Asbury Automotive Group Inc (ABG) 2009 Q3 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'd like to turn the call over to the Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thanks, James, and good morning to everyone. Welcome to Asbury Automotive Group's third 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's third 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 discussions today are likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties, and actual results may differ materially from those suggested by the statements.

For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time-to-time, including our form 10-K for the year ended December 2008, any subsequently filed quarterly reports on form 10-Q, and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements.

With that said, I'd like to hand the call over to Charles.

Thanks, Ryan, and good morning, everyone, and thanks for joining us today. We are pleased to announce third quarter income from continuing operations of $0.29 per diluted share, up 38% versus prior year results, despite a 12% decrease in revenues over the same period. Our third quarter results were reduced $0.02 per share by non-core charges which Craig will discuss in more detail later.

This improved financial performance reflects what we believe is a temporary boost from the Government's Cash-for-Clunkers program, combined with the benefits of the dramatic expense reductions we have achieved over the past year.

This quarter, with a SAAR of $14.1 million in August and $9.2 million in September, tested the impact of our ongoing restructuring efforts on the flexibility of our employees to capture the sales on the upside and maintain cost savings on the downside. Each of our employees have been instrumental in successfully navigating a litany of changes during the most difficult of times. The elimination of our regional management structure, the relocation of our corporate headquarters, the ongoing conversion of all stores to a new DMS and a common chart of accounts, the centralization of payroll processing, significant debt reduction and bank amendments, and resetting our cost base for today's sales environment. We're asking a lot of our employees and they continue to deliver.

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

Thanks, Charles. Asbury has made great strides in maximizing cash flow, preserving liquidity, improving working capital, and monetizing the balance sheet over the last year. In addition, we have delivered over $100 million of SG&A expense reductions. And while accomplishing all of this, we were still able to invest in our infrastructure to drive future efficiency and profitability.

In terms of our infrastructure investments, I would like to provide the following updates. We are 70% complete with the consolidation of payroll processing, which we expect to finish by the end of this year. We are 59% complete with the conversion of our stores to the Arkona DMS. Our goal is to complete the DMS conversion by next summer. We are also 50% complete with the conversion of all of our stores to a common chart of accounts, which we expect to complete in the middle of 2010.

The company has made tremendous progress on these infrastructure and (inaudible) with respect to the speed and quality of implementation, especially when you consider the disruptions of our concurrent corporate relocation and restructuring activities. This is a direct reflection of the caliber of Asbury's employees. I couldn't be more appreciative of their hard work and commitment.

I'd like to discuss a couple of housekeeping items. In this quarter we incurred a $0.02 charge stemming from $0.04 of DMS transition and restructuring costs. This was partially offset by a $0.02 tax benefit. Our $0.06 discontinued operations loss is primarily related to an accounting charge on vacated leases.

With respect to CapEx, we have spent $6.1 million year-to-date and are on track to achieve the $10 million target we set for 2009. We are targeting a CapEx budget of $25 million for 2010.

The company's financial position continues to improve with total available liquidity on September 30th of approximately $205 million, including $34 million of cash and borrowing facility availability of $171 million. We currently have nothing drawn under either the B of A or J.P. Morgan facilities.

Finally, I would like to conclude by highlighting the fact that over the last 12 months, we have paid down 12% or $75 million of our non-floor plan debt. We have no significant debt maturities scheduled in 2012. At this point, we believe that maximizing cash flows from our existing operations and opportunistically paying down debt are the best ways to balance risk and enhance investor returns.

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

Thanks, Craig. The automotive retail industry experienced sequential strength in the third quarter over the second quarter with a SAAR of 11.5 versus 9.6 million. We believe third quarter new vehicle sales performance was a temporary up-tick driven in a large part by the Federal Government's Cash-for-Clunkers program. Following a strong August SAAR of 14.1 million, the September SAAR dropped back to 9.2 million, which is more in line with the sales levels we've experienced for most of 2009.

New light vehicle retail unit sales were down 11% in the third quarter versus last year, which is generally inline with the broader industry. Our luxury sales were softer than our other segments, primarily because most of the luxury cars were not eligible for the Cash for Clunkers program. Additionally, luxury sales were impacted by tight inventory levels at some of our luxury stores during this period.

Speaking of inventory, on a same-store basis, our new light vehicle inventory is down $93 million, or 26% since June, with our day supply around 46 as of September 30th. These record low inventory levels combined with the buzz generated from the Clunker program, helped us produce strong or new light vehicle retail gross margins which are up versus prior year at 7.4%. However, we are at a point where thin inventory levels are potentially impacting showroom traffic and sales volume. Simply stated, our new vehicle inventory was too low at the end of the quarter. For the first time in over two years, many of the factories are targeting production increases in the fourth quarter, which should enable us to adjust our inventory levels over the next quarter.

Asbury's used light vehicle unit sales were down 5% from the third quarter last year, but up 1% sequentially over the second quarter. Margins remain relatively stable at 11.5%. We ended the quarter with $72 million of used light vehicle inventory, or 44-day supply.

Finance and insurance for vehicle retail for the quarter was $888, down 9% year-over-year due to tighter lending standards and lower advance rates. On a sequential basis, however, F&I per vehicle retail has improved 9% from 817 in the second quarter, primarily as a result of improved product sales and broadening of advance rates.

In our parts and service businesses, revenues declined 8% and gross profit declined 7% from the third quarter of 2008. The gross margin for the third quarter was 50%, flat compared to the prior year. The year-over-year gross profit decline was driven primarily by reduced warranty work, as well as less internal preparation work associated with the reduction in new and used vehicle sales volumes.

Although traditional customer pay and wholesale parts were down year-over-year, over the last four quarters, we have seen a slight increase in customer pay, which includes internal prep work and wholesale parts offset by small reduction in warranty. On a same-store basis, the company's parts and service operations remain relatively stable this year with gross profit holding steady at approximately $79 million in the first and second quarter and $77 million in the third quarter of 2009.

Before passing the call back to Charles, I would like to briefly summarize the impact of the Cash-for-Clunkers program on Asbury. We sold 3,300 new vehicles as a direct result of this program, and we have collected all of the money due to us from the Government. Considering our brand mix and the fact that a great majority of our luxury cars were not eligible under the Clunkers program, we are very pleased with these results. And considering the vehicles the customers were trading in for Clunker deals, we anticipate only a moderate [pull] forward impact on future new vehicle sales.

Special mention and thanks are due to our great dealership teams that hustled and worked tirelessly to make this program a success for us. The fact that less than 1% of the deals we submitted as Clunker deals did not qualify is a testimony to the diligence and the persistence of these dealership teams. Thank you very much for making it happen.

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

Thanks, Michael. Going forward we'll continue to pursue operational excellence by focusing on the outstanding mix of dealerships we already own. Our operational restructuring goal is greatly enhanced by our geographic concentration and density within the markets we operate. We are fully engaged in numerous internal projects, several of which Craig highlighted earlier, that are critical for establishing Asbury's foundation for future growth.

Over the near term, we intend to live within our operating cash flow and pay down debt while adhering to a disciplined capital spending budget. We strongly believe this is the best path for Asbury in order to create maximum value for all our stakeholders in today's economy.

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

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions) We'll take our first question today from Rick Nelson with Stephens.

Thank you, and good morning.

Morning, Rick.

Morning, Rick.

Comment on October trends maybe as it relates to September, both new and used cars, as well as where your inventory is at today. I know you mentioned you're at 46 days supply at the end of the quarter? And when do you anticipate you'll be fully stocked from an inventory standpoint?

Rick, this is Michael. I'll answer that one. First, the first part of that multi-part question, October, on the new side, is marginally better than the rate that we saw in September. I would say used is up marginally again over that. Fixed operations is also up.

In terms of inventories, on the new side we are re-balancing our inventory in terms of both make and model mix, trim level mix, and unit numbers, pretty much and generally across the board with all the manufacturers. Used car inventory was at the higher number at the end of September. We are managing that inventory back down very quickly this month to our guidelines, and well on our way there.

Thank you for that, Michael. Can you also speak to geographic areas of strength and weakness? And I guess comments on Florida would be particularly of interest.

In the quarter, Florida participated along with the rest of the country, of course, in the Clunkers program. We had a concentration of the brands down there that did very well for us. So Florida performed very well. The mid-Atlantic states did well. Texas performed, again, very strong in that program.

So I would say most of the geographic regions performed inline with the overall. We are not -- I don't want to say not concerned about where we are. But from looking where we came from, we're much -- we feel much better about Florida than we did 12 months ago.

And some of the dealers are talking about the price erosion that we've seen at auction the past couple weeks. Do you think that says anything about demand for used cars potentially slowing?

Rick, this is Michael again. I'll answer that in two pieces. And you are correct in what you're hearing. First we saw an erosion of the sale rate at the auctions, which then is almost always followed by erosion in the pricing. I think what we're seeing is that some of that is, in fact, seasonality. It's happening a little bit later this year than it has in the past. We usually see that early September; we're seeing it now in October. And I think it reflects the general seasonal reduction in used car volume this time of year. But we anticipate that seasonality to change in the first quarter of 2010, as it has done in the past.

And demand, what you see it in October has strengthened for used cars relative to September?

Yes, that is correct.

And just one final question, if I could. Some of the other dealers are talking about stepping up the acquisition pays. It sounds like you guys are in -- still in debt pay down mode. I'm wondering how you evaluate those two alternatives.

Rick, we -- this is Charles. We are very comfortable with the balance in the mix of our portfolio. We like our geographic locations. And we're very fortunate right now that we can be opportunistic in whatever we want to add to the density that we have in these geographies and we feel like that's an advantage for us that we have in this marketplace and it is that density.

So we actually have the ability, whether it's paying down debt in the event the right deal that passes through our filter process comes to it -- to us, we have the ability to purchase it, as well -- from the manufacturer as well as our own ability. So on a go-forward basis, getting our balance sheet right and being selective on what we add to our portfolio and continue to work on our operational initiatives is what we feel is the best way to navigate this company to the position we want it to be in the future.

So we don't have to buy anything, but if something that's out there that we really like, we have the ability to do it.

And are prices still high out there on the acquisition front?

The pricing, it's always kind of fun to watch the pricing in the marketplace. The ones that are cheap nobody wants and the ones that are still very desirable, great locations, have done the job in the past, they're still pretty robust in what they want for the returns on them. And again, fortunately for us, it's being able to buy opportunistically with everything that goes through our filter process. So the good stores are still high. I think they always will be. And the stores, again, nobody wants, nobody wants them.

Thanks. Thanks a lot.

Okay, Rick.

Hey, Rick, it's Craig. I just add that we're very fortunate to be in a position where we're generating cash, we've got tremendous liquidity, and, in a sense, buying back debt sets return threshold for us. And buying back debt is attractive. If acquisitions are more attractive, obviously that's something that you consider. But paying down debt when we feel like we're in a situation where we're valued on EBITDA, the debt repurchase is an obvious and easy to calculate return threshold.

Thank you.

Thank you. Our next question will come from Rod Lache with Deutsche Bank.

Good morning, everybody.

Morning, Rod.

Hi, Rod.

Morning, Rod.

I had a couple questions. First on the new margins, which were obviously pretty strong. Do you sense that there was some benefit there from just the pace of activity during Cash-for-Clunkers? And just, more broadly and longer term, it sounds like you guys and others are planning to keep inventories relatively low. Do you think that that has kind of longer term implications for what the profitability of the new car business would be on like a gross profit level?

Rod, this is Michael. I think a couple things came into play for the margins. One of them is the fact that we did have a lot of showroom activity, a lot of buzz, a lot of people showing up to buy cars. So that was part of it.

The other part was, again, supply and demand. These inventories were tighter. So I think that's reflected in the margins. I think on a go-forward, as we restock, we are viewing this as the new world in inventories, the levels that we want to maintain are the levels that we hope that will continue to reflect these margins on a go-forward basis.

So you basically are saying that you think that these kinds of margins are sustainable?

I think so, yes.

Okay. And in the parts and service business, could you just give us a little bit more color on what's happening there with the same-store sales changes? At this point, what is the customer pay percentage versus warranty percentage? And when you look at customer pay, do you have any sense at this point of what the -- how that kind of breaks down? Is there a very large percentage that's relatively new, you know past four-year vehicles that you guys typically capture in your customer pay? And would there be any negative implications just because, obviously, the population of three- or four-year-old vehicles is going to decline just because sales have declined recently?

Again -- this is Michael, Rod. I'll try to answer that multi-part question in pieces. I'll give you the observational stuff and then get into the numerics.

I think what we are all seeing in the industry is, in the warranty side, particularly, is a reflection of the drop in new vehicle sales in the last 18 months. As you know, most of the warranty work is done in the first 36, and a vast majority of it is in the first 18. So I think all of us are seeing that.

As in terms of the customer pay piece, generally, we are seeing more maintenance work done than probably in the past is making up a bigger piece of our business. And we're also seeing consumers continually holding off on the very large part of the repair work, postponing it if they possibly can, if it's not safety related. So I hope that answers that part of the question.

Yes. And --

Craig.

-- Michael, let me hop in and help you out. Rod, just to kind of put it in perspective, customer pay would represent about 70% of our parts and service business. Warranty's only about 15%. And just kind of following up with what Michael said is we have seen the warranty business decline. So I don't have the ratio in front of me. But if we were to go back three or four quarters, you would see even longer than that, six quarters, you'd see a steady deterioration in warranty. So maybe we're down from 17 or 18% to the 15% today. Our customer pay business has felt some pressure but nowhere near as much pressure. In fact, over the last three or four quarters, customer pay is basically flat on a dollar basis.

On the customer pay, I don't know if it's possible to give us this level of depths. But is a disproportionate amount of the customer pay for you relatively newer vehicles or is it fairly spread out across, you know you guys are getting a fair number of five-, six-, seven-year-old vehicles that are -- that's part of the customer pay as well.

Rod, that's somewhat of a brand-specific answer. If you take BMW, for instance, they have maintenance built in to the price of the car, so the customers will bring the cars in for the period of which the maintenance covers it, which is 48 and 48. So we'll see that spectrum in there.

We have a number of Honda vehicles where we traditionally see the Honda customer bring the car back in on the regular scheduled maintenance program similar to Nissan and Toyota. And then we have, of course, the Lexus brands, where those customers have been very loyal.

So I don't have quantitative numbers in front of me, but I can give you that qualitative answer to that question.

Rod, one of the things that I think that we are looking forward to in the future, and you probably have noticed and have heard this, is the certified pre-owned vehicles are continuing to grow on the used vehicles sales side. And that is almost like new vehicle customers coming back in. There is a period of time that they're still loyal to the franchise dealer where they bought the vehicle.

So I think that in the future, some of the customer pay or warranty that we have lost for whatever reasons, that these cars will start coming back to our dealerships as well for some of the maintenance items. So I think that that's a part of the future that we're looking forward to.

So you're feeling pretty good about the outlook for the customer pay business looking forward?

Personally I do.

Yes.

I mean, I think that we're positioning ourselves well with not only the initiatives that we're doing, because it's -- customer loyalty is a big part of that business. So they want to come back and see the value in doing business with a franchise dealer instead of the independent dealers, because that, years ago, the independents were wearing us out. And finally, as we learned from a franchise standpoint, to compete in that arena, we offer a lot more value now than the independents do. And I think that we have the opportunity in our sales channel to educate the customer along those lines so that they want to come back to us more. So we're very positive about the future with the fix side of the business.

Great. Thank you.

(Operator Instructions) We'll now hear from John Murphy with Bank of America/Merrill Lynch.

Good morning, guys.

Good morning, John.

Morning, John.

Morning, John.

You mentioned that the inventory, the low levels of inventory were restraint on demand or constraint on demand in the quarter. If you had more inventory to sell, how much higher do you think sales would have been? I mean, it -- just a little bit or a lot? I mean, what do -- what's the magnitude of the pressure there?

John, this is Michael. That's almost like asking me how high is high. That is a good question. Let me answer it in a little bit of a general way.

When the inventories on the new side, particularly, get down to the levels that they were down to, the mix, the trim level mix and the color mix of the inventory also gets pressured. It's not the ideal mix, it's not the perfect inventory. So not only is it the number of vehicles available for sale which impacts how many we can sell, it's the variety, what's on the grocery shelf that we can sell.

So I couldn't really give you a number as to how much. I can just tell you that it was restrained. We had numerous requests for cars we just couldn't fill the orders and the program, of course, ran out. But it -- really, it was restrained, I just can't quantify that number.

Okay. Then I'm going to ask you another tough one and ask you how high is high again. On credit availability, we're hearing a varied degree of answers of it's not -- it's a big problem or it's not a problem at all. What are you seeing as far as credit availability to the consumer? Are loan-to-value ratios now a lot lower so it's tougher to get guys financed? What do you see in there on that side and how much of a pressure do you see on demand from that?

John, this is Michael again. I'll answer that in a trend, trending way. Credit availability, as a general response, is better today than it was six months ago. Advance rates, which is, obviously, the amount of money that would be lent against both the new car and the used car side, the advance rates have improved. As far as the criteria and the specifications or the [stips] as we would put them for a consumer that's out there, they have been relaxed a little bit and the way that lenders tier the buyers' scoring, that has relaxed.

So it is not where it was 24 months ago, but it is definitely better than it was six or nine months ago. And we've seen that as a nice, gradual trend pretty much across the line for particularly the last three months.

Okay. Then I'll ask you another similar question on leasing. I mean, what are you seeing on the leasing front? Is that easing or are -- you're seeing more leasing coming back to the market? Because that must be an important factor for you guys given your mix.

John, that's a good question, and it is important to us, of course. It is pretty much branch specific and driven by captives. Our captive partners have, particularly in the high lines and the Asian imports, have been pushing leasing continually. It's been very strong there. We've seen residual values improve marginally again. But we have seen a greater participation from a number of our OEM partners in the leasing area. So we're very pleased with that and we hope that will continue to sustain itself over the next period.

Okay. And then, lastly, just on -- what are you seeing in the pricing environment? Obviously that could, I mean, it sounds like there's some non-conventional players, a/k/a Toyota, potentially ramping up some of the -- some incentives in advertising spend. Are you seeing that in the market and will that at all put your gross margins at risk as we look into the fourth quarter.

John, this is Michael again. Toyota is -- good observation. Toyota is ramping up their marketing substantially. General Motors, of course, is having a nice presence in the marketplace again. And we are seeing a ramping up of new car inventories.

I can't address the incentives, they change so quickly, and I couldn't and wouldn't want to predict what the manufacturers will do. We are hopeful that the inventories and their production will stay inline or more inline with demand than they have in the past. So we are taking the position that we will manage our new car inventory to that level. And, as I stated earlier, I think we can maintain these margins.

Okay. And really I -- just a last question. When you look at the cost savings you've achieved to date, it's $100 million. You went through a number of the actions that you're taking and some of them are only halfway done, some of them are 70% done. I mean, how much do you think you'll ultimately really achieve here? Is there an update to your cost-savings forecast? And how much of that do you think will be really structural going forward?

John, I'd answer that by saying that the vast majority of the savings have been realized to date and we've done a lot of heavy lifting. As you'll recall, the corporate staff is down by 25%. We eliminated six regional management offices. The guys out in stores have done a tremendous job.

That, to a large extent, is behind us. I think what you'll see going forward is continued productivity improvements. But those will come from these much heavier investments like DMS, chart of accounts. We're trying to move a lot of -- a lot of the work we do into a paperless environment. We're trying to use many more web-based functions within the store. But those will take time to play out.

I think if I were in your shoes, for planning purposes, and let me be short-range here, if I could, we're looking at SGA in the fourth quarter somewhere probably in the low 80s, 82% or so as a percent of our gross. And that's down about 150 basis points from where it would have been a year ago on a comparable basis.

Okay. Great. Thank you very much.

Thanks, John.

Thank you, John.

Thank you. And with that as our last question, we want to thank everyone for listening today. And certainly any follow-up or future thoughts, you certainly can give Ryan Marsh a call. And we appreciate everyone being a part of this today. Thank you.

Thank you.

This does conclude today's conference call. Thank you for participating.