

Yes, that's correct, $10 million.

And is that -- should we consider that to be your maintenance rate or is that actually, perhaps lower than maintenance, where you are sort of conserving cash in '09.

No, that would be maintenance rate.

Okay, great. Thanks very much.

And, everyone, that is all the time we have for questions today. I will turn the conference back over to our speakers for any additional or closing remarks.

Well, we appreciate everyone joining us today. We are very excited about what is going in Asbury at this time, even though it is a very challenging time with the culture that is in this organization and the people that are working very hard, very diligent and the approach that we have taken to make sure we have the liquidity to get through this, again, very difficult time and the people to execute that. We are very comfortable with whatever the market happens in '09. So thank you for joining us today and we will talk to you next quarter.

That does conclude today's conference. Thank you, all, for your participation and have a great day.