Asbury Automotive Group Inc (ABG) 2009 Q2 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 the Treasurer, Mr. Ryan Marsh. Please go ahead sir.

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

As you know, the press release detailing Asbury Automotive's second quarter results was issued earlier this morning and is now posted on our website at www.asburyauto.com.

Participating with us today 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 in my office afterwards to address any follow-up questions you might have.

Before we begin I must remind you that the discussion during the call today is likely to contain forward-looking statements. All forward-looking statements are subject to uncertainties, and actual results may differ materially from those suggested by the statements. For information regarding the risks that may cause actual results to differ please see our Form 10-K for the year ended 2008 filed with the SEC, our Form 10-Q for the quarter ended June 30, 2009 when filed with the SEC, and our earnings release that we issued earlier today. We expressly disclaim any responsibility to update forward-looking statements.

With housekeeping out of the way -- Charles?

Thanks, Ryan. And good morning everyone and thanks for joining us today. Thematically I would characterize the second quarter of 2009 as a quarter of continued momentum. Despite a third consecutive quarter of depressed SAAR, Asbury had a good quarter. Building on the $0.07 per share profit we delivered in the first quarter of 2009, we are encouraged to report income from continuing operations of $0.18 per diluted share for the second quarter. The $0.18 includes $0.04 of non-core charges.

We at Asbury are extremely proud of these results considering that the quarter was punctuated by the bankruptcies of two of our large manufacturing partners, as well as continued weakness in new vehicle sales. Delivering these operating results in a 9.6 million SAAR environment underscores our longer-term earnings potential.

However, this dramatic improvement did not come cheap in terms of the human cost of our realignment. We're using this time as an opportunity to accelerate our strategy for creating the optimal operating structure for our company.

During our fourth quarter and year end 2008 earnings calls we announced the elimination of our regional management structure. We are well into the process of transforming Asbury from a highly decentralized regional-centric organization into a leaner, more efficient and centralized company. We are achieving this without losing the entrepreneurial spirit of our management teams at the store level.

The streamlining of our management structure, in addition to other initiatives and our variable cost structure, has yielded over $100 million of SG&A cost savings on a same-store basis over the last 12 months.

Continuing in our spirit of transparency to all of our stakeholders, in May we announced the impact of Chrysler and GM bankruptcies on our store base. We lost one of our four Chrysler stores and two of our six GM stores. And Michael will provide more details on the store closures during his portion of the call.

Although these store closures are tough for everyone over the near term, we will continue to work with the manufacturers through this difficult period. We're also working diligently to relocate the employees impacted by these store closures, and to date a substantial number of these employees have been successfully transitioned to other Asbury dealerships.

While these changes have been extremely difficult, I'd like to point out that the employees of Asbury continue to inspire and motivate all of us with their determination and innovation. I'd like to take a moment to thank all of our employees for all their hard work. They define Asbury regardless of what it says on their business card-- McDavid, Coggin, Plaza, Gray-Daniels, Crown, Courtesy, Nalley, North Point, Spirit or Asbury.

And now I'll hand the call over to Craig.

Thanks, Charles. In several respects this was a very eventful and successful quarter for Asbury. In addition to the dramatic improvements in our profitability, we have also made great strides in reducing the risk of tripping our financial covenants, prereserving our liquidity, and monetizing our balance sheet to reduce leverage.

Last Friday, we disclosed that we had successfully amended our revolving credit facility with B of A and our used vehicle line with JP Morgan. These amendments are similar to the amendment we negotiated with Wachovia for our mortgage facility, which we disclosed in May.

With our bond prices recovering significantly in recent months, we felt that structuring and closing these amendments now was the most prudent strategy for maximizing our operational flexibility and maintaining financial covenant compliance.

Going forward, we will no longer need to repurchase debt to generate gains in order to remain in compliance with our covenants. Keep in mind, the $34 million in gains from our debt repurchases last year roll off during the fourth quarter of this year.

The support and responsiveness of our financial partners during the amendment process speaks volumes about the strength of these critical relationships.

Maximizing cash flow and preserving liquidity are our highest priorities. Our cash position remains strong with $42 million of cash on hand at the end of the quarter. After taking our recent amendments into consideration, the availability under our two credit facilities is approximately $170 million today and our financial covenants do not further limit the amount we could draw under these lines. We currently have nothing drawn under either the B of A or JP Morgan lines. As of June 30, we are compliant with all of our covenants.

In terms of monetizing our balance sheet and deleveraging, we sold our Sacramento Mercedes store on June 30, and used a portion of the proceeds to retire $8 million of mortgage debt under the Wachovia facility in July. This $8 million is the restricted cash you will see on our June 30 balance sheet when we file our 10-K.

I would like to provide a quick CapEx update. Year to date we have spent $5 million on CapEx and are well on track to achieve the $10 million to $15 million target we have set for 2009. We are benefiting from several years of heavy investments in our stores and today are shifting our focus to investing in our IT infrastructure as a foundation for future productivity enhancements.

Some of the highlights of our IT investments include elimination of approximately 50% of our technology systems and consolidation of the remaining systems into a centralized secure data center; the conversion of all of our stores to a common chart of accounts which we expect to complete this fall. The consolidation of payroll for all of our employees is on track to be completed by January 2010, and the conversion of half of our stores to the DealerTrack Arkona DMS. Our goal is to complete the DMS conversions by next summer.

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 perform at historically low levels of new vehicle sales with sales essentially stabilizing during the second quarter with a SAAR of 9.6 compared to the first quarter SAAR of 9.5.

New light vehicle retail unit sales were down 33% in the second quarter versus last year, which is generally in line with the broader industry. On a positive note, new light vehicle retail gross margins have recovered from the levels they were in the first quarter of 2009 at 6.8%.

On a same-store basis, our new light vehicle inventory is down $57 million or 14% since March, with our days supply hovering around 69, a 26-day improvement from the 95 days last quarter.

Manufacturers' production cuts, combined with our efforts to align inventory to levels appropriate for the current environment, have proven to be effective. Used light vehicle unit sales continued to show more strength relative to new light vehicle sales but were down 17% from the second quarter last year. It is important to note, however, that versus the first quarter of 2009, our used light vehicle sales are up 10% with margins remaining stable at 11.2%. In order to meet the increased demand for used light vehicles, we increased our used light vehicle inventory slightly to $70 million or 38 days supply as of June 30.

Our F&I for vehicle retail for the quarter was $817, down 17% year over year. F&I income has been primarily impacted by tighter lending standards, particularly lower advance rates, that make it more difficult for customers to get financing for aftermarket products and services. Our Florida dealerships have been particularly impacted due to their historically higher volumes of sub prime customers.

Parts and service revenues declined 6% from the second quarter 2008, with gross profit declining 9%. The decline in gross profit in parts and service was driven by reduced internal preparation work associated with new and used vehicle sales volumes, as well as declines in the dollars that customers are spending on their vehicles being serviced.

Warranty work was basically flat and wholesale parts were down roughly 4%.

I want to spend a couple of minutes following up on Charles's comments regarding those stores impacted by the Chrysler and GM bankruptcies. With respect to the inventory at these three stores, we were able to transfer a substantial number of the vehicles to the other stores within the Asbury footprint. We have not experienced any material inventory related losses to date.

The Chrysler store located in Roswell Georgia, has been converted to a standalone Nalley-branded used car outlet. We have approximately three years remaining on the lease at this facility.

The two GM stores, a Chevrolet and a Pontiac GMC Buick store, are both located in Kissimmee, Florida. We expect to have both of these stores wound down by the end of August when their respective leases expire. After August, the immediate impact of the bankruptcies will essentially be behind us.

A recent initiative that is creating a lot of buzz is the federal CARS legislation, otherwise known as Cash For Clunkers. At this point it is still premature to really provide much in the way of feedback or guidance on its impact, but simple arithmetic implies a potential one-time boost to the US new vehicle sales of up to 250,000 units.

The program officially kicked off last Friday and to date we have experienced over 500 sales as a direct result of the program. This program has definitely succeeded in generating consumer enthusiasm and additional showroom traffic.

Also, a number of the OEMs have been very proactive in finding ways to win more sales with the program. For example, one of our import brands has structured a five-year lease, qualifies under the program, and is priced between $70 and $90 a month to help affordability for interested buyers.

As with any new program with very tight deadlines there have been a number of startup issues. The administration portion of this initiative is both burdensome and complicated. We are working through these hurdles and I want to thank all of our dealership teams for all of their additional effort to make this a success.

Finally, as I interact with our general managers, it is apparent that they appreciate and understand the critical role they play in our organization. They drive the efficiencies needed in our organization, as well as providing the revenue derived from satisfying the transportation needs of all of our customers. I want to express my continued appreciation for everyone's hard work, their perseverance and effort in this current environment.

With that, I'd like to hand the call back to Charles to conclude our prepared remarks. Charles?

Thanks Michael. As I reflect on the events of the last few quarters, I continue to be impressed by the speed and magnitude of Asbury's progress, the depth and importance of our relationships and the value of a deep bench of talented and motivated teammates. I'm very encouraged by our results to date and excited about our future as Asbury starts running on all cylinders. And when the SAAR begins to recover to a more sustainable level I believe we're going to see some exceptional results.

I'd now like to turn the call back to the operator and we'll take your questions.

(Operator instructions.) Rick Nelson with Stephens, Inc.

Thank you. Good morning and congratulations on navigating a tough quarter. Can you talk about the sequential improvement that we saw on new car margins? Do you think that's sustainable given the inventory reductions that we're seeing at Asbury and across the industry?

Rick, this is Michael. I think, yes, we'll be able to maintain that. Two things are taking place, one of them you alluded to. The reduction in inventory production has helped us on the supply and demand side of it. The other part of it is the initiatives that we've been putting in place focusing on gross profit production at the new car level. And I think with our particular brand mix, with what's going on in the marketplace today, I think it is sustainable.

And on the used car side, I'm curious if you're seeing any resistance there of late to the rising prices?

On the CARS iniative?

On the used --

Oh, I'm sorry, on the used side. No, we are -- used car business is not only stable, it's growing a little bit. We've seen a slight increase in the average cost, of course, in selling price of our used vehicles but we're not seeing any resistance to the buying yet.

I will point out as a side note that the prices at the auctions are still holding up very well and we get the benefit of that also.

Yes, Rick, just one follow-up on that. As everything moves up in price, the trade-in values move up as well and so that allows actually some of the customers to move up in their trading cycle.

At some point you would think that would be begin to benefit the new car side of the business.

That's exactly right, which is -- that's a normal cycle. That is what happens.

Can you also discuss regional areas of strength and weakness? What's happening in Florida I guess is a particular interest.

This is Charles. We are experiencing a stability in Florida. It is certainly not at the levels that we've experienced in the past. But with a lot of the initiatives that we've put in with the restructuring of our organization and have been able to take that expense out, there's a direct benefit to our profitability to our expense reduction, as well as a lot of the inventory initiatives where the manufacturer as well as us have lowered the inventory levels, the used car initiatives that we put in with the aging and days supply of our used cars. So a lot of retail initiatives that we put in has also helped Florida but we are seeing a little bit of a stabilizing there.

[Very good.] Thanks and good luck.

(Operator instructions.) And we have no further questions at this time.

Well, we really do appreciate everyone's visiting with us today. We -- just kind of as a last comment I'd like to say that the $100 million worth of expense that we've been able to take out over the last 12 months, a lot of that has been structural. We have virtually completed the structural change of the organization. A lot of initiatives that we are working on today are forward initiatives of which we will expect either profitability gains or expense reductions in the future as we do a lot of the technology changes that we're doing and other initiatives that we've got.

So, with that, I appreciate everyone being with us today and we're looking forward to another exciting call next quarter.

And that does conclude today's conference. Thank you for your participation. You may now disconnect.