Asbury Automotive Group Inc (ABG) 2010 Q4 法說會逐字稿

Good day, and welcome to the ABG fourth quarter and year end 2010 earnings 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.

Thank you, Katherine, and good morning to everyone. Welcome to Asbury Automotive Group's fourth quarter and year end 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 fourth quarter results was issued earlier this morning and is now posted on our website at asburyauto.com. Participating with us today are Craig Monaghan, our President and Chief Executive Officer and Michael Kearney, our Executive Vice President and Chief Operating Officer. As always, at the conclusion of our remarks, we'll open the call up for questions. I will be available in my office afterwards to address any follow-up questions that 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 certain other risks that may cause actual results to differ, please see our filings with the SEC from time to time, which includes our Form 10-K for the year ended December 2010, which will be filed within the next couple of days and any subsequently filed quarterly reports on Form 10-Q and our earnings release, which was issued this morning. We expressly disclaim any responsibility to update forward-looking statements. With that said, it is my pleasure to hand the call over to Craig.

Thanks, Ryan. Good morning, everyone, and thank you for joining us today. The automotive market continues to show signs of steady improvement with the US SAAR growing 14% to 12.4 million units in the fourth quarter compared to the prior year period. I want to highlight the fact that on the same store basis, our new vehicle sales volumes were up 23% over the same period. A clear indication that our stores outperformed their respective markets. Consumer confidence appears to be stabilizing, and credit conditions have steadily improved for our consumers. We are pleased to announce fourth quarter adjusted EPS from continuing operations of $0.37 per diluted share, a 76% increase compared to an adjusted $0.21 for the same period in the prior year. Fourth quarter 2010 results were adjusted for our bond refinancing and related activities which reduced our operating results by $0.23 per diluted share. Fourth quarter 2010 revenues totaled $1 billion, a 22% increase compared to the prior period. Gross profit was up 17%, with increases across all business lines. Compared to the industry retail sales, these are fantastic results.

We continue to make progress in improving our cost structure with an SG&A to gross profit margin of 76.4% for the quarter, a 240 basis point improvement compared to the prior year period or 160 basis point improvement, excluding a $2.1 million luxury incentive program. We have made significant investments in our core business and have worked prudently to improve our balance sheet. We have accomplished this while maintaining a strong cash position, ending the year with over $80 million, including the cash available in our floor plan offset accounts. We're budgeting $35 million of CapEx in 2011. This does not include potential real estate purchases we may pursue over the next year as part of the our strategy to retire outstanding leases. Now, I'll hand the call over to Michael.

Thank you, Craig. Before I provide our operational highlights, I would like to remind you that in December, we announced an agreement to sell our heavy truck business to Rush Enterprises. We anticipate the sale closing during the first quarter of this year and now report the heavy truck operating results as discontinued operations within our financial statements. Everything I will be covering with respect to operational highlights will pertain only to our light vehicle same store retail business. Our new vehicle unit sales were up significantly at 23% in the fourth quarter versus last year while new vehicle revenues were up 25%. Our average selling price has increased largely due to stronger luxury vehicle sales and increasing consumer preferences for buying vehicles with higher levels of content.

Our new vehicle inventory was $432 million at the end of December with a 59-day supply on a 30-day trailing basis. New vehicle gross margins were 6.8% for the quarter. Adjusted for the impact of a luxury incentive program from which we do not anticipate any further benefit in the near future, new vehicle gross margins would have been 6.4%. I would like to point out that we continue to experience pressure on our new vehicle gross margins, particularly within our midline import brands. However, as we enter the stronger selling season, we anticipate new vehicle margins stabilizing. Furthermore, I am optimistic that the margins will be supported by the cadence of new product offerings from many of our major brands over the next couple of quarters such as the BMW X3 and the Acura TL and Toyota Avalon in the first quarter, the Honda Civic and Toyota Camry in the second quarter.

Asbury's used vehicle unit sales continued their strong growth with an increase of 22% from the fourth quarter last year. During the quarter, we successfully grew used sales and unit volumes while maintaining margins near 10%. As a result of the strong used vehicle sales and our used vehicle retailing strategy, we ended the quarter with $75 million of used light vehicle inventory or 35 day supply on a trailing 30-day basis. F&I revenues experienced 34% growth compared to the same period last year. F&I PVR for the quarter was $1,017, up 9% year-over-year due to better execution of our F&I sales processes, improved lending standards and consistent advance rates. We are also seeing evidence of increased lending to sub prime customers of some of our markets, as well as an expansion in leasing from many of our captive finance partners.

In the fourth quarter of 2010, our parts and service revenues continued to recover, increasing 5.8% and gross profit grew 9.2% compared to the fourth quarter of 2009. Parts and service gross margin for the fourth quarter was 53.6%, up 160 basis points compared to the prior year. The year-over-year gross profit improvement was driven primarily by the 30% increase in internal prep work, as well as a 21% increase in warranty work. In addition to improving -- to the improving economy, we believe that the initiatives we had put in place to increase customer pay are working as evidenced by the 5% improvement in customer pay revenue.

Before leaving parts and service, I would like to point out that extreme weather conditions in January and February affected many of our locations. Consequently, we have lost approximately 5% to 6% of our fixed operations capacity thus far in the first quarter. Overall, I am very pleased with our operating performance and would like to extend my gratitude to everyone in the field. Thanks again for your dedication and commitment to our customers. With that, I'll hand the call back to Craig to conclude our prepared remarks. Craig?

Thanks, Michael. 2010 was a year of significant accomplishments. We strengthened our balance sheet, improving our leverage and liquidity. Extending our debt maturities, exiting two major leases and regaining the flexibility to repatriate capital to shareholders. We made significant progress on our infrastructure and technology strategies to date, completing 100% of our CRM roll-out, completing 95% of our website relaunches and completing 30% of our DMS roll-out. And most importantly, we demonstrated core operational growth. We're among the leaders in our industry for growth and same store sales and operating income.

Looking ahead, we will remain disciplined with our capital allocation. We plan to continue to reduce leverage and retire leases. We will continue to invest in our process and technology initiatives. We will be opportunistic in repurchasing shares, and we will evaluate acquisitions that meet our strategic objectives and generate returns in excess of our cost of capital. In closing, I want to thank each of our employees for their dedication and innovation. I would now like to turn the call back to the operator, and we'll be happy to take your questions. Operator?

Thank you. (Operator Instructions)Rick Nelson.

Thank you, good morning. Nice quarter. Can you comment on the OEM incentives, provide some more color, luxury related? Is that auto house, what is the driver there?

Rick, this is Michael. Yes, that was primarily the driver for that incentive, yes.

Michael, what gives you comfort that margin pressures here are going to subside? I know you talked about some of the new models coming up. What is your view on stair-step incentives, and are those likely to continue?

Let me answer them in reverse, Rick. I think incentives, in general, as we have seen, have not been to the level at which they used to be. But I think we'll continue to see stair-steps. They've been around for a long time. They're nothing new, and I think the manufacturers are using them as a tool today to gain market share.

To answer your question about the margins, I think part of it is as the selling season, as March comes around, the spring selling, we see a little more enthusiasm. I think we will see the cadence of new product will help us, particularly the brands that we cover. And I think, again, just a general focus on our part to really monitor it, will give us a little bit of an edge on that.

And how do you view the trade-off between volume in used cars and margins in used cars? I know the same-store growth was pretty terrific, but we did see more margin pressures there than we have been seeing.

Rick, you're right, and I think it is a little bit of a trade-off, but we instituted a strategy in 2010, late '09 and early '10, to grow our used-car volume. I think we noted early in the first quarter of '10 that there might be some trade-off as we expand what we are selling in the stores and how we're trading for those vehicles. So, we did see a little bit of compression on the margin, but with that kind of increase in volume, I think that trade-off was worth it. I think we'll continue to see a push and a little bit of pressure in the used-car world. But it is a program that we're not going to abandon, and we want to continue to grow that volume.

Hello, Rick, it is Craig. I would just jump in and add, our used-vehicle margins are close to 10% in the first quarter. Clearly not where they've been at historical levels, but that's a pretty respectable margin, especially as we look across the industry. And I think as you know, we look at that -- essentially that microeconomic trade-off between price and volume, and we try to stay [out on a] difference curve where we can maximize the total return. And we think we're pretty close to that with this combination of volume and margin.

We also saw a big increase in F&I per unit and same store. Wondering what that driver is there, and is that sustainable?

Rick, this is Michael again. I think a lot of it is process, process, process. We have an internal program that we installed, again, a little over 18 months ago, where we do training; we call it a boot-camp training. It is just a retraining of our individuals. I think there's always a bottom third of F&I producers in any group of dealerships, and we will constantly work on the bottom third to bring them up so that we continue to have growth in that area.

And then finally, I just want to congratulate Craig on his promotion, and if we could get an update or timeline on the CFO search.And would the back [off have] consolidation still continue primarily under Craig's direction, or as we bring in a new CFO, would that change?

Well, Rick, thank you very much. One thing I would say though is that I'm just one person here, I'm part of a much larger team. And we're very much a team-ball kind of organization. Me moving into a different responsibility doesn't really change a whole lot about what we've been doing. It is a strategy that we've all built together, and we'll all continue to pursue together. I'm just looking around the table here with us today; we have Ryan and Keith Style and Michael, and we are very much committed to continuing to get our common DMS rolled out. We think that will bring us a lot of productivity benefits down the road.

We do believe that there are things that we can do much more efficient in our back offices. We're going to continue on that path. So, while there is a change here, there is really not all that much of a change. We do have a search underway. I can't give you a timeline yet for when we expect that to be filled, but bottom line is, you will not see a change in strategy.

Great, thanks a lot, and good luck.

Thank you.

Thank you. Dan Galves with Deutsche Bank.

Good morning. I'm sitting in for Rod this morning. Congratulations to Craig and Michael for your promotions, and we definitely wish Charles the best of luck going forward.

Just had a couple of questions. You guys looked like you gained pretty significant market share in new vehicles during the quarter. Your sales were up 22% same-store versus a 13.5% industry in the quarter. It looked like that was really a step up in share gain in the fourth quarter. Is there anything that you can attribute that to?

Dan, this is Michael. Thank you very much for that. It is a targeted effort. Again, as Craig mentioned, it is from the team and the field people. We have certain brands in certain markets at the beginning of '10 that we said we would target for marketing support, as well as field support to grow that business where we saw opportunities. And I think, almost without exception, we took advantage of that, particularly in our mid-line imports. So, we did experience, again, a little trade-off in margin. But we grew market share with those brands, and I think that we will see the long-term benefits of that.

Okay, great. And then going forward, it looks like on a per-store basis, your new-unit sales are down. If you compare it to mid-decade, like 2005, your units per store is down much less than the overall market is down. So, it looks like units per store could get back to where it was in that 2005 level relatively soon. Would you agree with that?

And number two, are there any significant investments in fixed costs you need to make? Is there a point along the cycle where the leverage you've been getting in SG&A could take a pause, I guess I'm saying?

Hello, Dan, it's Craig. Maybe I can start with the second half of the question, and I'll turn it back to Michael to talk about the first half. But on the SG&A side, we consider this to be a year of infrastructure build for us. I think over the course of the last two years, you saw a tremendous amount of heavy lifting, a lot of pretty aggressive cost cutting. We think our cost structure for the infrastructure that we have today is pretty much in line. What we have to do now is get some of these technologies put in place. And that will allow us, if you would, the next step function in productivity improvement. We've said that we're 30% done with the CRM; by the end of the summer, we hope to be substantially complete. We feel very good about the progress that we're making. But I think once that's done, and only once that's done, will we be able to really drive any significant incremental benefits.

I'll turn it back to Michael on the sales per store.

Dan, back in the -- to your question, '05 and '06, they were pretty heady days for new-car volume. But I will tell you that philosophically, we believe as the economy warms up and we see a continued growth in the SAAR, there are, in fact, as you know, less dealerships in the United States. So, we would expect that the numbers of sales per facility should in fact, as you indicated, should in fact grow some, yes.

Just a follow-up on Craig's comment. So, we shouldn't really be expecting any significant pick-up in personnel costs at the dealership level to support increased volume?

No, I think as gross profits improve, with an improvement in the SAAR, we think the SAAR this year could be somewhere in the $12.5 million to $13 million range. If we see an uplift in the SAAR, we'll see incremental growth, and that will help -- just the leverage alone will help drive an improved SG&A ratio. But we don't -- I come back to -- our focus right now is on getting these technologies in place. We are not focused on any significant headcount reductions.

Okay, thanks. One more, if I could. On the used side, a 30-day supply of inventory, how does that look compared to historically; is that lower than historically? And has your acquisitions changed as far as used vehicles in terms of the split of trade-ins versus auction acquisitions? We're looking at a fairly low supply of used cars going forward. I guess I'm just wondering if you see any constraints to getting enough used inventory to support continued growth in that area.

Dan, this is Michael again. The 30- to 35-day supply of used cars is something we have focused on in the latter half of '09, throughout '10. So, we are very comfortable with that day supply.

To answer your other question, it is very brand specific as to your mix of trades versus acquisitions. As a general rule, we are probably 55% to 60% trade, that rule, but again, it is very brand specific. As you know, we are all, in the industry, experiencing a little bit of shortage at the auctions. There were less daily rental fleets, less lease turn-ins. However, again, if you go back to our strategy that we initiated in late '09 and '10, we have had and continue to have a strong push on taking a higher percentage of trades at our dealerships. We will then recondition and sell those vehicles. So, although we may experience some higher prices at the auctions, we do not experience -- we do not think we'll experience a shortage or have any constraints on the ability to acquire used cars.

Okay. Thanks a lot for taking my questions.

Thanks, Dan.

Thank you. John Murphy with Bank of America Merrill Lynch.

Good morning, guys. This is Elizabeth Lane on for John. I just wanted to follow up with a little bit more detail on inventory, which is that, on the new-vehicle side, are you seeing levels that are looking a little light at this point? Because I saw floor-plan financing expense was much lower from 3Q, which I assume is largely due to the heavy-truck business going into disc ops, but it was still about flat with last year, which is when industry inventory levels were very low. So, do you think your current inventory position is still a little low, or are you comfortable with that level?

Elizabeth, thanks for the question; it is Craig. I'll start with the big picture, then Michael can talk about specific product lines. But there are two things that I think are happening that -- in that inventory and the floor-plan expense. One is, you're right, the heavy-truck business has been moved to disc ops, so that's causing somewhat of a dislocation there. Second thing that's happening is, we park a lot of our excess cash in -- we pay down floor plan with these floor-plan offset accounts. And that number can run up and down quarter-to-quarter and cause a little bit of distortion. If you get with Ryan after the call, he can give you a little more color about how much cash we've had in floor plan on a quarter-by-quarter basis.

Okay.

Elizabeth, and to specifics, our day supply, generally without exception, I think provides us adequate inventory to support the sales rate that we're seeing. We don't anticipate any shortages. As always, in some brands, there are always products that you can't get enough of as fast as you want them, but that's no different than it's been for a long time. So, I would say overall that our inventory levels are adequate to support the sales that we think will be out there in the economy for the foreseeable future.

Okay, great. Thanks. And how should we think about the luxury manufacturer incentive programs going forward? Is that something that we should expect to see in the results for the next couple of quarters, or is that more of a one-time benefit, or more heavily weighted towards one quarter over others?

This is Michael again. I think what we were referring to earlier was a one-time for that particular manufacturer. You won't see any of that in the near future.

As to the broader question about luxury incentives, we don't have visibility into what they will do. As you know, it is almost always tied to either a model, ending of a model, a new one coming out, or oversupply. And again, we don't control that. So, we don't anticipate it, but then again, we wouldn't be surprised what we would see.

Right, okay, great. Thanks very much, guys.

At this time, there are no more questions. We appreciate you spending some time with us this morning. Thank you very much.

Thank you, and 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 March 1, 2011. You may access the replay by dialing 888-203-1112, or 719-457-0820, and entering the replay pass code 6790920 followed by the pound key. Thank you for your participation, and have a good day.