Asbury Automotive Group Inc (ABG) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the ABG Third Quarter 2011 Earnings Call. Today's conference is being recorded.

At this time, it is my pleasure to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thanks, Carla, and good morning to everybody. Welcome to Asbury Automotive Group's Third Quarter 2011 Earnings Call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's third quarter results was issued earlier this morning, and 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 Krenz our Senior Vice President and CFO. At the conclusion of our remarks, we'll open up the call for questions and I'll be available later today in my office for 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 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 10-K for the year ended December 2010 and any subsequently filed quarterly reports on Form 10-Q and our earnings release that was issued earlier this morning. 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 third quarter adjusted EPS from continuing operations of $0.44 per diluted share,a 13% increase compared to $0.39 for the same period last year.

In light of the challenges we faced in the third quarter due to Japanese-branded inventory shortages, these are impressive results. Our stores, particularly the Japanese -branded stores, demonstrated tremendous flexibility and agility over the quarter to compensate for the drop in new vehicle inventory. Additionally, we made great progress in strengthening our balance sheet and improving our technology infrastructure.

Now Scott will provide more detail on the numbers and Michael follow with comments on our operational performance. Scott?

Thank you, Craig. Our third quarter results of $0.44 were adjusted for after-tax charges, including executive separation costs, the loss on the extinguishment of our convertible notes and property impairment of $1.5 millionor $0.05 per diluted share. Before these adjustments, reported EPS was $0.39.

The strong operating performance of our stores during the third quarter allowed us to continue strengthening our balance sheet, returning capital to our shareholders. During the third quarter, we spent over $80 million investing in our Business, repurchasing our common stock.

Year-to-date we have spent $16 million on CapEx and are on track to spend a total of $28 million in 2011. Previously, we had been budgeting $35 million for CapEx in 2011. Some of our budgeted CapEx for 2011 will now occur in 2012. This CapEx number excludes lease buy-outs and real estate investments.

With respect to real estate, we purchased $16 million of real estate during the quarter in anticipation of future lease maturities. Year-to-date we have acquired $30 million of previously leased properties. We continue to evaluate other additional lease buyout opportunities.

Our DMS conversions are going very well and we continue to invest in our technology infrastructure. We are now 80% of the way done and expect to be substantially complete by the end of the year.

We repurchased $9 million of our convertible notes and prepaid $40 million of our mortgages during the quarter,which resulted in a quarter end leverage ratio of 3.2 times. We intend to continue delevering during the fourth quarter, and by the end of the year, anticipate leverage to fall below the 3.0 times target we set in the second quarter.

We remain opportunistic with share repurchases. We repurchased $14 million or 842,000 shares of our common stock during the quarter. Year-to-date we have spent $32 million repurchasing approximately 1.9 million shares or almost 6% of our outstanding shares of common stock. We currently have approximately $28 million of capacity remaining under our existing authorization. We remain focused on striking our balance sheet, building out our technology infrastructure and returning capital to our shareholders.

We ended the quarter with total liquidity of $224 million, which includes $158 million under our revolving credit lines, $8 million in cash and $59 million available in floorplan offset accounts. In October, we closed a new $900 million five year syndicated credit facility. The credit facility includes a $175 million revolver, a $100 million used vehicle floorplan line and a $625 million new vehicle floorplan line. We want to thank our banking and captive finance partners who worked closely with us on this important deal.

We believe this facility will provide us the flexibility we need to execute our strategy over the next five years, as well as providing the Company significantly improved terms and conditions compared to our previous credit facilities. Based onour quarter-end floorplan balances, we would have realized an estimated $2 million in annualized pre-tax floorplan interest expense savings under the terms of our new floor plan financing arrangements, when compared to our previous facility.

We are executing our plan of allocating capital at a balanced and economically opportunistic manner to strengthen our balance sheet, return capital to our shareholders and position our Company for future growth. Year-to-date we have invested over $155 million on debt reduction, lease buy-outs, real estate investments, CapEx and share repurchases.

I'll 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.

New vehicle gross profit increased 8% compared to the prior year, as we were able to offset weaker unit volume sales of negative 8% with dramatically improved new vehicle margins. Our new vehicle margins for the quarter were 7%, a 70 basis point improvement over the prior period. As the supply of Japanese-branded vehicles continue to improve over the fourth quarter, new vehicle margins could come under pressure, especially if factory incentives remain at current levels. In the first quarter of 2011, under pre-tsunami conditions, our average J6 inventory levels hovered around $250 million. During the third quarter, our inventory levels fell to $143 million, the lowest level of J6 inventory in the history of our Company. As a result, our J6 brand sales were down 18% on the comparable period, due to the extremely low DSI for those new vehicles. However, as of today, we see a 50% increase in our J6 inventory levels and we expect that these inventory levels will continue to grow through the first quarter of 2012.

Used vehicle sales continue to be a strength for us and provided alternate products for many of our Japanese-branded stores during the quarter. We increased used unit sales 13% over the third quarter of last year. [Argin] slipped 130 basis points to 9.4% as transaction prices increased faster than lender advance rates and as a result of our decision to reduce our supply of used vehicles through the retail channel. We have previously increased our supply of used vehicles to offset the shortage ever Japanese-branded products.

Our used-to-new sales ratio of 83% is another new record for Asbury. We ended the third quarter with $92 million of used vehicle inventory, or 35 day supply on a trailing 30 day basis.

Our F&I business continues to remain strong for us, as the execution of our F&I sales process and training is generating record results for Asbury. Third quarter F&I revenues grew 16% compared to the prior period. F&I per vehicle retail for the quarter was $1,172, up $155 year-over-year. In addition to excellent F&I process execution, we continue to benefit from an improved lending environment, consistent advance rates and the expansion of our product sales.

In the third quarter, our Parts and Service revenues were flat and gross profit grew 3% compared to the third quarter of 2010. Parts and Service gross margin for the quarter was 56.1%, up 150 basis points compared to the prior year. The year-over-year gross profit improvement was driven primarily by the 22% increase in internal prep work.

We have initiated a national tire sales program as part of our strategic plan for our fixed operations. This program is designed to retain our current customers and provide an incentive to all of our customers to return to our dealerships.

Finally, I want to extend my appreciation to all of our associates in the field, you were doing an outstanding job in a challenging retail environment. Your boundless energy and Innovation are inspiring. I can't thank you enough.

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

Thanks, Michael. Third quarter, again, demonstrated the resilience of the dealer model and the tactical agility of the Asbury team. I am extremely pleased with the performance of our stores. Wehave been able to deliver excellent results while managing through the Japanese-branded supply constraints and investing in our technology infrastructure improvements. We believe our operational leverage will improve as we strengthen our Company, both operationally and financially.

2011 has been a transformational year for Asbury and the progress we made in the third quarter is no exception. We look forward to 2012 when the investments we have been making will start to show returns. Also, we believe our brand mix positions us well for next year, as Japanese-branded supply returns to normal and the cadence of new product introduction increases.

In closing, I want to thank each of our employees for their consistent commitment to the success of our Company. I continue to be amazed at how quickly everyone is able to adapt when faced with new challenges and opportunities.

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

Thank you. (Operator Instructions).

And we'll take our first question from Rick Nelson with Stephens

Thank you. Good morning. I would like to ask about the gross profit per unit on the new cars -- how we've seen big improvements this quarter and last. I'm curious how much of that is confined to the Japan nameplates or is it broader than that? And with supplies normalizing, how much of that do you think you're going to have to give back?

Rick, this is Michael. I think there's no doubt that some of it is due to the constraints on supplies with the J6 brands. I will tell you, however, that we saw some substantial margin increases in our domestics and we saw some consistent margin with the luxury brands. So I think that it was broad-based increases. I think that, as stated in our remarks, that as we get more J6 product, I think we'll continue to see a little pressure on the margin, although our entrepreneurs in the store have seen the benefits of the margin. And I think they'll work very hard to try to maintain as much of it as they can.

And Mike, on the used car side, that's been an important sales driver. With the supplies normalizing on the new car side, how do you think that's going to affect demand for used cars and -- we're already starting to see sourcing costs come down a bit. How do you think that's going to affect margin on used cars?

Good questions, Rick. I will answer them, hopefully, in pieces for you. The first part of it is that we will see new product coming in in volume. But from a broader view, as I stated a number of times, there's $45 million to $47 million used car sales in the United States each year, of which only one-third of that is captured by the franchise dealer body. So I think there's ample opportunity for us to continue to grow our business from that very large pie.

I will also tell you that the transaction prices have come down a little bit, so we think some of that is seasonal. But some of it is due to the fact that there is not that giant demand for the late model product as there was in the spring and summer. So to that end, I think we'll see a more normalizing of the retail used car pricing, which allows the payment to be different significantly from the new car transaction payment. And I think that bodes well for us to continue to grow the used car business.

Okay. Thank you for that color. One final question on F&I per unit, very high levels. Do you think those levels are sustainable?

Absolutely. As we've stated a number of times, we started this retraining and implementation process about eight quarters ago. We will continue on it. There's always a bottom third, so I think that the margins -- the F&I PVR are absolutely maintainable.

Great. Thanks a lot and good luck.

Thank you.

Thanks, Rick.

Moving on, we'll hear from Elizabeth Lane with Bank of America/Merrill Lynch.

Good morning guys. I was hoping you could give some color on the high gross margin in Parts and Service. Some of the other dealers have been seeing margin contraction there from deterioration in mix. So I'm wondering what was different for Asbury?

And if you could just go through the mix in the quarter versus last year that would be very helpful.

Elizabeth, this is Michael. I'll take a short at the first part of that. We have done a substantial increase in our used car business throughout the last eight quarters. We do a very large amount of reconditioning work on those used cars. And the margin on that business is very high. So I think that that's what calls us -- allows us to maintain that type of margin. We are seeing, in addition to that, a fair amount of older model vehicles being brought into the service department with what I would call a non-maintainance but repair -- large repair type of work, engine work, transmission work. Which, again, has a relatively high margin to that business as opposed to the lower margin maintenance or Parts and Service business, to that effect.

And I'm sorry,I didn't get the second part of that question.

I was just wondering if you could go through the mix of the businesses in Parts and Service, in terms of what -- customer pay was up and warranty, et cetera.

Elizabeth, this is Craig. I will jump here and help Michael out with that real quick. The reconditioning of truck parts is what drove our growth, it was up 25%, warranty was down 5%, customer pay was up slightly and wholesale was down slightly.

Thank you very much. And if I could just ask one more about inventory; it looks like from the production schedules that we have seen recently that Honda might be ramping up a little more quickly than Toyota, which seems like a bit of a reverse where from what we saw a month or two ago. What are you hearing from the manufacturers about the schedule of actual deliveries to the dealerships? And what's the inventory and day supply for both of those brands?

Elizabeth, this is Michael again. We're actually seeing a pretty good ramp up, both Honda and Acura. Honda inventories are up 70% from the August levels. So we are seeing product available -- becoming available on a daily basis. Our Toyota inventories ramped up a little bit earlier. They are growing up at 17% since August but from a higher base. So I think that the Toyota inventory levels are much better than the Honda levels were, say at the end of the September. But both of those are approaching normalcy this quarter. And I expect that we'll be back where we all want to be in the first quarter of next year.

Great. Thanks very much, guys.

And now we'll open up the floor up to Scott Stember with Sidoti & Co.

Good morning.

Hi, Scott.

Could you guys talk about how you performed with some of your brands versus the national average; namely, Toyota, Honda, maybe BMW and Nissan?

Scott, this is Michael. I would say very broad-based, we held our own with Honda. We were down to, as most Honda dealers were, very low day supply. But in terms of market share, we did fine with Honda. We lost a little bit of market share with Nissan. I think some of that is geography for us. We gained a little bit of market share with Nissan. We gained some market share with BMW. And I don't think there was a significant change with any of our other brands, one way or the other, throughout the last quarter.

Talk about SUV and trucks versus a year ago?

The SUV business is a little bit different. Let me get to the truck piece first. At our domestic stores, particularly, we have had a very strong truck business. There's been a little bit of tightness of availability with the Ford product, but when it is available, it sells very well, particularly with the introduction of the V6 Turbocharged Eco Ford brand. The Toyota and Nissan truck availability has been very much constrained so we see a little softness in those. And I think that's product availability.

SUVs not the business they used to be in, but the face of the SUV has changed dramatically. It's a much smaller vehicle, of course, as you know. We are seeing where we have had product, the market share and our piece of that business is okay. Again, because of our mix in the third quarter, we're very much constrained with Acura, Honda and Toyota with the availability of that product. So it was -- we saw a drop in that for us in the third quarter.

Okay. And could you just talk about the DMS system -- with it complete now. Maybe just frame out for us what we should look for, in terms of benefits, heading into 2012?

Scott, it's Craig. We're getting very close to the finish line on that. It's not just the DMS that we've been working on. We've got all new websites out with our stores, we've got our CRM up and running, we've got integration work that is very close to completion. And I would just say we're doing all that in the face of tremendous supply disruption. So it's been somewhat of a challenging few quarters for us. But we're very happy with the progress that we've made.

We're very much, though, looking forward to next year when we're going to be able to reap some benefits from these investments. Our objective is to take out 200 basis points of SG&A over the course of the next two years. And we think we are getting very close to having the basic platforms in place so that we can do that.

Got you. And last question;you said your used-to-new ratio was 83%. What was it this time last year?

Scott, I'm doing it from memory. I know in the fourth quarter, it was in the 72%, 75% range. When we started the program eight quarters ago it was .69%.

This time last year by 70%.

70%. Okay.

Great. That's all I have. Thank you.

Hey everybody, this concludes today's discussion. So we will turn it back over to Craig Monaghan, our CEO, for final concluding remarks.

Thank you, everyone, for joining us. Like I just said, it's -- we're making tremendous progress. We're very proud of our people, what our teams in the stores have been able to accomplish in a very difficult environment. And we are very much looking forward to putting this behind us and moving forward as we get to reap some of benefits from these investments. Thank you again for your time.

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 August 3rd. You may access the replay by dialing 888-203-1112 or 719-457-0820 and entering the replay pass code 4451418 followed by the pound key.