Asbury Automotive Group Inc (ABG) 2011 Q1 法說會逐字稿

Good day and welcome to the ABG first-quarter 2011 earnings 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, Rachelle, and good morning to everyone. Welcome to Asbury Automotive Group's first-quarter 2011 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 www.asburyauto.com. Participating with us today are Craig Monaghan, our President and CEO, and Michael Kearney, our Executive Vice President and 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 today's call may contain forward-looking statements. Forward-looking statements are historical in nature and invoke risks and uncertainties that could cause Asbury's results to differ materially from management's current expectations. We encourage you to review the forward-looking statements contained in our earnings release issued today as well as Asbury's most recent SEC filings for a complete description of these risks and uncertainties. We expressly disclaim any responsibility to update forward-looking statements.

It is my pleasure to hand the call to Craig.

Thanks, Ryan.

Good morning everyone and thank you for joining us today. We are pleased to announce first-quarter adjusted EPS from continuing operations of $0.35 per diluted share; that's 30% increase compared to $0.27 for the same period last year. First-quarter 2011 results were adjusted for an after-tax litigation reserve of $5.5 million, as well as after-tax executive separation cost of $1.4 million. There were no adjustments in the prior period. Additionally, included in discontinued operations is a $15.8 million after-tax gain from the sale of the heavy truck business.

First-quarter 2011 revenues totaled $1 billion, an 18% increase compared to the prior period. Gross profit was up 12% with increases across all business lines. Overall these results exceeded our expectations considering the harsh weather affecting our stores in January and February and the continued gross margin pressure impacting new vehicle sales across the industry.

Now, I'll hand over the call over to Michael.

Thank you, Craig.

I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same store retail performance. Both new vehicle unit sales and revenue were up significantly at 16% in the first-quarter versus last year. Our new vehicle inventory was $443 million at the end of March, with 62-day supply on a 30-day trailing basis. New vehicle gross margins were 6% for the quarter. During the quarter, we continued to experience pressure on our new vehicle gross margins. However, to the extent inventory becomes tight due to the Japan tragedy, we anticipate new vehicle margins improving. I will speak more on Japan in a moment.

Our Asbury 1-2-1 Used Vehicle Retail program continues to show benefits as used unit sales continue their strong growth, increasing 20% from the first-quarter last year. We were able to grow significant used unit volumes while maintaining margins of 10.6% compared to fourth-quarter 2010. We grew our used vehicle inventory from the fourth-quarter by 16% in anticipation of possible disruption of new vehicle inventory and increased used vehicle sales levels. We ended the first-quarter with $87 million, or 34-day supply on a trailing third day basis.

Moving on to our F&I business, execution of our F&I sales processes continue to yield strong results. Our F&I revenues grew 26% compared to the prior period. F&I PVR for the quarter was $1,019, up 6% year over year. In addition to excellent F&I sales execution, we are benefiting from improved availability of credit to consumers and consistent advance rates.

In the first-quarter, our parts and service revenue increased 1% and gross profit grew 3% compared to first-quarter of 2010. Parts and service gross margin for the quarter was 54.6%, up 120 basis points compared to the prior year. The year over year gross profit improvement was driven primarily by the 25% increase in internal prep work.

On our last earnings call, I cautioned that extreme weather conditions in January and February affected many of our locations. These are great results considering the parts and service operation capacity we lost due to that weather. Every time our store operations are challenged, they rise to the challenge and succeed. I'm very impressed with our team's passion for winning and extend my gratitude to everyone in the field. Thanks again for your dedication and commitment to our customers.

It is this passion for winning that will help carry us through the anticipated supply disruptions resulting from the unfortunate events in Japan. I would like to take a moment to share our views on the crisis. We continue to evaluate the consequences that the earthquakes and related events in Japan will have on our operating results. We anticipate some meaningful supply disruptions, but we are unable to quantify the depth of the duration at this time. We are beginning to see the effect of production disruptions and expect to have approximately 45 to 50 day supply of inventory of our Japanese brands at the end of April.

We are working to mitigate the situation through several initiatives, such as; being more selective on the gross we will accept on vehicle sales; broadening our used car inventory, particularly certified pre-owned vehicles; restricting sales of most late model vehicles at auctions; moving new and used inventories strategically within our dealership network; examining alternate sources for used vehicles; evaluating advertising spend on a more frequent basis; and proactively communicating with our customers about the production challenges and the potential for product shortages. We are confident in the long-term strength of our Japanese partners and believe the current disruption will be temporary.

And now I'll hand the call back to Craig to conclude our prepared remarks. Craig?

Thanks Michael.

We are pleased with our for first-quarter performance. Our teams in the stores are doing a phenomenal job as reflected in our numbers. Unfortunately, we anticipate some temporary headwinds due to the Japanese inventory shortages. Here's how we see it playing out , we anticipate feeling the impact on our results beginning in June as Japanese inventories continue to fall. The full effect will be realized in the third-quarter.

Despite the situation in Japan, we continue to execute our strategy of re-investing in our business, funding our technology initiatives, and strengthening our balance sheet. We ended the first-quarter with $104 million available between cash and our floor plan offset accounts. So far this year, we generated a $26 million pre-tax gain on the sale of the heavy truck business, sold our subprime consumer loan portfolio, paid down $7 million in mortgage debt, spent $17 million on property lease buyouts with another $14 million under contract, and re-purchased $4 million of Asbury common stock.

One last thought before I close. Our first-quarter results of $0.35 per diluted share and a $13.1 million SAAR environment were 17% higher on a same-store basis than our 2008 first-quarter results, despite the fact that the SAAR is 14% lower. This is a testament to the progress Asbury has made.

In closing, I want to thank each of our employees for their dedication and innovation and I'd now like to turn the call back to the operator and we will be happy to take your questions.

Thank you. The question and answer session will be conducted electronically. (Operator Instructions).

And we will hear from John Murphy with Bank of America Merrill Lynch.

Good morning, guys.

Good morning, John.

Just on the Japan impact -- if we could think about the fourth quarter of this year on the end of the back side of the impact and out into 2012, do you think there's going to be any long-term impact or is this very much a short-term supply disruption?

John, this is Michael.

Our view is this is a temporary supply disruption. If I look at the brands that are being affected and I look at the history of those brands in our marketplace, I don't see mass defections by any stretch of that, and I know that these particular manufacturers, when the production capacity comes up to full bore again, they will do what it is that they need to do to gain any share back and they will do that whether it is through incentives or whether it is through other types of promotions. But, I don't see this as being a long-term issue for those brands at all.

Okay.

Then second question, you highlighted weather as a pressure on parts and services business in the first quarter. I was just wondering if you think you saw any other pressure either in the new or used business from weather in the first quarter, similar to what you highlighted on parts and service?

John there was a little bit. We had some pretty ugly stuff go through, of all places, Texas. As you know, right around the Super Bowl we lost five full days in all of our stores in Texas, just as an example, so there was some effect on the new and used car side. We saw the -- in our business you can make up sales with a good weekend. It's tough to make up parts and services business when you just totally lost the days.

Got you.

Then just on the gross margins in the gross profit per vehicle retail on the new side and the used side, there was an absolute decline of about $300 on new and about $140 on used. Is that the kind of number that we should expect to reverse as we see these shortages in vehicles going forward and demand continues to recover? And do you think you can get both those numbers back above $2,000?

Hey, John, it's Craig. I'll start.

We -- late in the quarter we're already beginning to see improvement in margins. The greatest margin pressure that we felt in the quarter was in the January and then spreading into February, but that has began to turn already. I think our view, especially with the disruptions we are seeing in Japan, is that we should continue to see improvement in margin as we move forward.

Okay, great. Thank you very much guys.

Thank you.

Our next question we will hear from Rick Nelson with Stephens Inc.

Thank you. Good morning.

Hey, Rick.

Just to follow up on that, Craig or Michael, can you talk about the margins and used cars as you source more vehicles at auction with what you are saying there?

Rick, as you know, there's a frenzy going on in the marketplace at the auctions today so that there are prices that are going up. Our view is that margins can be maintained within reason. We think the limiting factor on that will be more the lender advances, how fast the lenders adapt to the pricing changes at the auctions. So, I think near term, we will be able to maintain those margins.

Past near-term, it's always difficult to guess what the prices we will have to pay, but as I'd mentioned in a number of our calls in the past, is that in particular on the used car side, that margin -- that difference between what they will lend and what we are paying for, we just have to go back to the old days of requiring more down payment, and we have been saying that for the last number of years anyway as the lenders have gone through cycles of how they have done the advances. So, I think, again, round-about answer, I think short-term, we should be able to maintain those margins.

As we build our models for the foregone gross profit from the Japanese cars, what sort of gross per unit should we be looking at for that segment?

Rick, it's Craig.

I would say you can say you can look at our average grosses and maybe back them off a little bit, but you've got to remember that the impact that we are going to see is not just the Toyota, Honda, Nissan. We're going to feel it in the luxury, the Japanese luxury lines, as well. So, there will be some high margin vehicles that we are also short on inventory with.

Okay, thank you.

We are hearing about Toyota allocations basically grinding to a halt. Not caring so much about Nissan, if you could reduce up to date on what is happening with them as an OEM in terms of product allocation?

Rick, this is Michael.

As far as Nissan goes, we don't like to talk about individual brands a whole lot, but I will tell you that Nissan product levels with us is the best of the Japanese brands, and we have not seen the type of news that you're talking about from Nissan to date with the exception of Infinity, of course. But, yes to confirm what you are saying that the most dramatic amongst the brands has been Toyota. Honda is similar, but Nissan has not been as dramatic in their production at least what we are saying that they are saying through the end of June.

Okay. Thanks a lot.

If I could also get the customer paying warranty numbers for service and parts, that would be helpful.

Rick, we will get back to you on that one.

Next, we will move to Scott Stember with Sidoti & Co.

Good morning.

Good morning.

Could you guys touch on your ability to possibly cross sell between bands? In the event you can't get a Toyota product to somebody, do you the ability at a nearby location to possibly move somebody into a different branch?

Yes. This is Michael. We do.

We always like to keep a customer, of course, in the first place they show up, but through our website and through some ancillary products that we have within our websites, we can show customers, of course, different products. We have -- a number of our markets, as you know, are tightly clustered dealerships, Atlanta, Greensboro, Jacksonville, so we can -- not only can we do it electronically, we'll have the ability to do that physically as well. So, we do have that ability. It's one of the advantages, of course, to having a variety of brands and having the concentration dealerships that we have in certain of our markets.

All right.

Moving over to parts and services, it appears that the customer pay was pretty much flat in the quarter. I assume that was because of weather.

Yes. I'm sorry, go ahead.

Can you just talk about how later in the quarter, how that performed then heading into April?

Yes, we had actually -- in the month of January, we had a decline, and then February was a essentially flat and a very nice increase in March. What we saw was -- again, we didn't have the weather issues in March.

April is April. I will just go onto say that April business has not been affected by weather to date.

Okay, then last question, can you touch base on the DMS conversion? How far along you are right now and when we could expect that again to be finished?

Scott, this is Craig.

The DMS, we are about 45% complete as of today. We have slowed that down just a little bit. We are now feeling that will be substantially complete by the end of the year. Our Kona conversions are taking a little longer than our R&R conversions.

Got you.

That's all I have. Thank you.

(Operator Instructions)

Next we will move to Rod Lache with Deutsche Bank.

Good morning, everyone.

Hey, Rod.

I was hoping you could just take a step back and just talk a little bit about the new margins in a little bit more detail. I think you guys have commented before that there's some adjustments that dealers have to make in dealing with a more competitive landscape, maybe in the import side, but it is -- it did market a new low for the margins in the new business and maybe you can focus a little bit on the luxury business, where it looked like the earnings were flattish, maybe down a little bit on pretty strong sales. What actually is happening there and aside from just the inventories tightening, which obviously is going to happen and should be positive for margins going forward, what are you guys changing within your process to give yourselves a lift there?

Rod, this is Michael. I will start off and Craig may follow up on it.

There's a couple of things just to add some color to that. There's a couple of things happening in the luxury part of the business. One, is that in certain of our brands that the life cycle of the product is run out almost completely. Some of our brands have a much older product that is out there, so I think in any environment as those models get aged, you see a little pressure on the margin.

In additional to that, we are not saying the incentives, and we've touched on that in the past that we had seen in the past, so I think that is part of it. The other part is the scramble for market share. It's very intense coming out of the recession, and as you know, gaining market share can be very expensive, so that the process that all of us are going through, dealers and manufacturers as well, was trying to make sure that we get that market share as the economy warms up a little bit. So, all of those together have put a little bit of pressure on the pricing of those.

As you noted, with the inventories becoming a little tighter, we think that margin will grow a little bit. We're also beginning to see some newer products in some of our brands that will start to hit the showrooms later this spring and into the summer and early fall, and again, I think that normal cycle with new product helps our new car margins. So, those are the manufacturing or the product pieces.

The sales process, we continually to work on that to get the margin, and we balance that with making sure that we don't lose market share. If we can continue to grow the volume, which we have done, there are a lot of other pieces to the dealership business that will allow us to keep a customer for life, and that's our long-term view. And, we may be willing to sacrifice a little bit of margin to get a customer for life.

Yes. I think the only thing that I would add to what Michael has said is that we can't forget that with the economy where it is, even though it is improving, we're looking at fairly high unemployment numbers, housing values are still under pressure, and if anything, moving down rather than up, so we do, to a very large extent, see much more of a price conscious or need based buyer as opposed to the buyer who is -- who feels that the car has reached 2 or 3 years of age and now has to be replaced. One of the things that will help us in that regard going forward is we continue to see signs of improvement within the economy; that, combined with everything else that Michael has mentioned, should lead to improvement in margins.

Also just related to that, you mentioned the pull back on incentives. I guess the near-term interplay on what happens to margins would probably be more driven by just the inventories out there, but once we get back to normal -- we are already seeing a pretty significant pull back on incentives into April from some of the automakers. But, I am just wondering, once inventories come back to normal, if incentives take another step down, is that something that you feel you can adjust for or is that something that puts additional pressure on you guys?

Rod, this is Michael.

I think I will answer that by saying I think in the case of the J3 and perhaps even the J6 that as their production becomes normalized I think we will see a time period in which there will be incentives on those products, whether they are some vetted leases or financed rates. I don't know yet, but I think you'll see that they will go back to get their market back. So, I think short-term, we will see incentives on those brands.

Again, as we've mentioned in the past as long as the supply and production stays fairly well in tune with the demand, we won't see incentives like we used to. We are adjusting to that in our sales process. I just think that we have gone through this market grab piece. That will become more normalized, and we will see the margins go in an upward direction.

Okay.

And then just a last question, on the outlook for used, it's good to hear the confidence in the sustainability of the used margins. I'm wondering whether you can just comment on the outlook for volume? It seems like there's an opportunity to actually ramp-up on the used car side as long as the supply is available. Is that supply something that would constrain you at this point or do you think you can actually take advantage of additional volume growth? And, then in the intermediate term, beyond sort of these near-term dislocations, what are your thoughts on the outlook for used margins?

Rod, this is Michael.

Again, I mentioned with Rick earlier, I think as long as the banks can stay in step with the pricing, I think the margins -- we can hold those margins. The more challenging question, and it is a very good question, is on the availability. There is a finite amount of used cars out there. I don't know what that number is.

I do know that there is a frenzy right now at auctions. We are there all the time and we were very sophisticated buying system, a very sophisticated set of individuals that buy both at auctions. They also then move inventory around, and we are exploring other ways to acquire inventory that is not traditional, so I think near term we will be able to fuel the demand for the used cars. We will continue to evaluate it long-term, but I think that as you have seen with us and with a number of groups as well as other dealers, the used car business is still very hot; it is growing, and we will just try to continue to feed the demand for it.

Thanks for that.

Just to clarify, what would you defined as a nontraditional source of used vehicles?

Without giving away, and I don't want to sound silly on this, but without giving away some of our business stuff, I will just tell you that there are a approximately 44 million used cars roughly sold in the United States each year, but only about one-third of those are controlled by franchised dealers so that two-thirds of that number is controlled through other channels, and we are exploring many of those other channels to acquire those vehicles.

Okay, great. Thank you.

Okay. Thanks, Rod.

And there are no further questions. At this time, I would like to turn the call back over to the speakers for any additional or closing remarks.

Okay, well, we appreciate your time with us this morning. We feel like we are making good progress; we still have things to do. We -- the Japanese crisis is clearly going to create some challenges for us, but we feel like we are in great shape, and we will work our way through it. We thank you for your time today.

And that will conclude today's call. We thank you for your participation.