Asbury Automotive Group Inc (ABG) 2009 Q1 法說會逐字稿

Good day and welcome everyone 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 Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thanks, Operator and good afternoon to everyone. Welcome to Asbury Automotive Groups first quarter 2009 earnings call. Today's call is being recorded and will be available for replay later today.

A press release detailing Asbury Automotive's first quarter results was released this morning and is posted on our website at www.asburyauto.com. Participating with us today on the call are Charles Oglesby, our CEO; Craig Monaghan, our CFO; and Michael Kearney, our COO. As always at the conclusion of our remarks we'll open the call up for questions and I'll be available afterwards to accept any questions you might 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 these statements are only predictions and subject to risks and uncertainties relating to the general economic conditions, our restructuring and cost savings initiatives, interest rate fluctuations, changes in consumer credit and spending as well as other factors over which management has no control. Our actual results may vary materially from these predictions. Any such statements should be evaluated together from information about Asbury Automotive in our public filings that are included in our annual report on Form 10-K as well as our Forms 10-Q. At this time I'd like to turn the call over to Charles.

Thanks, Ryan, and good afternoon, everyone, and thanks for joining us today. On our fourth quarter earnings call, we indicated that we broke even in January and February, and I'm excited to announce that our efforts continue to yield results as we posted a $0.07 per diluted share in earnings from continuing operations for the first full quarter. To put this in perspective, in the fourth quarter of 2008, we lost $0.08 per share after adjusting for non-core items and a $10.3 million SAR environment. We were able to deliver a $0.07 per share profit this quarter even though the SAR declined 800,000 units from the fourth quarter level to 9.5 million units. This speaks volumes not only for the impact of our cost cutting initiatives but also about the hard work and tenacity demonstrated by everyone at Asbury and I cannot thank our employees enough for all their sacrifices during this turbulent period.

Next, I would like to spend a few moments discussing what we are seeing in the marketplace. Traffic in our dealerships is still very slow and new vehicle sales remain depressed. The dramatic increases in unemployment, uncertainty around the face of General Motors and Chrysler and tight credit conditions continue to weigh heavily on consumers. Accordingly, we are not planning for any material improvement in new vehicle sales over the balance of this year.

Before handing the call over to Craig, I would like to update you on our restructuring and operational initiatives. The corporate relocation from New York to Georgia is complete and the restructuring of our regional management structure is under way. This has taken some time as it is a significant change to our business, but we expect to be largely finished with the transition by the end of the third quarter. Michael Kearney, our new Chief Operating Officer, has been instrumental in helping to drive this change in our operating model. And finally, we continue to invest in the infrastructure needed to support our stores, despite our CapEx, our tight CapEx budget for the year, we are investing aggressively to rebuild our technology platforms and establish the foundation for further productivity improvements. We are not making panic driven decisions but we are moving very quickly to implement our centralized services strategy and with that I'll hand the call over to Craig.

Thanks, Charles. This has been a transitional quarter for us. We have gone from large write-offs, operating loss, like going concern opinion, to positive operating performance and increasing forward momentum in just a few months time. We have dramatically improved our cost structure, last quarter we highlighted the $27 million in same-store expense reductions from the fourth quarter of 2007. I am extremely pleased to announce that our same-store expenses for the first quarter were down $34 million or 22% from last year's first quarter, which represents an annual run rate savings in excess of $120 million. Charles alluded to the fact that we continue to invest in the Company. I would like to provide an update with respect to the progress we have made on our technology infrastructure buildout.

In January, our financial consolidation system, Hyperion Financial Management, was upgraded from System 3 to 9, a six generation improvement. We have developed and begun rolling out a common chart of accounts. The payroll for half of our employees is now processed out of a central location on a standardized software platform. We have eliminated approximately 25% of our technology systems and are consolidating the remaining systems to a centralized data center. We've converted 42 of our stores, almost half, to the dealer track Arcona DMS. I'm extremely pleased with the speed at which we are moving, the progress we have made to date and momentum we are building.

In light of the recent announcement from GM regarding Pontiac, I would like to share with you some detail on our inventory levels. We have $2.3 million in inventory between two Pontiac stores with the entire inventory being 2009 models. In total, our GM inventory stands at $26 million and our Chrysler inventory stands at $15 million. We continue to monitor our domestic inventory closely and have reduced our GM and Chrysler inventory levels by $29 million or 41% since December 2008. Our liquidity position remains strong. We ended the quarter with $36 million of cash on hand and approximately $163 million of borrowing capacity. Finally, we're in compliance with all of our covenants.

Now I'd like to hand the call over to Michael Kearney, our COO, to provide some operational highlights for the quarter. Michael?

Thanks, Craig. The automotive retailing industry continues to be challenging, especially for new vehicle sales. Our same-store new vehicle light retail sales were down 38% in the first quarter which is in line with the broader industry and margins for new vehicle sales continue to be under pressure. All of our brands have been impacted by this downturn. On a same-store basis, our new light vehicle inventory is down $89 million or 18% since December 31, with our day supply hovering around 94, a 12 day improvement from 106 days at year-end. We continue to focus on inventory management with a goal of getting our new inventory down to levels appropriate for the current environment.

Used vehicle unit sales have been less impacted than new with same-store sales down 24% from the first quarter, and it is important to note, however, that versus the fourth quarter of 2008, our used vehicle sales are up 8% and margins have recovered to 11.6%. Given the relative strength of the used vehicle market, we intensely increased our used vehicle inventory to $65 million or 39 day supply as of March 31, in anticipation of the Spring selling season. Our F&I per vehicle retail for the quarter was $873 down 15% year-over-year. F&I income has been significantly impacted by tighter lending standards, particularly lower advance rates that make it more difficult for us to have after market products and services financed by our lenders. Same-store parts and service revenues dropped 5% versus the first quarter of 2008 due mostly to reduced internal work volumes stemming from softer year-over-year vehicle sales. Parts and service revenues were also impacted slightly by decreased customer volumes.

I am extremely proud of the progress we have made and I feel like this quarter has been a turning point for the Company. Our goal in our centralized structure is to provide our associates at the store level with the best tools and the best environment so they can compete and win. I want to express my appreciation for everyone's hard work and accomplishments. I am excited to be part of the Asbury team and look forward to our future. With that, I would like to hand the call back to Charles to conclude our prepared remarks. Charles?

Thanks, Michael. There are many challenging dynamics impacting the market that we simply can't control; however there are internal levers we can pull to actively manage the things we can control, and as our results demonstrate today to remain viable and competitive in the current market. This quarter was filled with a lot of fundamental blocking and tackling to prepare our Company for greater success in the quarters ahead. We are rebuilding Asbury, creating a stronger, leaner organization that we believe will survive the current economic climate and be positioned to deliver much stronger results when the economy recovers. And now I'd like to turn the call back to the Operator for questions. Operator?

Certainly. (Operator Instructions) We'll take our first question from John Murphy with Merrill Lynch.

Good morning guys. I was just wondering if you could talk about some of your regional performances, particularly in Florida given your overexposure there, just what you're seeing in the market in general on new, used and parts and service if you can.

Yes, John. We'll let Michael handle that question.

John, the Florida market, we believe, has bottomed out, we're on the bottom. We are seeing a slight bit of recovery in certain areas. Our performance first quarter of this year versus the fourth quarter of last year shows substantial improvement. Used car retail volume has picked up a little bit. Service is still somewhat depressed and soft but we have had dramatic cost reductions, so the operations, the income and the operations we've seen a dramatic improvement in the last six months.

We're still seeing some depression in California, and that's still a very tough market and the rest of our markets are probably, they are performing to market levels.

And then if we think about this F&I PVR drop to 873 which is pretty substantial, is that something that you believe you can get to a target of a thousand, again some time in the near future or is that something structurally because lending standards has sort of taken a hickey?

Well, John, we do believe we can get back to a thousand. I've said to a number of people in the past, this market reminds me of the '80's where loan to values were different from the banks, more cash involved and I think that we're in an adjustment period but I do believe that we can get back to the thousand for retail unit number.

And just on structural costs running about $120 million run rate that's pretty impressive. How much of that do you think is maintainable as sales recover and how much of that is actually variable at this point?

We believe that with the restructuring of our organization, as I've said before, anything with a Re in front of it is Asbury, it's almost like we are Re-Asbury, we relocated, we restructured, we reorganized, so our belief is that 50%, it would be 50/50, be 50% structural and 50% probably would be variable.

Lastly, just one housekeeping, Craig, as we look at the going concern opinion from the 10-K, as we look through the course of the year what are the steps that you need to take to make sure that's rectified by the end of this year to make sure that's done?

Well, that's a complex question, John. We've got to generate profits and we've got to be very cognizant of the debt levels we've got.

Okay, thank you very much.

Thanks, John.

We'll take our next question from Rick Nelson with Stephens, Inc.

Thank you and good afternoon. I'd like to ask you about the margins in used cars, we've saw a sequential improvement this quarter, wondering if you believe that to be sustainable?

Rick, this is Michael. With our new approach to day supply and the levels of used car inventories that we are keeping in the dealerships, we think that the margins that we have seen will continue to stay there, as you know, we keep less product on the ground. We force the terms to go quicker, product stays fresher and newer, so the margins improve, so I think the answer to the question is we will continue to maintain this margin, don't know how much further we'll grow it but I think we'll maintain what we've got.

Okay, thank you for that. A question also about the potential for OEM bankruptcy and it seems to be a growing probability. I'm wondering how you see that impacting your business both near term and long term?

Hi, Rick, it's Craig. I'll jump in and take a first shot at that. Obviously we don't have a crystal ball. We don't know any more than anybody else does about what the future holds. but what we've tried to do for you and for our shareholders is spell out what the exposure is. So just to recap that Chrysler inventory was about 15 million, GM's at about 26 million, and you can come up with your own haircut that you think that inventory might take in the event of a bankruptcy. We're not sure that those haircuts would really be all that significant if the government is going to stand behind those vehicles. Our receivables from the manufacturers in total is less than $2 million. Our parts inventory is less than $4 million, and we don't think the parts inventories would take much of a haircut at all. So I guess bottom line, we're very much aware where these exposures are but it's something that we think we could work our way through.

Okay, thank you. Wondering also on the inventory, we got the inventory day supply overall for new but can you break that down between domestic brands and foreign brands and luxury, if you haven't?

Yes, Rick, this is Michael again. The midline imports are running around 90 days, domestics right around 100, luxury 95 and some of our other value brands about 110 days at the end of the quarter.

And what would be the target there, I would guess you'd want to reduce those levels.

In broad sense, we want to be in that 60 to 75 day supply, blended all together I would target luxuries 45 to 60, domestic is somewhere in the 70 to 80 day, midline imports 45 to 60 and the other brands somewhere in the 60 to 70 day range.

Thanks. Also, I'd like to ask about how the business tracked during the quarter, we're hearing about sequential improvement, particularly late in March and any comments about April would be helpful. Thank you.

Rick, we have seen some predictions of 9, 6, to 10 but under 10 and I would say that our best guess right now would be those pretty solid predictions.

Rick, it's Craig. I'd just like to hop in on this day supply. One of the things that, when Michael is talking about these numbers, the way that we're calculating these numbers is pretty much a straight 30 day trailing calculation off the P&L and balance sheet. There's some pretty substantial inconsistency amongst the publicly traded retailers I think in how that number is calculated so I just wanted to give some perspective on the basis for the calculation that Michael was sharing with you.

Thanks for that, Craig. Good luck guys.

Thank you.

We'll take our next question from Rich Kwas from Wachovia.

Hi, good afternoon guys.

Hi, Rich.

Craig, on the Chrysler/GM exposure, in terms of the stores, are those owned or leased?

On the Chrysler side, three out of the four are leased. On the GM side, four out of the six are leased.

Okay, so theoretically and particularly as it relates to Chrysler if kind of the worst case scenario happens, you'd have to find alternative purposes for the ones that you lease right now, right?

That's correct.

And I mean, what would that entail potentially?

Well, I'll just hop in there. Some of the leases are relatively short-term, so we don't have that issue in every case, but for those that are long term, we would have to find another franchise to put in there. In the case of a bankruptcy, we believe that under our contracts, those properties would then be open to alternative uses, i.e. you could put a drug store in there potentially.

Okay. Charles, in terms of the environment right now, one of your competitors last week said that actually traffic has started to get a little bit better here in April and that the financing environment is still very tough, so closing rates are still a challenge. What's your sense here over the last 20 to 30 days of what's happening out there?

We agree with that Rich that there's a lot of traffic out there. As you'll recall, there was at one point in time in the marketplace a huge secondary market. I think that it got labeled subprime but we had always called it secondary so I'm going to go revert back to the secondary terminology and there's a huge secondary market out there that's not been served by many lenders at this time, so there are buyers that would buy if credit was available to them. And so that, even though you have an increase in traffic, you've noticed that the retail SAR has been relatively steady over the last few months, and we kind of expected, we think that, that's where we hope that's where at least the bottom is, but once some of that credit starts to open up, there's a market that's just waiting to be served there so I think that that's one of the big areas of opportunity for all of us in the retail businesses is when that piece moves.

And then on new vehicle margins, what were the differences in the quarter across import, luxury and domestic?

Rich, they were all depressed or down, because I think that right now with excess inventory in the marketplace, everyone is working to get inventories down and that, as you know, that keeps pressure on margins. I think that as these inventories do start to lean up and the production cuts that the manufacturers have made really start to impact the market, you'll see the strengthening of these margins because retailers cannot, they just cannot stay in business at these low margins. These are probably I would almost say historically low margins for new vehicle departments, even though they're low anyway, but this is pretty ridiculous.

And then last housekeeping question, parts and service, Craig, what was the split between customer pay and warranty?

Just one second Rich, we'll get that for you.

Rich, you talking about the out of the total what was the makeup of it?

Well, that and also just the same-store performance.

Out of the total for the quarter, customer pay made up more than half of the gross, warranty makes up 20% and then the balance internal wholesale parts.

And then what was the same-store performance of customer pay and warranty?

Customer pay was down 6%, warranty was up 3.

Okay, great. Thank you.

Yes.

We'll take our next question from Matt Nemer with Thomas Weisel Partners.

Good afternoon, everyone.

Good afternoon, Matt.

My first question is on discontinued operations, can you just remind us of how many stores are in there, what generally are they, and how many were added this quarter? Any quantitative data you can provide for what's in there?

Sure, Matt, it's Craig. There are five stores in disc ops, one of the stores has been sold and the other four are all under contract. There's a -- and they're across-the-board. We've got domestic, we've got a luxury store, we've got two import stores.

Okay, thanks. And then secondly, on the 45 stores that are up and running on the new track DMS system, can you provide any, sort of any qualitative data on what's changed in those stores? Are they running more efficiently, are they more profitable? Maybe give us a sense for how that's going.

Well, I think that we're very early in the game to be talking about productivity savings coming from these technology investments. We are moving very quickly and I mean, if you just step back and think about it, we're rolling out a payroll system, we're rolling out common chart of accounts, we're rolling out a DMS. These things can be very disruptive, they can turn a store upside down. I think our objective as we're moving through this process is get them rolled out, get them up and running, get the training done. Don't disrupt the stores as they work through these difficult environments and if we can just get that done it's a huge success. I think the productivity savings will come later on as we learn to become more efficient with these new tools.

So is it fair to conclude that really in the first quarter of '09 and perhaps even the third and fourth quarter of '08, you've got a relatively large percentage of your stores that are in a state of disruption, aside from what's going on in the overall market?

Yes, Matt, this is Michael. I think that's a fair assumption. We've taken these stores, we've converted the DMS systems for them, taken out what was familiar and put in the unfamiliar. We've also, the same sets of stores converted them from at least three different payroll systems on to one common payroll system, so yes, I would say your assessment is fairly accurate. We've had the disruption, along with the economic issues that we've all been facing but it's moving on at a very measured pace, a pace that we don't believe will slow down at all and we will just continue moving along and get it done to schedule which we set forth.

I would just have to add, our hat is off to our people in our stores who are managing through this extremely difficult economic environment and then dealing with all this change on top of it. They've really done yeoman's work.

Is the disruption mainly in the back of the store or is there a lot of customer facing construction in the front?

We get them everywhere.

Matt, it's universal in the dealerships.

Okay, and then lastly, you alluded to your efforts to eliminate the regional management structure and I'm just wondering, how much of the cost savings from that change we're seeing in these first quarter results versus how much is coming and maybe we might see in the back nine, and then as a follow-on to that, what's sort of the long term vision here for the structure of the organization in terms of a centralized versus decentralized structure?

Matt, it's Craig. I'll take the first piece of the question. On the organizational realignments, the $5 million that we announced that we could save from relocating corporate headquarters and downsizing that, the bulk of those savings are now being realized and I would say we -- and that was the case in the current quarter. Not all of it but the bulk of it. For the regional office consolidations, we are just beginning to feel that. There were six regions, we will probably be into the third quarter before we start to feel the more than half of those savings rolling through the P&L.

What's the dollar amount on those? Did you provide that already?

Sure. The corporate piece is $5 million.

Yes.

But that also included in that $5 million is our ability to sublet our space in New York City. That rent is about $1 million a year and that space has not been sublet. That's the only piece that's not done on that.

Got it.

The regional restructuring we're targeting $10 million and I would say we are -- in the current quarter, we may have felt somewhere between 1 million and $2 million at best of those savings.

Okay.

And then the second part of your question about our long term vision is this is a tremendous change for Asbury because as you know, we were very decentralized, I believe that we did an excellent job being in a decentralized market. In the market that we're in today that actually works against us. Having a centralized model with the right technology to support the organization so that we have the ability to measure the right metrics that we want to and share that information with our general manager partners and have as lean an overhead as possible, with as many centralized parts that do not touch the customer, we realize that touching the customer is the key. It's my belief that this is still a people business, is vitally important to the success of the organization because we are in local markets that we compete against other independent dealers and we must be even better and should be better at the customer response as well as our employee response and support of them.

I think the consolidators in the past, we have wondered how can we add value if we had all of these layers of management and support organizations. When they served a purpose that was fine but in today's market and the future I don't believe they will serve a purpose like that so we will have a very lean management team with strong support of technology to make sure that we are able to communicate and measure ourselves appropriately.

Okay, thanks and good luck.

Thank you.

Next we'll take the next question from Rod Lache with Deutsche Bank.

Good afternoon. This is [Dan Galveston] for Rod. How are you guys?

Hi, Dan.

Good. Just had a couple questions, on the dealerships that are under contract and the one that is sold, can you give us a trailing 12 month revenue and EBITDA number on those, and also, just wanted to know if, it seems like dealerships really weren't moving, has the market for the sale of dealerships gotten any better?

I don't have trailing 12 month numbers for those stores. I will tell you that those four stores that are under contract lost $0.03 in the quarter so about half of the disc ops loss is associated with those four stores. With respect to the market for selling stores, there seems to be more momentum in the market today. It has been tough to get sales done because it's like everybody else, it's been tough for the buyer to get financed. But we are clearly seeing a higher energy level right now than we have in the past.

Okay, thanks, and if those stores under contract do go through, how would that affect your mortgage payable?

These stores will not have a significant impact on our mortgage liability.

Okay. On the -- I wanted to ask about the used floor plan line. Is there anything drawn on that, I think it's a $50 million facility?

No, none of our lines were drawn at the end of the quarter. None of the lines are drawn today.

Is that number included in the $163 million available borrowings?

Yes, it is.

That you gave us. And then on parts and service, the warranty being positive year-over-year was a little surprising, I can't remember a positive warranty quarter for a while. Can you give us any color on that and how are you thinking about warranty going forward as the number of new vehicles under warranty is likely to fall over the next couple years?

Dan, this is Michael. I'll answer the first part of the question for you. The 3% increase in warranty comes about largely from two areas. One, we have a fairly decent amount of BMW dealerships so we have not only service contracts but the maintenance included in that brand, and that is our warranty. You may or may not be aware that the Lexus had a substantial recall in the last number of months and that we have three very large volume Lexus stores so that has also impacted that so that's what we contribute that increase to.

The second part of the question is just the cars get better, they do require less warranty work so we are taking all of the appropriate measures to grow our customer pay business, our wholesale business where appropriate, and to have extended hours, extended days, and one market we're open seven days a week now for service to make sure we're there to service the customers. So we are aware of the warranty business going down and we are firmly committed to make that up on the customer pay side.

Thank you, one more if I could. Just following up on the used margin was there any impact of improving used wholesale prices during the quarter on your margins?

To the extent that -- when an individual dealer, general manager, knows that the wholesale prices are improving at least in a short window of time, they can be more aggressive to make a deal put together. They can be more aggressive on how they value the trade on a used car. So to that extent I would say that has a piece of it. I think the biggest piece, Dan, is the tightening up of our day supply and a quicker movement of our inventory through the dealerships in that small day supply.

Okay, thanks very much.

(Operator Instructions) There are no further questions at this time.

We certainly appreciate everyone joining us today and following the Asbury story. This was a lot of fun for us to navigate through these challenging times and we're rebuilding an incredible organization. I want to say thanks again to again, to all of our employees for the support that they've been giving us and the ability that they've had to shift and be nimble during all these changes that's gone on in the market as well as in the Company. So with that we look forward to our next earnings call and thanks for being with us today.

That now concludes today's conference. We thank you for your participation.