Asbury Automotive Group Inc (ABG) 2010 Q2 法說會逐字稿

Welcome to the Asbury Automotive second quarter financial results conference call. Just a reminder, today's call is being recorded. At this time, for opening remarks and introductions,I'll turn the call over to Mr. Ryan Marsh. Please go ahead, sir.

Thanks, Debbie and good morning to everyone. Welcome to Asbury Automotive Group's second 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 second quarter results, issued earlier this morning, is now posted on our Web site 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 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 the statements.

For information regarding uncertainties of these 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 31, 2009, and any subsequently filed quarterly reports on form 10-Q. We expressly disclaim any responsibility to update forward-looking statements. It is now my pleasure to turn the call over to Charles.

Thanks, Ryan, and good morning everyone and thanks for joining us today. Today we reported Asbury's second quarter income from continuing operations of $0.42. More than a two-fold increase versus $0.20 a year ago. These results were driven by a 13% increase in revenue and reduction of 400 basis points in SG&A as a percentage of gross profit. We saw double-digit growth in new and used vehicle units.

Parts and service gross profit is up by 5%, boosted by a 5% increase in customer pay. And finance and insurance gross profit improved 35% with F&I per vehicle per sold, breaking back over $1,000 per vehicle. Our operating income margin of 3.4% is a 31% increase over a year ago, and sequentially is up 13% over this year's first quarter.

Asbury has covered a lot of ground in a short period of time, with many of the initiatives we have put in place in order to improve our profitability regardless of the [broad SAR] environment. An $11 million SAR is still a very depressed sales environment, yet Asbury continues to deliver healthy results.

I am also very encouraged by the completion of our IT strategy review, and the resulting plan to take us to the next level of productivity gains. Craig will fill you in on the details and I'll turn the call over to Craig now.

Thanks, Charles. In the second quarter, Asbury delivered income from continuing operations of $0.42per diluted share, versus $0.20 in the prior year period. Last year results included a charge of $0.04 per diluted share, due to expenses primarily associated with the company's relocation and restructuring activities.

Our improved performance was primarily the result of a 13% increase in gross profit, and a 400 basis point decrease in SG&A as a percent of gross profit. This quarter in particular, demonstrates our ability to flow through incremental changes in gross profit to operating income. While gross profit increased 13% compared to the prior period, operating income jumped 46%. We were able to flow through 55% of the increase in gross profit to operating income as a result of our leaner cost structure and discipline.

While analyzing SG&A expense, it is important to consider rent expense. Renting versus buying is a financing decision. Either you pay interest expense on a mortgage, or you pay rent expense with a lease. The expense, however, fits different parts of the income statement and can potentially distort productivity analysis. If you adjust our SG&A for rent expense, Asbury's SG&A as a percent of gross profit was 70.5% in the second quarter. We have added a new table to our standard press release that provide more visibility on our rent expense.

While we are maintaining our capital spending discipline in 2010, with CAPEX target remaining at approximately $25 million, roughly in line with our depreciation expense. We expect our effective tax rate to be 38% to 40%. With respect to discontinued operations, a majority of the $900,000 loss, was linked to dark rents on vacated properties we no longer conduct operations. Absent, non-recurring items, we anticipate incurring $0.02 to $0.03 loss per diluted share, per quarter, for the foreseeable future.

Our financial condition remains strong, with total available liquidity of approximately $260 million as of June 30, 2010. This includes cash and floor plan offset availability of $94 million, as well as borrowing availability of $166 million, with a strong capital base, liquidity, and flexibility to retire debt, grow organically or grow through acquisitions.

As a result of the comprehensive IT strategy review we announced in the first quarter, we have decided to use ADP as our common DMS provider. We anticipate our first group of stores going live in October, and completing the roll out, Company-wide, by the end of next summer. We do not anticipate any material financial charges, or increased expenses as a result of this transition.

Over the long-term, we expect continued productivity improvements from these investments, as we install a fully integrated state-of-the-art suite of tools in all of our stores. Our entire organization is extremely excited and energized as we prepare to enhance our IT infrastructure. We're looking forward to a quick, minimally disruptive implementation.

Now I'd like to turn the call over to 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 on a same store basis. Our attractive brand mix of luxury and imports contributed to the 11% increase in same-store new vehicle unit sales. Luxury new unit sales were up 14% and Mid-Line import unit sales were up 9%.

Our general managers have been doing a fantastic job maintaining a disciplined, nimble approach, to running their stores during this uncertain market environment. Many of the initiatives we have touched on in prior calls, are starting to take hold, as demonstrated in this quarter's exceptional results.

Of particular note are our used car retail strategy and our F&I training program. I will refer to those within their respective segments. Same-store new vehicle unit sales were up 11% in the second quarter versus last year, while new vehicle revenues were up 16%. Generally speaking, unit volumes increased across each of our brand segments, consistent with overall US vehicle sales.

Increased unit sales were primarily the result of less stringent consumer lending standards, enhanced financing incentive programs by certain manufacturers, and a favorable comparison with the weak economic environment we faced in the second quarter of 2009. In addition to the strong recovery in unit sales, new vehicle retail margins remain close to 7%. Inventory level to continue to remain alive with consumer demand and preferences. Looking ahead, we are very comfortable with our new vehicle inventory levels of 63 days.

We continue to see strength in used vehicle unit sales, with a 13% growth compared to the prior period, while maintaining gross margins around 11%. The used market continues to perform well, due to relatively high demand and favorable pricing. Asbury's used vehicle sales have grown significantly over the last quarter.

Our performance that substantiates our implementation of the Asbury one-to-one program. Our aggressive inventory management supported the increased unit volumes, while keeping our day supply at approximately 34, at the end of the quarter. The rebound in F&I we started to see last quarter, has continued into the second quarter, increasing 35% compared to the prior year. This improvement is due to the double-digit growth and same-store unit sales and magnifies with a 17% jump in dealership generated F&I, per vehicle retail, to $1,005.

F&I continues to benefit from increased product sales, improved consumer credit, consistent rates from our lenders, and our focus on training of our F&I personnel on best practices. This training program, developed internally, supports our General Manager's and F&I staff in all areas of the sales process. These are fantastic results, and I'm extremely pleased with the progress of our F&I team and the work they've done over the last 12 months.

Revenues in our parts and service business were flat compared to the prior year period. This is the first quarter in seven quarters where we did not experience decline revenues. More importantly, however, gross profit increased 5% over the prior year period, due to a 5% increase in customer pay, and increased volumes from the reconditioning of used vehicles.

We are encouraged by the increase in customer pay, which more than offset the declines we experienced in warranty. Company wide, our customer pay [RO] account is up over 4% compared to last year. During the second quarter, customer pay represented 63% of our light vehicle parts and service gross profit, while warranty comprised 15%. This quarter we have decided to add a table to our press release that provides a more detailed breakout of our parts and service gross profit.

Before I close, I'd like to emphasize Craig's point on Asbury's IT strategy. I would like to emphasize that this is not just simply a DMS conversion. Our technology decisions will provide an invaluable suite of tools, that will allow our sales and service teams to dramatically improve the customer experience, by expediting the sale process and maximizing the lifetime value of our customers.

Other benefits for our stores include ease of use, as well as enhanced reporting and improved process efficiencies. I'm very pleased with the operating performance and would like to extend my gratitude to everyone in the field. Thanks again for your excellent execution and dedication to our customers. With that I'll hand the call back to Charles to conclude our prepared remarks. Charles?

Thanks, Michael. We believe we are making progress in formulating the ideal, large automotive retailer business model. In order to differentiate us, it is critical to install a winning culture that leverages our scale while retaining the ability to respond quickly to changes in local area markets. We run the business as a partnership with our General Managers and treat them as entrepreneurs and leaders, to run Asbury's dealerships, while providing them with the benefits of our scale.

It is important to note that these benefits are not limited to simply pulling out cost. These benefits also include providing tools and frameworks for sharing best practices. While the pace of the economic recovery remains uncertain, we continue to invest in Asbury's future in order to make a positive impact on our customers, our employees, the communities we serve, and our shareholders. Although the market has improved compared to last year, we believe it is prudent to continue operating conservatively.

Despite the increased volatility in our sector, we will continue with our approach of speaking to our results. During this period of depressed SAR, Asbury has demonstrated its ability to improve profitably, as well as the fact that the dealer model works. As we turn this corner, we're now more prepared than ever to enter the creating value phase. I am very pleased with the progress to date that Asbury has delivered.

Looking to the future, we are seeing the pace of activity in the acquisition market strengthening, and we have the capital to deploy, in order to take advantage of these more compelling opportunities. I would now like to turn the call back to the operator and we'll be happy to take your questions. Operator?

Thank you, gentlemen. (Operator Instructions) . And we'll go first today to Rick Nelson with

Hi. Thank you. Good morning. Congratulations on a great quarter.

Thank you.

Can you talk about the regional performance strength to weaknesses? I am particularly interested in Florida.

Rick, this is Michael. Florida has rebounded very well. Actually, most every part of our business in the Southeast and East has done very well. We've seen increase in new and used unit sales, as well as profitability in all those markets pretty much across the East and Southeast.

Okay. Thank you for that. I'm wondering if you could also comment on your biggest brand, Honda. I know we saw some -- their unit sales lagging the industry. And why do you think that is? And what's the future hold for Honda?

Do you want to go, Charles, first?

This is Charles. I will make one comment on that and let Michael give a little more color on it. As you know, Honda is one of our great partners. They are in between a little product right now compared to some of the rest of the market. We are very bullish on the future with Honda.

I mean, we've been partners with them along time. We've seen the same thing happen in other points with Honda that when they were out of step with the market with some of the products. They've got some great products coming. It's a great brand.

A lot of loyal customers. So I think what we're seeing right now is just a temporary decline in the percentage of sales with Honda. But we're very bullish on Honda for the future, Rick.

Rick, I would just add one piece to that. If you look at the Acura segment of the Honda business, they've experienced a 20% growth year-over-year in volume, without any new product, just product that was not available last year. So I think that's evident that the consumer is still very strong on the brand, as we are as a Company.

Will you look at the gross profit increase by segment, it looks like the Mid-Line domestic and luxury segments saw some very good growth. On the Mid-Line imports was down. Is that driven by Honda, or is that other factors?

Rick, this is Michael again. I think it is driven to a certain extent by Honda. I think also, if you look at the volumes that we've experienced with Nissan, which is a little bit lower margin business, that contributes to that.

We look at our Mid-Line, at our domestics, particularly our Chevrolet and Ford stores, we've seen a nice increase in the vehicle grosses, as well as the having the ability to have product available for sale this year versus the shortage of product that we all experienced in the domestic brands in the second quarter of last year.

Any comments on what you're seeing to date, in July we're hearing about a nice recovery in the industry.

What we're experiencing, Rick, is kind of a mirror of June. I think there's still some uncertainty in the market place. Again, where we have positioned ourself, is whatever happens in the market place, we will do well. We will be profitable. We're looking forward to the day when consumer confidence comes back, and we get back to the volumes of 13, 14, 15 SAR, which I believe will be there. I don't think we're going to see the type of recovery personally, in the second half, that many people thought would happen earlier in the year. We've always said we're going to be conservative with our company. And we know that we are prepared to be able to move with the market. And so from our perspective, we know that we can take advantage, whatever way the market goes, we'll be in good shape.

Okay. Thanks a lot. Good luck.

Thanks, Rick.

We'll go next to Rod Lache with Deutsche Bank.

Good morning, guys. This is Dan Gal, in for Rod.

Hi, Dan.

Thanks for the additional disclosures, really appreciate that. Wanted to focus a little bit on margins here. In the parts and service business, on a Company wide basis, margins were like 52.3%,

We haven't seen a number that high in awhile. Was there anything in there that's unsustainable? What kind of takeaway shall we take from that type of number?

Hey, Dan, this is Michael. I know what we are experiencing in the service departments is, customers that have higher mileage vehicles and older vehicles are starting to return to the shop. Along with that, we are seeing more of what we would call the major type repairs, not just your oil changes or your brake pads, but maybe rotors being replaced, timing belts being worked on. We've experienced, at least in a number of regions, a nice increase in the gross profit per customer pay repair order. So I think they are all contributing to that increased margin that you're seeing. And we believe this is a trend that will continue.

And maybe I could just hop in there behind Mike, and Dan give you a little more color. We've been digging pretty hard into some of the underlying data within the fixed ops business. And what we are finding, at least on a preliminary basis, is that the number of miles on a vehicle is growing substantially, versus where they were three or four years ago. You go back into the 2007-2008 range, over 40% of the vehicles coming into our shops would have 30,000 or fewer miles on them. Today that number is down substantially. It's being replaced by much older vehicles. The other thing that we're learning is that, as you would expect, the dollars per RO on an older vehicle are substantially higher than the dollars per RO on a vehicle that's got less than 30,000 miles. So you put these two things together and it may answer some of the question of what are we seeing, not just in our business but across the industry, in this parts and service business this quarter.

Yes,thanks a lot for that. Just to follow up a little bit, there's been concern about pressure on the customer pay business as the population of three to four-year-old vehicles or less goes down. But it sounds like you guys are getting your fair share of older vehicles that are out of warranty, for kind of non-warranty repairs. Is that what you're seeing?

Older vehicles are becoming a much larger percentage of our total population.

Got it.

And they have been growing, as a percentage of that population, consistently over the past, I'd say, two years.

You know, Dan, just one little bit of color to that. This is Charles. This is what we're supposed to do. Again, we go to the market to regain share that we lost to the independents. And as we are growing this segment of our business, that's what you're seeing with the dealer model now.

They are competitive in the market place versus the independent. The consumer has had a lot of experience now with the independents. And with the growth, not only in the customer service area of our business, but the value side of it, these customers are coming back in now to the dealerships.

Thanks a lot for all that color on that. And moving onto used vehicles -- or I'm sorry, on the new margins, I did notice a sequential decline in the dollars per unit growth margin from kind of the 2200 range down to less than 2100. Just on a corporate basis.

Were you guys seeing something in the fourth quarter, in the first quarter, that was -- is there anything you can chalk up the sequential decline there? Shall we be looking for margins like this going forward, or back to what you guys were doing in the fourth quarter and in the first quarter?

Dan, this is Michael again. I think in the second quarter, we experienced a little bit of a make shift in what we had available to sell. There was a little different from what our standard mix is. We, as you know, have a fairly large footprint in the luxury side. And there was some constraint of different models, particularly with brands that they were introducing new products. So that's where we carry the higher margin. We also then saw a growth in some of our Mid-Lines. So I would expect that as the products within certain makes, particularly in our luxuries, become more available as they did in the month of June, we will see at least a consistency in the margins that we have produced for the last four quarters.

Okay. Thanks a lot for taking my questions.

Thanks, Dan.

(Operator Instructions). We'll go next to John Murphy with Bank of America/Merrill Lynch.

Good morning, guys.

Good morning, John.

You did, obviously, a great job on the cost cutting and really streamlining the business in a really tough time. And when you adjust for that rent factor being at 70.5%, SG&A gross is really impressive.

But it does seem like there's some more wood to chop and you're putting a common DMS in,and that's coming over essentially the next 12 months. Is there a lot more cost-cutting and efficiencies and operating leverage that you think you can gain over time, even if we didn't have a real increase in the sales level at this point?

Yes, John, it's Craig. We believe there is. We are still behind the curve with respect to where some of our competitors are with systems and processes. And we think as we get caught up that will definitely bring additional productivity gains. I don't think you should expect to see those gains, quarter on quarter.

Right now I feel like we have chopped a lot of wood. We have made a lot of progress. We have made a lot of progress very quickly. I think you see it in the results. But now we're going to go through a period for about a year, and a little bit more, because it will take time for these things to take hold.

But as now build this new IT infrastructure, that will bring the next step function, if you would, of improvement in margins. But we'd ask that you give us a little bit of time as we work our way there. We're very excited about it. There are quite a few enhancements that are going to be happening across the stores. As Michael said, it's much more than just the DMS. This project includes DMS, includes CRM, includes a lot of the processes within the stores themselves. We've got many, many people across our organization working on the design of these technologies and processes.

To a large extent it's being led by our people at the stores. And we're going to hit four stores here in the first of October. We're very excited about it.

We kind of view it as a giant Petri dish when we go into those stores. We are targeting to provide them the most fully integrated set of tools that exist in any store anywhere. We've got great partners working with us. And we think it will bring significant enhancements down the road.

So there's still a whole lot of wood chopping going on, John.

That's good to hear. You do sound very enthusiastic and excited about it so that is also good to hear as well. If we look at what's happening in the first quarter and second quarter for just your earnings, to get real simple about this, you posted $0.42 in the second quarter, $0.27 in the first quarter.

If you were to look at that sort of on a seasonal basis, basically that's about 50% of your earnings, if sales are about flat for the course of the year. So it could indicate you guys are on a pretty healthy run rate of close to $1.40 in Earnings Per Share. And

I'm not trying to hood wink you into giving us guidance here, but is there anything weird or odd or unusual in the first half of the year, that would throw off any of the sort of the general typical seasonality we would see in earnings pattern, if sales kind of stayed in this low to mid $11 million in sales rate for the remainder of the year?

John, it's Craig again. We try to be very transparent with our results. That is why we provide all these tables in addition to what you see in the Q. I would say those numbers are clean. And, the rule of thumb you talk about, earnings in the first half of the year are typically very similar to the earnings in the second half of the year, if the SAR stays stable. That's not an unrealistic expectation.

Okay.

John, again this is Charles. Where we have positioned our company is to be very nimble. We can move up and we have the ability to move down and still be very profitable. So that's the key, all of the work that we have done has placed us in this position. And that's really what we're enjoying right now.

That's great. And then just lastly on inventory, sound like you're in good shape. Is there any sort of pockets of excess or pockets of shortages? Would you like more inventory? Does the inventory need to go through an adjustment process or are you just real good where your right now and wouldn't make too many changes at all?

John, this is Michael. We don't ever have the perfect situation. There's always a particular model within any brand that we'd like to have more of. I'd love to have more BMW 5 series right now, the brand-new one, and I would love to have more Mercedes E class. But looking all over everything I'm pleased with it. I don't think we have any issues. I'm satisfied with the jobs done at the stores with the inventories that we've got. And I would say we are overall just satisfied with what we've got right now.

Great. Thank you very much, guys.

Thanks, John.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn it back to management for additional or closing remarks.

We really do appreciate everyone visiting with us today. We are excited about what is going on with our organization. And we are really looking forward again to next quarter with our results with you. Thanks very much.

Ladies and gentlemen, we 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 and running through August 3rd, 2010. (Operator Instructions). Again, we thank you for your participation.