Asbury Automotive Group Inc (ABG) 2010 Q1 法說會逐字稿

Good day and welcome to Asbury's first quarter 2010 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thanks, Alicia, and good morning to everyone. Welcome to Asbury Automotive Group's first-quarter 2010 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 first-quarter results was issued earlier this morning and is now posted on our website at the www.Asburyauto.com.

Participating with us today are Charles Oglesby, our CEO; Craig Monahan, our CFO; and Michael Kearney, our COO. As always, at the conclusion of our remarks, we will open the call up for questions and I will 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. 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 these statements.

For information regarding certain other 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 fiscal year ended December 31st, 2009, and any subsequent filed quarterly reports on Form 10-Q. We expressly disclaim any responsibility to update forward-looking statements. With that, it is my pleasure to turn the call over to Charles.

Thanks, Ryan. And good morning, everyone and thanks for joining us today. I am excited to report a breakout quarter that reflects the collective results of the entire Asbury team. Combined revenues from new, used and F&I jumped 22% driven by a 15% increase in new and used light vehicle units, as well as increased revenue and F&I for vehicle retailed. We experienced improved sales across all of our major geographies, particularly Florida, Georgia and the Carolinas. The increased sales coupled with our leaner cost structure enabled us to move to more than triple our income from continuing operations delivering first quarter diluted earnings per share of $0.27 versus $0.08 a year ago.

I am thrilled to see our stores take market share and improve margins. I was especially pleased with our used vehicle performance being among the best in the industry. In the continuous challenge of balancing margins with volumes, our used vehicle strategies and execution resulted in a 14% increase in unit sales while holding gross margins above 11% and yielding a 17% increase in total gross profit over the prior year period.

With the right strategies, our brands and people are making the difference. And now I'll hand the call over to Craig.

Thanks, Charles. We are pleased to announce first quarter income from continuing operations of $0.27 per diluted share versus $0.08 in the prior year period. This increase is primarily the result of the 12% increase in gross profit and 370 basis point decrease in SG&A as a percentage of gross profit.

EPS for the first quarter was $0.22 per diluted share compared to $0.01 per diluted share a year ago. First quarter revenues totaled $960 million growing over 17% from $820 million in the prior year period. 17% increase in total revenues was primarily the result of a 22% increase in new vehicle revenue and a 21% increase in used vehicle revenue.

Gross profit increased across all four of our business lines in the first quarter. The 12% increase in total gross profit was primarily the result of a 32% increase in new vehicle gross profit, a 27% increase in F&I gross profit and a 15% increase in used vehicle gross profit. Our total gross profit margin declined 70 basis points to 17% principally from a shift index resulting from the double digit growth and lower margin in new and used vehicle businesses.

As expected, some of the variable components of our SG&A expenses have begun to increase with the recovery in sales volumes. However, our productivity measures are helping us flow more of the increases in gross profit to income. Importantly, same store SG&A expense as a percent of gross profit was 79.3% for the first quarter compared to 83% for the prior period.

Our fixed expenses were lower during the period due to our restructuring efforts and a reduction in charge costs as a result of improvement in loss experiences and favorable policy renewals.

We are maintaining capital spending discipline with our 2010 CapEx target remaining at $25 million, roughly in line with depreciation expense. We expect our effective tax rate to be 38% to 40%. With respect to discontinuing operations, a majority of the $1.5 million loss was linked to operating losses of a store we sold in California during the first quarter.

Going forward, we anticipate incurring a $0.01 to $0.02 loss per diluted share per quarter for the foreseeable future. These charges stem primarily from carrying costs of vacated properties.

Our financial condition remains strong with total available liquidity of approximately $203 million as of March 31st including cash and cash equivalents of $29 million and borrowing availability of $174 million under various credit facilities. Our available liquidity decreased by approximately $49 million between December 31st and March 31st primarily as a result of using excess cash to prepay for planned debt. We currently have nothing drawn under our revolving credit facility and in compliance with all of our financial covenants.

Additionally, I would like to highlight, we have no material debt maturities until September 2012. We plan on operating within our cash flows by pursuing a balanced capital allocation strategy of reinvesting in our business, seeking store acquisitions to the extent the risk adjusted returns are compelling, and strengthening our balance sheet.

The Board authorization to repurchase up to $30 million of debt is still in effect. We have launched a comprehensive IT strategy review with the help of an outside IT consulting firm. This ongoing effort includes the valuation of our DMS strategy. We anticipate sharing the results in the second quarter of 2010.

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

Thanks, Craig. Everything I will be covering with respect to operational highlights will pertain only to our light vehicle retail business. While the first quarter started out slowly, we had an exceptional March, thanks in part to aggressive incentives by some of the manufacturers and pent up demand following difficult weather conditions in January and February for most of our geographies.

Our attractive brand mix of luxury and imports contributed to the 15% increase in same store vehicle unit sales. Luxury new unit sales were up 21% and midline import sales were up 18%. The strong rebound in our southeastern and new vehicle market contributed to the 22% increase in new vehicle revenue. Our new vehicle revenue was up 28% in Florida, up 28% in Georgia and up 15% in the Carolinas.

Same store new vehicle units sales were up 16% in the first quarter versus last year, while new vehicle revenues were up 21%. Unit volumes increased across each of our brand segments which was consistent with overall US vehicle sales. Increased unit sales were primarily the result of increased consumer confidence, less stringent consumer lending standards, enhanced financing incentive programs by certain manufacturers, and a favorable comparison with a weak economic environment in the first quarter of 2009.

Toyota new vehicle revenue was up 9% for the quarter compared to other midline imports of 23%. In March, however, Toyota new vehicle sales were up 40% compared to 36% for the other midline imports.

In addition to the strong recovery in unit sales, the new vehicle retail margin of 7.1% was up 60 basis points, contributing to the 33% increase in new vehicle gross profit. New vehicle pricing appears more rational now that inventory levels are much better aligned with consumer preferences and manufacturer production schedules.

Looking ahead, we are very comfortable with our new vehicle inventory levels of 55 day supply.

I'm extremely pleased with our 14% growth in same store used retail vehicle unit sales compared to the prior period, while maintaining gross margin excess of 11%. We were successful in capturing volume growth while also growing our retail gross profit 16%. I attribute this in part to entrepreneurial nimble store level management as well as evidence that our used car strategies that we began implementing last year are working.

Our aggressive inventory management increased our turns and we ended the quarter at approximately a 32-day supply.

Financial insurance revenue has started to rebound increasing 27% during the first quarter of 2010 from the prior year. This improvement is due to a 15% increase in same store unit sales, coupled with a 10% increase in F&I per vehicle retailed to $990. The increase in F&I for vehicles sold was primarily a result of improved consumer credit, improving advanced rates from lenders and our focus on continued training of our F&I personnel on best practices.

Although revenues in our parts and service business were down, gross profit increased 1% over the prior year period, due in a large part to the increased volume from the reconditioning of used vehicles.

I would like to note that our customer pay gross was flat on a year-over-year basis for the first time in five quarters. Toyota parts and service revenue increased 16% in contrast to our total same store light vehicle parts and service revenue, which was down 5%.

The pace of the various Toyota recall campaigns has slowed considerably as has the mix of the type of repair. We are performing much more of the 90L recall, the gas pedal floor mat repair, than the AOA or sticky pedal repair. The 90L pays more than the AOA, but the 90L is now being done on a more timed basis.

We believe the decrease in customer pay revenue is a result of customers continuing to delay maintenance visits and bigger ticket repair work as they continue to limit nonessential spending as well as a decrease in the population of vehicles in the market due to the decreased unit sales in the last two years. We believe the decrease in our warranty business reflects improvement in the quality of vehicles produced in recent years, increased service intervals, as well as the lower of number of vehicles under warranty due to our reduced overall sales in recent periods.

As a result of the significant decline in US vehicle sales over the past two years, our warranty business may continue to experience some erosion. However, warranty is a small piece of our overall parts and service business representing approximately 17% of fixed operation sales.

We are continuing to invest in service technology and capacity enhancements, upgrading equipment, improving customer retention and satisfaction, and capitalizing on our dealer training programs. We have several initiatives, a few of which I discussed during our previous earnings call, underway to proactively address the anticipated decline in units and operations.

Overall, I'm very pleased with our operating performance and would like to extend my gratitude to everyone in the field. Thanks again for your hard work and dedication to our customers.

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

Thanks, Michael. While we are excited about this quarter, our challenge is to focus on the incremental sales opportunities we are seeing in the strengthening marketplace while remaining disciplined with our cost structure.

I would also like to highlight that we are seeing more activity in the acquisition market and we are engaging in more discussions. We are encouraged by the recovery we are seeing in the marketplace. However, until we see evidence that the recent improvement is sustainable, we will continue to operate conservatively.

I would now like to turn the call back to the operator and we'll be happy to take your questions. Operator?

(Operator Instructions). We will take our first question from John Murphy, with Bank of America. Your line is open.

Hi, guys. This is actually Elizabeth Lane on for John. Congrats on the good quarter.

Hi, Elizabeth. Thank you.

And I just wanted to ask you a couple of quick questions. Do you attribute the increase in same store sales more to improving showroom traffic or a higher conquest rate due to the increased availability of financing and appealing incentives in March?

Elizabeth, this is Michael. I think the answer is yes and yes to those. We, of course, experienced a decrease in showroom traffic in January and February from December, we think in large part due to some seasonality. But, of course to the rolling winter storms that came across our geographies. So the seasonality by being March and the better weather we saw and a substantial up tick in traffic and we do see an improvement in the consumer lending environment. We see better advance rates and we see a broader spectrum of customers being bought. So I think that -- I hope that that answers both of those.

Yes. Great. And just one question about SG&A, which is that you guys have cut a lot of costs over the last year to year and a half and it's obviously coming through in the bottom line which we saw this quarter. What kind of SG&A's percent of gross do you think is an achievable level or target rate, given your SAR assumptions for 2010 and 2011?

Elizabeth, it's Craig. We think that over the course of the next couple of years we could get another 200 basis points on SG&A. And obviously, it's somewhat dependent on where the SAR goes, but we feel like we've made a lot of progress, but we still have a lot of work to do.

Okay. Great. And just one other quick one which is that another dealer announced this morning that they're reinstating their dividends. And is that something that Asbury is considering at all or what are the Company's priorities for capital at the current time?

Right now, Elizabeth, that's not a consideration for us.

Okay.

And I don't -- and currently, we couldn't reinstate our dividend anyway. So right now we're focused on the continuing operational side of the business and that's where we are right now and balancing the -- working on our balance sheet.

Okay. Great. Thanks very much, guys.

Thank you.

Thank you.

We'll take our next question from Rick Nelson with Stephens, Inc. Your line is open.

Thank you and good morning and I'd like to say congrats on a great quarter as well.

Thanks, Rick.

Thank you, Rick.

[Could you walk] through the IT strategy review and were there some issues with the DMS system?

Rick, it's Craig. We've been very aggressively rolling a strategy that was driving us to common charts of accounts, common DMS. And as we were working our way through that, we began to realize that if we really want to have a state of the art IT platform, it's bigger than just charts and DMSs. There's so much movement today towards the web and all the technologies around the web, how we interact with the customer. We know today a customer can on their iPhone and look at inventory new and used. And we think the day comes when they're going to get their financing on the iPhone. And we want to make sure we've got a technology platform in place that enables us to exploit those technologies.

And so we hired a third party firm that has tremendous expertise in this area to work with us across the entire spectrum of technology and you can't do that without talking about DMS. So that's part of it. I'd say we're about halfway through that effort. We will wrap that up during the current quarter and we'll get back to you with more information when we have our next earnings call.

Yeah. Right. This is perfect timing for us to do that from an organizational and a growth standpoint. So we are very pleased with the data that we're getting and as Craig said, we'll be excited to report that next quarter.

Great. Thank you for that. Also I'm wondering about the strength in sales in March, if you're seeing carryover into April?

Rick, this is Michael. April is always, since I've been in the business, always been less than March. I would say that April is consistent with being April. But there are some seasonality effects in our business and April is one of those months that's generally not the same as March, but I'm encouraged with the floor traffic and pleased with the inventory levels that we've got going into the month.

Okay. Great. Also, if we could get a breakdown of the service and parts revenue. I think I missed some of the numbers, customer pay, warranty, internal -- any other components that count there?

Rick, I've got the gross. Customer pay gross was flat quarter over quarter. Wholesales parts was down 3%. Warranty down 8% and internal up 25%.

Okay. And X Toyota what would the warranty number look like?

About minus 15%.

And customer pay, do you think you got benefits from the Toyota recall? Is there a way to look at that X Toyota?

Rick, I don't think so. Toyota, we don't have a giant footprint with Toyota. So I would say no, I think it's more a function of consumers coming out and spending a little bit more money particularly as the weather freed up. I would also tell you that the recalls are just a part of our business. So we always have them from quarter to quarter, manufacturer to manufacturer. So I don't think that that had any great driving effect on the customer pay at all.

And given the units in operation, the declines that you've discussed, what is the outlook for same store sales?

In -- and when you say sales, in the service area?

In the service area, specifically. Yes.

We're optimistic that the customer part will stay in the same ballpark that it has quarter over quarter. As I noted in our remarks, I think you're going to see a continual erosion of the warranty business as the cars got better and we have less units in operation.

That's one of the issues that we are continuously addressing, because we're aware there's a hole now that had been created in the last two years of lower retail -- of new vehicle sales. So in the future, that will impact customer pay. There's a lot of initiatives that we have and all retailers really are looking at to balance that out. We have been able to show more service contracts as an example which will tie the customer closer to us for a longer period of time. We're offering a broader array of services that in the past dealerships did not need to offer. We're much more competitive in the marketplace with the independent dealers that are out there. So our strategy will be to gain market share from independent dealers with these owners that traditionally have not come back to the dealership after their warranty period. So there are a lot of things that will happen within the retail organization to work towards maintaining a longer relationship with these customers.

One of your peers was talking about pick up in the domestic dealers in the customer pay side that maybe some of the deferral of maintenance was starting to show up this year. Is that something you're seeing as well?

Rick, we're seeing a little bit of it, but as you know, our exposure to the domestics is substantially less than some of our peers. So we are seeing a little bit of that pick up. But it's not enough that it would drive our overall number.

Got you. Great. Thanks and good luck.

Thanks, Rick.

Thank you.

(Operator Instructions). We will take our next question from Derrick Wenger with Jeffries and Company.

How are you? Thank you. A couple parts here. The balance sheet, the cash flow statement is not out yet. Do you have the capital expenditures for the quarter and what the outlook for the year is? That's the first question on CapEx. I assume letter of credits are out are about $26 million on that $200 million facility to give you the availability. And you had mentioned that you had a maturity in 2012. I thought you said December. Isn't that September and can you delineate the components of the long term debt? And then lastly, that $30 million debt that you can buy back, is that any debt?

Hi Derrick, it's Craig. I think we've got all the questions. Let's us take a shot. Ryan and I are going to do this together. I'll start off with CapEx. We spent about $3 million in the quarter. We will file the Q by the way, if not later this afternoon, tomorrow, so you'll be getting all the details here shortly. With respect to the debt, I'm going to let Ryan take over. He's the expert.

On LCs we're at about $12 million. It's like $11.9 million and so it crept up a little bit to $12 million. And then in terms of debt repurchases, it could be sub-debt mortgages. It's open to any debt and actually it would include buyout of leased properties to the extent that we had any opportunities there.

And could you clarify your question on the maturity that you had?

Yeah. How much is outstanding on the eights, the 7 5/8 and the converts, because you had said -- I think you had said the maturity was in December, but I thought it was in September.

Yes. On the converts, there's 55 phase or 54.7 phase and those are September of 2012. And on 7 5/8, those are actually 2017 maturity, so those are out there. But we have some mortgages that are going to come due in 2011 and that's -- by the time we amortize down to their maturity, they'll be about $21 million of mortgages that will mature in June of 2011 and August of 2011. And that, again, is mortgage debt.

Okay. Great. Great. Okay. Thank you.

(Operator Instructions). We have a question from Christina Buss with Thomas Weisel. Your line is open.

Hi. This is Christian, not Christina. Congratulations on a very impressive quarter.

Thank you.

I'm wondering if you could provide a little bit more perspective on how you were thinking about the parts and service business going forward.

Chris, this is Michael. We are all faced with, as Charles noted, this kind of hole where we've got a lack of vehicle sales for two years. So we have initiated some programs where we are expanding hours and days going to seven days service. We're expanding the hours of operation. We are and have been for a number of years in the tire and wheel business and are expanding the tire and wheel business. We are expanding into the windshield repair business. We also have a pilot program that started two years ago and is now being run throughout the entire company where we are actively promoting and selling prepaid maintenance and extended warranty programs in the service lane to customers that show up that need that. So that is a program that will tie and bring those customers back to us. We are in the middle of evaluating a number of loyalty and retention programs as part of our overall IT strategy work. So we're addressing the fact that there's a substantial base of customers out there and that, again, as Charles noted, that we've allowed them to be our direct competitors and we will now go after that business to grow our customer business, which we think will more than offset the decline in the warranty business over the foreseeable future.

And can you talk to me a little bit about sort of the operating margin contribution from the parts and service, the flow through to SG&A and the operating profit for parts and service? How does it shake out in that to the new vehicles and used vehicles?

Yes. This is Craig. I'm not sure I completely understand the question. What I will say is in the new and used side of the business you get gross profit, but then if you come down to the P&L, we've got to take out our compensation expense. And in that part of the business, that compensation expense falls into other -- into SG&A. In the parts and service business, much of the people cost is actually taken out before you get to gross. So parts and service gross, just broadly speaking, I would say flows through in a much bigger way than you do -- you see on what we call the variable side of the business.

Okay. That's very helpful. Thanks for clearing that up for me.

Yes, And, Christian, if you'd like to get together after the call or get with Ryan, we'd be happy to spend more time on how the P&L is constructed here at Asbury.

Okay. Thanks a lot.

We have no further questions at this time.

All right. Great. We appreciate everyone joining us today. We are personally within our organization, we are not surprised at this type of breakout quarter for us, because it really is the result of all the work and strategies that has been initiated in the past and I think when the market strengthened as it did, we got the results that we were working for. So with that, we're looking forward to our next quarter call and thanks everyone for joining.

Thank you for your participation in today's conference. As a reminder, there will be a replay available for this conference beginning later this afternoon through May 6th, 2010. (Operator Instructions). You may now disconnect and enjoy the rest of your day.