Asbury Automotive Group Inc (ABG) 2008 Q4 法說會逐字稿

Good day and welcome to the Asbury Automotive Group quarterly earnings results conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thanks, operator, and good morning to everybody. Welcome to Asbury Automotive Group's fourth quarter 2008 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury Automotive's fourth quarter results was released this morning and is posted on our website at www.asburyauto.com. Participating with us on the call are Charles Oglesby, Chief Executive Officer, Craig Monaghan, Chief Financial Officer, and Michael Kearney, Chief Operating Officer. As always, at the conclusion of our remarks, we will open up the call for questions and I'll be available afterwards to accept any questions you may have by dialing my office.

Before we begin, I'd like to remind you that we may make forward-looking statements relating to Asbury Automotive on this call. We caution you that these statements are only predictions and are subject to risks and uncertainties related to general economic conditions, our restructuring and cost savings initiatives, interest rate fluctuations, and changes in consumer credit and spending and other factors of which management has no control. Our actual results may vary materially from these predictions. Any such statements should be evaluated together with the information about Asbury Automotive in our public filings included in our annual report on Form 10-K. At this time, I would like to turn the call over to Charles.

Thank you, Ryan, and good morning, everyone and thanks for joining us today. First of all, I want to explain all of our shareholders why we delayed our earnings call and 10-K filing until today. Very late in our year-end process our auditor, Deloitte & Touche, indicated that they anticipated giving Asbury a going concern opinion. This opinion carried significant consequences for us as it resulted in a default under certain of our lending agreements.

We see our future differently and, in fact, believe the actions we have taken to date position us well for long-term success. Our liquidity remains strong with approximately $92 million of cash at year end and borrowing capacity of $116 million. We also have considerable financial flexibility with no material debt maturities until 2012. Furthermore, we have made tremendous progress on the restructuring and productivity plans that we announced during our third quarter conference call. Fortunately, our financial partners see our future as we do. Despite the extremely tight time line resulting from the late hour of our auditor's opinion, our lending partners demonstrated their confidence in us and our viability with all 11 voting to provide us with waivers. The fact that we were able to garner 100% approval vote reinforces my conviction that our business remains viable and that our business partners have trust in us, and we are focused on the right things. I would like to take a second and publicly say thank you to all of our lending partners for their responsiveness and sterling partnership.

Now we'd like to move to our industry and operational results. As you are all well aware, the auto retailing industry faced unprecedented head winds in 2008. After a decade of selling over 16 million new cars a year in the US, the SAR plummeted 18% to $13.2 million in 2008. On a year-over-year basis, the fourth quarter SAR plunged more dramatically from $16 million to $10.3 million, or 35%. So far in 2009, the SAR has averaged less than $9.5 million, and we are structuring our business to be profitable at these levels. In fact, we're pleased to disclose that the company broke even for the first two months of 2009, traditionally, two of the weakest months of the year for automotive retailing. It's important to note that all automotive brands, including luxury, and mid-line imports as well as the domestics, are experiencing extremely challenging year-over-year sales trends. Two fundamental issues are driving this decline, the erosion of consumer confidence and the contraction of credit. I believe consumers have been overwhelmed with so much negativity over the last year that they are concerned about spending a substantial amount of money on something that is not absolutely necessary. Furthermore, tightened credit continues to be a challenge for potential buyers.

In light of all these challenges facing automotive retail, we remain laser focused on preserving our liquidity. Cash is king. In our third quarter earnings call, we announced a number of capital preservation and cost reduction initiatives. Given the speed with which the SAR has deteriorated, we continue to make the tough decisions to accelerate cost cutting and integration initiatives. Though disruptive and painful, we are thinking creatively and moving quickly to ensure the long-term success of our company.

I am proud to share what we have accomplished to date. We have relocated our corporate headquarters to Duluth, Georgia, two months ahead of schedule, and reduced corporate staffing levels by 25%. Actions we have taken to reduce SG&A include no bonuses for corporate employees, and no pay raises for officers and directors. We have also taken other actions, such as reduced 401(k) matches and a voluntary 10% reduction in senior management compensation. We continue to focus on store level productivity and have reduced our national workforce by 14%. We have accelerated our restructuring plans by eliminating our regional management structure. The new streamlined organization is designed to exploit economies of scale, afforded by our size, while at the same time, allowing our general managers to be entrepreneurs and manage all customer and store-level activity. As part of this new structure, I am pleased to announce the promotion of Michael Kearney, former CEO of our East Region to Senior Vice President and Chief Operating Officer. Michael is very excited about this opportunity and with over 30 years of automotive retail experience, he is up to the task.

During our third quarter conference call, we announced restructuring plans that specifically identified annualized savings of $25 million to be completed by the second half of 2009. We have made tremendous strides in reducing our costs across all levels of the organization and we have significantly exceeded that goal. In fact, during the fourth quarter, we achieved over $100 million in annualized savings. I want to thank everyone across the organization, particularly the general managers, for the tremendous strides we have made and despite this accomplishment, we continue to seek additional cost savings and operational efficiencies. With respect to capital preservation, we suspended our dividend last quarter and continued to keep our acquisitions on board. Capital spending for 2009 will be limited to maintenance and IT infrastructure development, which will approximate $10 million to $15 million, roughly 82% below 2008 levels. We continue to focus on working capital efficiency and critical areas such as contracts in transit, accounts receivable collections, and closely managing used vehicle inventory.

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 down materially during the fourth quarter, but consistent with automotive industry results. Our used light vehicle sales were impacted to a lesser degree, down 27%. Our used vehicle inventories were down approximately $25 million or 30% from third quarter level, and are at the lowest levels in our recent history at 34 days in inventory. Our parts and service business softened, with revenues declining 4% on a same-store basis. And finally, F&I was impacted by contract and credit, and lower loan to value requirements on financing, decreasing to $916 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 would like to start with a recap of our financial performance for the fourth quarter. We reported a loss from continuing operations of $11.15 per diluted share. Included in this loss were $11.07 of noncore items detailed in the table attached in today's press release. The most significant noncore items are impairment charges totaling $536 million, $492 million of which relates to the write-off of all of our goodwill. I want to emphasize that these charges are noncash and do not impact our debt covenants. During the fourth quarter, we repurchased $60 million of our public debt for approximately $24 million. The majority of the debt we repurchased was our convertible notes that mature in 2012. We view this as a prudent use of cash as it materially reduces the amount of our nearest maturing debt, delivers significant gains, and provides an attractive implied rate of return for our shareholders. Covenants and liquidity continue to be critical focus areas.

I'd like to address those topics next. Attached to our press release you will find a summary of our two primary sets of financial covenants, those on our revolver and used vehicle line and our major mortgage facilities. As you will note, we cleared all of our covenants in the fourth quarter as the repurchase of $60 million of sub notes provided us with significant breathing room under our tightest covenant. As Charles explained earlier, our lending partners provided waivers in response to our auditors opinion. As part of the waiver process, we volunteered to reduce our revolving credit facility by $25 million, from $200 million to $175 million and the used vehicle facility $25 million, from $75 million to $50 million. Since both of these facilities use a borrowing base calculation to determine amounts available to us, these reductions have no impact on our current liquidity or access to capital. With respect to liquidity, our position remains strong. At year end we had $92 million of cash on hand and $116 million of excess borrowing capacity under our facilities.

In the fourth quarter, we successfully reduced our SG&A cost by $27 million or over $100 million on an annualized basis. These savings reflect reduced personnel costs, fund expenses and advertising expenses. It is important to note that the fourth quarter results do not reflect the $5 million in annual savings we expect from our corporate office relocation, nor do they reflect the full impact of the elimination of our regional management structure, which is expected to deliver annualized cost savings of more than $10 million. The full benefit of these two initiatives will not be realized until the second quarter of this year.

Our balance sheet is the unbiased litmus test for the impact of our initiatives, and in this regard, way like to share some powerful evidence of our progress. During the quarter, we improved our net cash position by $60 million. This is particularly impressive considering that we retired $60 million of debt. Simply stated, we're moving rapidly to enhance our liquidity and drive productivity improvements, and it's working. With that I would like to turn the call back to Charles.

Thanks, Craig. I am extremely proud of what our entire team at Asbury has accomplished in a very short amount of time. We are placing a great amount of internal stress on top of a great amount of external stress and our employees are demonstrating their courage and strength. We have made great progress in rebuilding our company for the future. I am confident that we will not only survive this turn you leapt period, but also emerge stronger as we look to learn from the negatives of this recession and turn them into opportunities. As it has been said, every adversity carries within it the seed of greater benefit. Now I would like to turn the call back over to the operator, and we'll take your questions. Operator.

Thank you, Mr. Oglesby. (Operator Instructions) We will pause for a moment to assemble the queue. And we will now take our first question from Rick Nelson with Stephens, Incorporated.

Thank you and good morning.

Good morning, Rick.

What covenants did the auditors raise they questions about to arrive at this going concern opinion, and also, how much flexibility do you think your banks have to amend covenants if necessary?

The tightest covenant is a leverage test, Rick. One of the reasons that we've attached the covenant calculations to the release is so that everybody has full disclosure, complete transparency on all of the covenants, so they're there. The bank's concern was that over the course of the next 12 months we could trip that covenant. More specifically, one of the things that they had some reservation about was that we may have to buy back debt at a discount in order to clear that covenant, and in their view, there was no certainty that we'd be able to buy back the debt or what price we'd be able to obtain that debt. And then second part of your question, Rick?

Was the flexibility that the banks have to amend covenants, if necessary?

We're not in a position to speak to what the banks would do in the future. We can't predict that, but I think the fact that everyone of our lenders stepped up at very short notice and gave us the waiver we needed on the heels of this auditor opinion, I think speaks mountains about the relationship we have with them and the support that they provide us.

Are you having conversations now with the banks about amendments of covenants?

We are constantly in dialogue with our banks, but, no, we're not talking about amendments at this point in time.

A question also on the annualized cost savings, $100 million. Wondering how much of that is permanent and how much of that reflected the downturn in the business?

It's very difficult for us to say what's permanent and what is a function of the variable cost structure in this industry. We tried to do that internally. We are of the view that it's only the things that we're doing at that time regional level and the corporate headquarters level, those are permanent. Those costs will never come back, I think you could lock those in. I would say roughly and these are best estimates that 50% of the costs are just a function of the way continues operates. Our cost structures are variable, whether that's on the sales force or in parts and service, and so I would lock that 50% in as variable, and I would say the cost in between are--it's fuzzy. Some are permanent, some are structural, but it's very difficult to know that much more precisely.

Just one comment on that, Rick, is that as this cost--as business improves, and this cost comes back, it is variable, and that's not a bad thing, because that means that we're beginning to grow again, and the market is beginning to improve and have some lift.

How about other potential sources of cash? Can you speak to your inventory levels now and--

Yes, Rick, I think our inventories -- the source of cash is the used vehicle inventory, since all the new vehicle inventory is floored. Our used vehicle inventories are, we think, the at levels--they're historically low levels for us. We think they're roughly the right levels. In fact, we think we may want to just slightly increase the levels of used inventory we're carrying as we move into the selling season so I don't think there's a lot on that side. I do think there's more work we can do on the balance sheet across the rest of, if you will, our current assets and liabilities, and it's a scenario that we continue to dig into.

And on the new car side, how much of the downturn do you think is credit impacted where TALF could possibly affect, and how much is just consumer unemployment confidence factors?

Rick, we hope that TALF will help but it's too early to see that right now, but there's a combination, certainly the lower consumer confidence right now is in play, but the credit is actually probably a bigger part of the business downturn in my estimation, because there are buyers out there right now, but the credit requirements today remind me of what it was like in the '80s. There's more equity that is needed today, and the consumer is going through this change where before almost anybody could walk into a dealership and walk out with zero money down or 130% loan to value, and today, that's not happening. Even the best credit, it rarely can walk out with 125%, 130% loan to value. So I think there's an adjustment period going on from the consumer to the new credit standards as well as right now the traffic is less because of the consumer confidence.

Thank you for that color and good luck.

Thank you, Rick.

(Operator Instructions). We will now take our next question from Mr. Rich Kwas with Wachovia.

Good morning, guys, how are you?

How are you, Rich?

Craig, question on the cost reduction. The $10 million that comes from the regional management consolidation, the $5 million from the corporate relocation, that would be on top of the 100 million or so annualized cost savings?

Yes. There may have been a very small amount that we saw in the fourth quarter. I would say $1.2 million at most, on the regional work.

Okay, and then backing up to Rick's question about how much is structural versus variable, it sounds like, if I take that $100 million, I know you've got $27 million in the fourth quarter. If I take the remainder of that and cut that in half, that would be somewhat structural, in terms of cost saves?

I think that's a good estimate. It's a very soft number.

On the waivers, are there any limits in terms of duration, time limits, where you would be bumping up against an expiration for the waivers?

The waivers were specifically for our year-end financials. We would have to--the next time this issue would come to the forefront would be at the end of 2009.

Okay. So this would have to be potentially reevaluated?

And it would be reevaluated with a different auditor.

Right, okay. And then inventory on new vehicle inventory, I know you were shifting more and more to using captives. Is it 100% captives at this point in terms of used vehicle?

It's not 100% but the vast majority on the new vehicle inventory is with the captives.

In terms of the Detroit Three, captives is that 100% with captives?

No. B of A floors our Chrysler stores. We have four Chrysler stores. Yes, that's it. Ford and GM are flooring their own stores.

Okay. And then finally, last quarter you talked about asset sales going through the portfolio and determining what assets you wanted to keep. The market obviously, is very difficult to get transactions done here. How do you see that evolving over the course of this year?

Portfolio management is the way we've always looked at our assets, and currently we do have a couple of stores under contract, which we expect to close within the next 45 to 60 days, and a couple of them before that. So wee--we're like anyone else. It depends on the quality of the asset and the buyers that are available there and currently, we don't have any of our quality assets available for sale. So we are repositioning ourselves and shedding ourselves of stores that take a lot more energy to manage versus the return that we're getting. But if we do need to sell any of these quality assets, there are some buyers available.

Okay, and are you finding buyers either not being able to get the capital to purchase the assets or is it just an unwillingness across--

It's a combination of things. Most of the buyers that would want these assets have capitalization themselves, and would be willing to put enough equity in that they could get the financing that they need but any other buyer, if their own financial position is not strong enough, with not be able to find financing for these stores.

And lastly, on the used inventory, seems like used is picked up here over the last couple months. Are you having to--I assume you're having to go to auction more to replenish the inventory. That a fair assertion?

We'll let our new COO answer that question.

Rich, that is true. As you know, with the new car volume being down, which is the largest single source of our trade-ins, we've had to go to the auctions, and the auctions business has picked up in the first quarter of this year, there's more buyers there, but there's plenty of product available, so we're not having to fight for every single one of the units, but that is where we're probably having to go get the vast majority of our used cars now.

Rich, one of the things with the CPO sector improving and continuing to increase, the dealers are the only ones that have access to that inventory. So that's a benefit to us from an--as independent dealers we have access to that inventory that other dealers don't.

Sure.

Used car dealers.

Okay. Great. Thanks.

Thank you. (Operator Instructions) And we will now take our next question from Rod Lache with Deutsche Bank.

Good morning.

Hello, Rod.

Did I hear you say that you are running at around break-even in the first two months of this year, and if so, can you just give us a little color on what you are seeing in the used business now with the lower inventory be constraining your volume, or going to auctions, constraining margins? And any color on the parts and service business?

Yes, Rod, you did hear us say that we basically broke even for the first two months of the year and certainly part of that is because of the business model itself. Used has improved, strengthened, and where it has strengthened is the CPO business, and vehicles $10,000 or less. The margins on those, and the turn rate, is pretty high. So that part of the used business has strengthened, and we're going to auction more because with this reduction in new retail sales, we don't have access to all of the trade-ins that we need, so that does allow to us go to auction and be able to pick up those vehicles. With parts and service, that still is--even though it has lessened to a degree and softened, it's still showing the strength of our business model, because the fixed part of the business is maintaining stability. I mean, it will move up and down three or four percent or move up depending on the days in the month, but the cycle that the customer needs to come back in is still there. If they don't buy new or used they need to have the car serviced and with all of the initiatives that the consolidators and the dealer body has put in place in the past, we're seeing more retentioning of our customer base. And the CPO, as well, helps there because even though a customer may buy a certified pre-owned vehicle, instead of new, we are able to pick that customer up into our parts and service because the same thing, it needs to be serviced, and it has warranty left on it, CPO, so that kind of replaces that customer so we're able to sustain our parts and service business.

So would you expect the parts and service business to be pretty consistent, comp-wise, with what we saw in the fourth quarter?

Rod, this is Craig. Parts and service is under pressure, and continues to be under pressure. We just want to be clear about that. Parts and service through the first two months were down. In the used business, our margins are holding, and we think that's in part because of the great job you guys have done with the inventory but we broke even the first two months despite this continued deterioration parts and service. I think in large part the used vehicle business was stable, I would say, and the impact of all these cost cuts, productivity initiatives that we've undertaken, I think are beginning to flow through, but like we said earlier, we've still not seen the full impact of everything that we're undertaking.

Any additional color on--if we think about SG&A to gross and how that would look at this level of demand volume, is there a way to look at that it way, just given that there's some variable and some fixed reduction? Maybe if we look at the first quarter, do you have any color on how--what kind of range you're expecting SG&A to gross, come in at?

Rod, I think that's a tough one to call. We haven't been focusing on a number like that, specifically. What we're doing instead is on a store-by-store basis, looking to see what we can do to drive productivity. Obviously, in everything outside of that, and where we end up on a net to gross is a number that falls out at the end of the day. Unfortunately, what's happening is we're taking out costs. I think we finally caught up. Through the fourth quarter, our revenues were declining faster than we could take out costs. I think as we got into the beginning of the first quarter, our cost reduction initiatives began to catch up. Where the net-to-gross plays out in the end is going to be a function of what does the reduction in revenue, how does that delevering, or that delevering balance out against what we've done on the cost reduction side, and I don't have a number yet.

Okay. And just lastly, can you just comment a little bit on the leverage? Is that $50 million used inventory facility--that, I believe, is excluded from your leverage calculation, can you confirm that? And how much of that are you currently using?

I'll start and confirm. Used vehicle facility would not be included in leverage calculation. That facility is not drawn, nor is the revolver drawn as of today.

The facility is not drawn today? So you would be able to actually reduce your bank leverage further by moving into that?

That's correct. We could improve our leverage ratio, and let me be very clear. One of the things we try to do is be very transparent. I think what I hear you saying is we could draw--the question is could we draw the used vehicle facility. Yes. Could we use that to buy back debt? Yes. If we did so, would that improve our leverage test, absolutely. Again, to be clear, neither the revolver nor the used vehicle facility are drawn as of today.

Can you just tell us which of these noncore items have you excluded from the basic calculation? It looks like there's a slightly different calculation of EBITDA, and you're adding slightly different noncash charges.

Yes, Rod, that's a fair question. Each of the facilities is different in the way they--if you adjust EBITDA. I think the best thing to do is maybe get on the--get on the phone with Ryan afterwards, and we can take you through the details.

All right, thank you.

Thank you. (Operator Instructions). And it appears that we have no further questions at this time.

We want to thank everyone for joining us today. This is a new day for Asbury, because as everyone realizes, with the elimination of our regional structure, that now we have a different alignment of our leadership. We're excited about the future. We appreciate our general managers because again, these are the entrepreneurs that touch our customers and our employees every day, and we're excited about our new future and look forward to our next earnings call. Thank you.

This concludes today's Asbury Automotive Group conference call. Thank you for joining us today, and have a wonderful day.