Asbury Automotive Group Inc (ABG) 2011 Q2 法說會逐字稿

Good day and welcome to the Asbury Automotive Group second quarter 2011 earnings call. (Operator Instructions). At this time I would like to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thanks Beth, and good afternoon to everybody. Welcome to Asbury Automotive Group's second quarter 2011 earnings call. Today's call is being recorded and will be available for replay later today.

The press release detailing Asbury Automotive's second quarter results issued earlier this morning is posted on our website at asburyauto .com. Participating with us today are Craig Monaghan, our President and CEO, Michael Kearney, our Executive Vice President and COO, and Scott J. Krenz, our Senior Vice President and CFO.

At the conclusion of our remarks we will open up the call for questions and I will be available later for 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 of the risks that may cause actual results to differ please see our filings with the SEC from time to time including our Form 10K for the year ended December, 2010, any subsequently filed quarterly reports from Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements although we do enjoy reading them.

It is my pleasure to hand the call off to Craig.

Thanks, Ryan. Good morning, everyone and thank you for joining us today. We are pleased to announce second quarter adjusted EPS from continuing operations of $0.51 per diluted share, a 28% increase compared to $0.40 for the same period last year. Our excellent operating performance reflects the quality and commitment of our people as well as the benefits of the business improvements and processes that we are putting in place as we successfully execute our strategic initiatives.

On the management front I would like to welcome Scott Krenz, our new CFO, to the Asbury team. We are extremely pleased to have a person of Scott's caliber and experience on board. Now, Scott will provide more detail on the numbers and Michael will follow will comments on our operational performance. Scott?

Thank you, Craig. I can't tell you how excited I am it to have joined the Asbury team. In the four weeks I have been here I have to tell you I've been so impressed by the team's strength and their focus on the customer.

Our second quarter results of $0.51 were adjusted for after tax executive separation costs of $1.7 million, or $0.05 per diluted share, as well as an after tax charge for a lease termination and property impairment of $900,000 or $0.03 per diluted share. Before these adjustments, reported EPS was $0.43. There were no adjustments in the prior period.

We continued to make great progress in strengthening our balance sheet and investing capital thoughtfully. Since the first quarter, we have acquired $13 million of previously leased properties, repurchased $9 million of our convertible notes, and repurchased $13 million of Asbury common stock.

We anticipate allocating capital in a balanced, prudent manner between investing in our business, strengthening our balance sheet, returning capital to our shareholders, and acquisitions which have a compelling value proposition.

Year-to-date we have spent $11 million on CapEx, and are on track to spend a total of $35 million, which we targeted for the year. This excludes lease buyouts and real estate investments. We have achieved our target leverage ratio of 3.5 times and are now focused on leveraging our ratio further to 3.0 times.

In addition to reducing our debt levels we are also evaluating additional lease buyout opportunities. Last week, the board increased our share repurchase authorization by $35 million and we now have $45 million of capacity remaining under existing authorizations. We are not actively pursuing any acquisitions at this time as we focus on strengthening our balance sheet, building out our infrastructure and integrating our Greenville stores.

Despite our capital deployment activity over the quarter our liquidity remains healthy. We ended the quarter with total liquidity of $282 million, which includes $153 million under our revolving credit lines, $23 million in cash and $106 million available in our floor plan offset accounts.

Finally, our DMS conversions are going very well. We are now two thirds of the way done and expect to be substantially completed by the end of the year. I will now hand the call over to Michael to discuss our operational highlights.

Thank you, Scott. I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same store retail performance. Our new vehicle gross profit increased 12% compared to the prior year as we were able to offset weaker unit volume sales of negative 1% with dramatically improved new vehicle margins. Our new vehicle margins for the quarter were 7.2%, a 70 basis points improvement over the prior period.

We do not anticipate any further improvements in our new vehicle margins and it may be difficult to maintain margins at these levels given our current inventory composition and limited factory incentives.

Our Japanese dealerships are experiencing the impact of the Japanese supply shortages, as our new vehicle inventory was $349 million at the end of June. In comparison, we ended March with $430 million in new vehicle inventory. I will provide more color on Japan and the potential impact on our third quarter operating performance in a moment.

Used vehicle sales continue to be a strength for us. We increased used unit sales 18% over the second quarter last year while maintaining margins of 10.5%. Our used to new ratio of 81% is the highest level ever achieved. We ended the second quarter with $96 million of used vehicle inventory or 38 days' supply on a trailing 30 day basis.

Our F&I business continues to be another strength for us as the execution of our F&I sales processes and training is generating record results for Asbury. Second quarter F&I revenues grew 16% compared to the prior period. F&I per vehicle retail for the quarter was $1,112, up $97 year-over-year. In addition to excellent F&I process execution, we continue to benefit from sufficient availability of credit to consumers, consistent advance rates and expansion of product sales.

In the second quarter our parts and service revenues increased 2% and gross profit grew 4% compared to the second quarter of 2010. Parts and service gross margin for the quarter was 55.5%, up 120 basis points compared to the prior year. The year-over-year gross profit improvement was driven primarily by the 24% increase in internal prep work.

I would like to take a moment to address the impact that the tragedy in Japan is currently having on our operations. We are encouraged by the speed and efficiency with which our Japanese manufacturing partners are restoring production capacity and we admire their dedication. We started to feel the impact of the inventory shortages in June and anticipate that our affected inventories will bottom out in July or August. At the end of July, we are forecasting our J 6 inventory levels to be around $123 million, approximately 52% below where we were in March. We believe our third quarter earnings could be adversely impacted in the range of $0.05 to $0.10 per diluted share as a result of disruptions in the market. Our results will depend on, amongst other things, the SAAR, when production reaches normalized levels, and when we are able to receive a more favorable mix of product at our dealerships. We believe this will be a short-term issue and expect much healthier inventory levels heading into the fourth quarter.

Finally, I want to extend my appreciation to all of our associates in the field. You are doing an outstanding job. Your ability to adapt to the constantly changing environment within our industry never ceases to impress and amaze me. I can't thank you enough.

With that I will hand the call back to Craig to conclude our prepared remarks. Craig?

Thanks, Michael. I cannot reiterate enough the resilience of the dealer model and tactical agility of the Asbury team. I'm pleased with the performance of our stores. We have been able to deliver excellent results while managing through the Japanese supply constraints and investing in our infrastructure improvements. We believe our operational leverage will improve as we continue to strengthen our Company. We are executing on our plan of allocating capital in a balanced opportunistic manner to strengthen the balance sheet and position our Company for future growth. So far this year, we have invested close to $75 million on debt reduction, lease buyouts, CapEx and share repurchases.

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

(Operator Instructions). Our first question come from Rick Nelson with Steven. Go ahead, please.

Thank you and good afternoon and congratulations.

Thank you, Rick.

I would like to ask you about the inventory position individually for the J3 where you stand. Have we reached the apex yet with any of the OEMs like Toyota for example?

Rick, this is Michael. Yes, I can read them off to you. We have a table that we attached to the press release but essentially we have -- I think we have reached the bottom with Nissan Infiniti, I think we have reached the bottom with Toyota and Lexus. I would say that we are still working with Honda, as are many dealers. We anticipate that the bottom with Honda should be in the month of August.

And gross margin lift we saw this quarter, that was confined to the Japanese nameplates?

No, Rick, this is Michael again. No, we actually saw margin increase across the board. We saw some substantial increases, of course, in the J6 brands. We did, however, see some margin increase in BMW. We saw some margin increase in our Chevrolet stores and we saw some margin increase in our Korean brands.

As the inventory levels have begun to improve at Toyota, for example, have you been able to retain those grosses? And what is your expectation I guess as we move into a better inventory position on the gross margin line?

Rick, it's Michael again. To date we have been able to maintain margins, as I mentioned in the script. I think that all of us will experience a little pressure on margin as production ramps up, as the consumers come back to the showrooms at a faster pace and in larger numbers. I wouldn't -- I can't venture a guess to what that impact will be but we do expect some pressure on those margins as we head into the second half of the third quarter and into the fourth quarter.

Rick, this is Craig. I would just jump in and say while there may be pressure on that front obviously, as production comes online we expect the Japanese manufacturers to go after the share that they've lost, we expect to see significant improvement in incentives, much more aggressive advertising campaigns. So, I think as we sit here right now we are somewhat challenged in the third quarter but we are looking forward to a very healthy fourth quarter.

I would like to ask you about the DMS. If you can talk about the cost of that, that might go away next year as you get it fully implemented. And when do you think we start to see benefits from the new system?

Rick, we are probably spending some where around $2 million this year getting these DMS's rolled out. That is $2 million of, I would call it rollout costs, that we do not expect to repeat themselves next year. There may be a little bit in the first quarter but certainly nothing beyond that. And then I think we will probably look to drive incremental benefits over the course of the next one to two years as we strive to reach the productivity levels that some of our peers have been able to achieve that have the benefits of common systems throughout their platform. And if I could quanti -- I will try to quantify that for you. We look at some of our peers and we see SG&A margins excluding rent that are 200 basis points better than us. And that is our objective. We think we should be able to achieve those types of improvements as well.

What type of timeline, Craig, do you have to achieving?

I would say that is a one to two year initiative.

Great. Thanks a lot. And good luck.

Thank you.

Our next question comes from Rob Lache with Deutsche Bank.

Hi guys, it's Dan Galves in for Rod. And yes, I want to say congratulations, a great quarter under really tough circumstances. So I had a couple of questions on the different parts of the business. I must say I'm surprised you are ending the quarter with higher used inventory than you began with and were able to kind of maintain the margins despite what we expected to be higher acquisition prices during the quarter. Can you just talk about kind of the buying environment for used and how you were able to get a hold of so many used vehicles during the quarter?

Dan, this is Michael. We did have a little bit higher than we started out with. That was a plan. We knew that we would experience some J6 shortages throughout the second quarter and into the beginning of the third quarter.

As you noted, our average retail selling price quarter over quarter was essentially flat. Our margins were essentially flat. So we did have a discipline as to what we were paying for cars. To answer your question directly, we initiated a program two years ago called the Asbury One to One program which greatly enhanced our processes where we take trades in. We have not had to source as many vehicles at the auction as we used to and we have had the ability internally to move product around from one dealer to another so that we have been able to, again, take an inventory where it was a little bit higher in one place and move it to another place and not have to go to the auctions and buy them. But I think the single biggest factor is that we have just enhanced the processes and we have become much more aggressive on pricing trade ins as opposed to passing on those or having to go to the auction to buy the cars.

Okay. Thanks for that. On the new side, clearly production levels for the Japanese from have increased but it seems to -- seems like it is going to be tough for them to not only replace what they are selling but also to grow the inventories. What kind of visibility do you have on actually getting growth in the inventories instead of just stabilizing them?

Hey Dan, it's Craig. I will hop in here. I think one thing that we have done with this release, and we have included a table here in the back of the release where we have detailed where our J6 inventories stand, where we are estimating that they will stand at the end of July versus the end of March. I'll try to give you a little more color on that. But if you take a look at that chart, and then Michael will jump in here behind me, and I think it gets back to your question about used vehicle inventory as well.

If you take a look at that chart you will see that our Honda inventories are down 75% from where we were at the end of March. On the other hand, our Nissan inventories are only down 22% and the others are essentially in between. Clearly we feel some pressure. We've got some shortages out on these lots and those are the things that we are working through as we get through the third quarter. We can feel that production coming. There is no such thing as J6. Every manufacturer is different. But that is what we are punching through here in the third quarter. We think by the time we get back to the fourth we will actually be in very, very good shape.

Yes, Dan, this is Michael. To answer another part of the question the way I think also is that the January Japanese, of course, their production will ramp up and it will take a while to catch up to what the production used to be but as an industry we can sell if we need to and have to out of a much shorter inventory. So as the cars come in we have the ability to react, move very quickly, process them to the consumer and meet the consumers' demands. I think as the production approaches, or the supply levels approach what it was at the beginning of the second quarter we will be able to fill substantially all of the consumers' needs for that and then that gives us the ability to -- gives the manufacturers the ability to fill our inventories throughout the balance of the fourth quarter of this year.

We have been hearing that at least one Japanese assembler is essentially trying to get people to get customers to come in and order vehicles for when production gets better and maybe for fourth quarter delivery and allowing them to take advantage of the incentives that are out there right now. I guess what I'm getting at is do -- are you guys seeing a lot of activity in terms of orders that could turn into deliveries in let say the fourth quarter. And if you are, if those programs are going on is that something you are getting a lot of traction in?

Dan, this is Michael again. We don't --I will answer the question in reverse. We don't have any visibility to the specifics of what we think will be the very aggressive incentive programs that the manufacturers will put on in the fourth quarter. We are seeing more customers coming in and expressing a desire to order a car or to put themselves on one of our internal lists where we would call them when we know we have fixed production dates. I don't have the numbers in front of me but I will tell you we are seeing more of that kind of activity and we would all assume that those vehicles and those sales would be covered by any incentives that the manufacturer would put out there in the future.

Okay, so they are not covered by incentives right now, I mean you are not closing deals now for delivery later in the year?

No, we would only take an order for a specific car but that is not a sale, that is strictly an order of a vehicle and it would be subject to any and all incentives at the time of delivery of that vehicle.

Okay. Got you. And just a couple more, if I could. Your comments about aggressive incentives by the Japanese, I'm just wondering if you are hearing that from them or I just -- in our opinion with the yen as strong as it is, with the fact that they are probably facing a lot of pent up demand of people that have delayed purchases and the fact that inventories are going to remain pretty tight I don't really see any reason for them to get aggressive on incentives. Are you hearing that from them?

Well, I can tell you what we know and then again I would think the balance of that comes from a logical extension of the thought process. Toyota has a few incentives out there right now that are fairly aggressive, some 0% financing incentives already. We know that the 25th anniversary of the Camry, which is the new 2012 Camry, comes out this fall. We expect that Toyota will want to recapture the number one badge of honor so we fully expect that they will have some sort of incentive on that. So I can't sit here and tell you that we have any inside information or knowledge but based on our years of experience and knowing that they want to regain any lost market share we believe very strongly that there will be a pretty serious round of incentives and once one of the major manufacturers puts an incentive out the other ones pretty much have to follow.

Okay, and then just real quickly on parts and service. Warranty was up this quarter. I think it is comping against the recalls from last year. That is pretty impressive. Are you seeing anything that would be kind of a trend long-term that warranty could at least flatten or turn positive going forward? And then on the customer pay business, we have noticed that miles driven has been down the last few months. Are you seeing any weakening in that business?

I will answer the -- in reverse, the warranty piece. We are seeing fairly consistent warranty business. We are overcoming some comps from the Toyota and the Lexus recalls last year but as I have noted a couple of times in the past, Dan, there is always a recall so it is somewhat difficult to predict the warranty business. Although I think that a number of quarters ago the rate at which the warranty business was dropping probably flattened out and we have all as an industry recovered with that. But again it is hard to predict what recalls will be out there so we don't really get into that.

As far as the customer pay business it was a little bit soft one month within the quarter. We have seen -- sometimes you see the reaction to a gas price increase, sometimes you see reaction to just general political or economic news that is out there. But, for the most part nothing dramatic. We have seen steady, albeit small, but steady increases in that business and we continue to expect much larger increases as we go forward.

Okay, thanks a lot for the time. I appreciate it.

Yes.

(Operator Instructions). Our next question comes from John Murphy with Bank of America. Go ahead, please.

Good afternoon, guys. Just a follow-up on the questions on the inventory being light at Honda and Toyota right now. Just wondering as you are looking at those consumers are they really just delaying the purchases or is there any transfer over into used cars that you are able to execute or into other brands or is really just the consumer hitting pause and you think you will come back sometime when the inventory is back..

John, it's Michael. That is a good question. We see a little bit of consumer movement from one brand to another, not a huge amount at least in our portfolio. We see again a little bit of movement from a new car buyer to a used car buyer primarily in those instances where we had a need buyer show up at a store, they had to have another vehicle through either an accident or too many miles or their lease expired and we couldn't fulfill their needs. We could put them in a very late model low mileage certified pre owned. But we are also seeing a fair amount of the consumers who are saying we'll come back and we'll wait. We would like to see what product is available and again we have trained the consumers very well, they know that there will probably be incentive, so they wait for some of those. So we are seeing a fair amount of wait and see business and we believe that there is an increasing amount of s pent-up demand in J6 sales.

And you also commented on the idea that there might be increased incentives based on your experience. But if there is this perceived shortage by the consumer that the cars aren't around and they have to wait and it's uncertain exactly when they are going to come. Trying to understand, maybe the manufacturers come out with incentives, but can you get better grosses on those vehicles because there's this perceived shortage by the consumer, or do you really do think there is just going to be sort of this natural fade of the gross margin as we go into the fourth quarter?

As Craig noted, John, I think we could anticipate some, as you called it, natural fade but I think also short-term those can be offset by incentives. And I view it this way, as we build those inventories, we think that demand will allow us to maintain adequate margins with a larger amount of volume and a much bigger increase than what we have seen, of course, for the last three months. So, as I stated in the script, I don't see a growth in our new car margin, perhaps a little bit of pressure on it, but I think that between the demand from the consumer and what we anticipate to be incentives out there we should be able to maintain within reason what we have been doing for the last quarter.

Okay. Then on SG&A at 75.1% of gross, I mean that was a very good performance in what was a very tough environment. I think it is the best number you guys have put up in more than ten years. As we look at what happened in the quarter, obviously you have this structural move to common DMS but I would imagine you also cut some costs at the Japanese -- or the Honda and Toyota stores during the quarter. As we look at this, is this sort of a natural travel run rate that we should think you might be able to improve off going forward? Or was there anything sort of unique in the quarter that really put up, that really drove this very good performance?

John, it's Craig. Go back to what I mentioned earlier and that is we are very much in investment mode. If you just -- I think we are unique among the publicly traded automotive retailers in that it wasn't all that long ago that we were essentially a holding company running six stand-alone platforms. So we are still very much behind the eight ball and working to combine those stand-alone operations into a single enterprise.

So it is a major undertaking to convert a store's DMS. It is essentially like -- somebody else converting to SAP. And it is a tremendous amount of distraction across the store. It touches everyone in the store whether you are in new, used, parts and service or obviously our accounting shops. And that's what we're going through. So there is an economic cost, I mentioned earlier of somewhere around $2 million that we are incurring. There is also a tremendous distraction with our people. We've got people in stores essentially every other weekend doing some form of a conversion. And that's what we're working our way through. So I think we look at this SG&A ratios that we have been able to achieve now as just a step along the way. We think there is a lot more productivity to be driven by bringing these technologies to bear. First we've got to get the common systems in place. Once those are in place we can work on things like shared services and we see incremental benefits down the road. So no, I don't consider this run rate, I just consider this a milestone on the path to better performance in the future.

And then just lastly on the lease buyouts, and I know this has been part of your plan along the way, but it just sounded like you might be a little more aggressive on those lease buyouts. Are there better opportunities on cap rates or are you getting properties at -- is there a better financial incentive right now just given what is going on with commercial real estate or is this just part of the plan as well?

I think we are finding that landlords have properties that they have enjoyed above market rates on as the real estate market has corrected. And when we knock on their door, they are willing to talk. In some instances what we have done is we have done is we have actually lined up contracts to move and that has given us the leverage to be able to go back to a landlord and get an attractive buyout. We have done a number of those. We think there are potentially more to come in the future.

And then the other thing I would add that I think is very important is we had set a leverage ratio of 3.5 times, we have achieved that and as Scott mentioned earlier today, we are now targeting a leverage of 3.0 times. And that excludes these leases. So we want to go after debt, we want to get debt paid down. We want to pay off leases. And the other thing that we are very happy with is that the board has given us this authorization to buy back stock and we will pursue all of those opportunities on an opportunistic basis where we think we can get the best returns.

Great. And then just lastly the parts and service gross margin. That was pretty strong in the quarter. Was that just a function of mix or what -- was that, I mean the benefit of any efforts specifically that you are making there?

It is mostly mix, John. We -- as we continue to grow our used car business we do increasingly more -- a larger amount of reconditioning internal work on those. It is also then to a lesser degree a result of some of the projects we started a number of years ago which is expanding the products that we sell, a lot more tire business, a lot more front end type of work, paneless -- dentless paint repair and that type of work.

Okay. Great. Thank you very much.

You bet.

Thank you. At this time there are no further questions in queue. I would like to turn it back to Craig Monaghan for any closing remarks.

Great. Thank you very much and we appreciate your time today. Like I mentioned earlier we are very excited about the quarter and the progress that we are making and look forward to talking to you again at the end of the third quarter.

This concludes today's conference call. You may disconnect at any time. Thank you for joining us, and enjoy the rest of your day.