Asbury Automotive Group Inc (ABG) 2012 Q2 法說會逐字稿

Welcome to the ABG second quarter 2012 earnings call. (Operator Instructions). At this time, I would-like to turn the call over to the Treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Thank you, April, and good morning to everybody. Welcome to Asbury Automotive Group second quarter 2012 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's second 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 Scott Krenz, our Senior Vice President, 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 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 that 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 2011, any subsequently filed quarterly reports on form 10-Q, and our earnings release that we issued earlier today. WE expressly disclaim any responsibility to update Forward-looking statements. With all that said, It is my pleasure now to hand the call over to our CEO, Craig Monaghan.

Good morning everyone, and thank you for joining us. We are pleased to report all-time record results from continuing operations for the quarter. Our EPS from continuing operations increased 38% for the quarter to $0.69 per diluted share from an adjusted $0.50 per diluted share in the prior year period.

We achieved these results through solid operational performance and disciplined expense control. Scott will provide more detail on our financials and Mike will provide an overview of our operating results, but I would like to provide a few highlights from the quarter. Revenues improved 11%.

We continue to improve our cost structure reducing SG&A as a percent of gross profit by 250 basis points after adjusting for our lease termination charge in the prior year period. Operating leverage resulted in a flow through of 74% of our incremental gross to profit. With our adjusted leverage at 2.3 times, we believe we have one of the strongest balance sheets among the publicly trade automotive retailers. Now Scott will provide more detail.

Thank you, Craig. We again had a clean quarter from an accounting standpoint. Our second quarter results of$0.69 includeno adjustments for non-core items.

We continue to demonstrate discipline with our cost structure. Our SG&A to gross profit ratio was 72.4% for the quarter. A 300 basis improvement compared to the prior year period when looking at the face of our financials. However, after taking into consideration a rent related adjustment, we called out in the second quarter of 2011, the year-over-year improvement works out to be 250 basis points.

Our SG&A to gross profit ration improved 380 basis points compared to our 2011 year-end ratio of 76.2%. We believe this reflects meaningful improvements in our cost structure. These improvements are a result of changes we have made in processes as well as investments we have made in systems and technology. We are also benefiting from our operating leverage in the increased sales environment.

We will continue to work very hard on reducing our costs and enhancing our operating leverage. We also benefited from a lower rent burden. Our rent adjust -- on a rent adjusted basis, SG&A to gross profit ratio with 67.9%. The majority of the improvement is a result of productivity related to personnel.

During the quarter, we spent approximately $16 million prepaying mortgages that mature in 2013. As a result, further debt reductions and growing EBITDA, we ended the quarter with a total debt to adjusted EBITDA ratio of 2.3 times. During the quarter, we plan on retiring the $15 million of converts we have maturing with cash flow from operations.

We will continue to evaluate our leverage and anticipate a liquidity requirements as we position our Company for potential future opportunities. During the second quarter, we spent approximately $9 million repurchasing 3,025,000 shares under our continuing share purchase program. At the end of the quarter, we had $38 million remaining under our board authorization.

As capital expenditures, in the second quarter we spent $11 million bringing our year-to-date total to $19 million of the $60 million we budgeted for 2012. Our CAPEX numbers exclude lease buyouts and real estate investments. So in addition to CAPEX, we spent $4.7 million to buy out a lease during the second quarter.

We continue to target opportunities to purchase properties we are currently leasing. We could close on several additional lease buyouts over the next several months. We ended the quarter with total liquidity of $242 million. This includes $215 million available under our undrawn committed revolving credit lines, $9 million in cash, and $18 million available in floor plan offset accounts. We continue to execute a balanced capital allocation strategy which centers on investing in our operations, the value acquisition growth opportunities, and supporting an ongoing share for purchase program. I will now hand the call over to Michael to discuss our operating 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 revenues increased 16% compared to the same period in the prior year. Our new vehicle margin for this quarter were at 6.5% down 70 basis points compared to the same period in the prior year.

As you will recall, in last year's second quarter, we did an excellent job holding margin on new vehicles as we faced eminent shortages in the J-6 supply. As inventory levels have recovered, we have seen our margins return to the 2010 levels. We ended the quarter with 63-day supply on a trailing 30-day basis. We continue to grow our used car businessincreasing used-unit sales 6% over the second quarter of last year.

Although margin slipped 140 basis points to 9.1%, we did see the benefit of the increased volume at out F&I and parts and service business segments. The margin pressure on used is attributed in part to comps against the strong prior year period as well as increased availability of a competitively priced new vehicles this quarter.

Additionally, in a number of our brands, we are seeing aggressive incentive offerings that are pushing the transaction price on a new model very close to that of a late model preowned vehicle. Our used to new unit sales ratio was 72% for the second quarter, and we ended this quarter with approximately $100 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 our stores broke all time Company records for both F&I revenues and per vehicle retail. Second quarter F&I revenues grew 21% compared to the same period in the prior year. F&I for vehicle retail for the quarter was $1,200, up 8% year-over- year. In addition to excellent F&I process execution and our continuous improvement training program, we continue to enhance our regional finance team management.

As part of this process, we are creating a more effective customer facing experience while increasing productivity. We continue to be the beneficiaries of the much improved lending environment, higher advance rate, consistent application of lender requirements, and aggressive lease terms. Our parts and server operations also produced an all-time second quarter gross profit record for the Company.

While the revenues were basically flat gross profit grew 4% compared to the second quarter of 2011. Parts and service gross margin for the quarter was 58.3%, up 240 basis points compared to the same period in the prior year. The year over year gross profit improvement driven primarily by the 22% increase in reconditioning work, and 3% in customer pay, more then offset the decrease and the gross profit from warranty work down 13% over the prior period.

We are experiencing a reduction of the higher recall volumes we saw this time last year as well as lower units and operation resulting from the drop in new vehicle sales over the last three years. Our national tire initiative continues to provide us with additional parts and service revenue and greater opportunity to retain both current and previous customers. Our tire sales grew 38% versus the same period last year. We are encouraged by the strength of vehicle sales through the first half of this year, considering the sales volume we have seen through the first half of the year as well as the activity we are seeing so far in July, we believe that the current sales pace has the potential to continue through the end of the year, resulting in a full year of SAAR in the low to mid $14 million range. There are several important factors that support our outlook, particularly the availability of consumer credit at attractive rates, the cadence of new products coming from all our manufacturing partners during the year, and the increased availability of fuel efficient and redesigned vehicles

Finally, I want to extend my appreciation and thanks to all of our associates in the field. Your collective efforts are reflected in these results. With that I will hand the call back to Craig to conclude our prepared remarks. Craig?

Thanks, Michael. We continue to build a stronger Company with the flexibility to capitalize on market opportunities. We are well positioned to grown shareholder value by investing in our business, pursuing acquisitions, and returning capital to our shareholders through an ongoing share repurchase program. These record results were achieved through the hard work, dedication, and commitment to innovation of the entire Asbury team. And what we characterize as a moderately-healthy SAAR environment,we are delivering record operating results.

We look forward to continuing progress as the economy recovers over the long-term. I would now like to turn the call back to the operator, and we would be happy to take your questions.

(Operator Instructions). We will first hear from Rick Nelson of Stephens.

Thank you and good morning.

Good morning, Rick.

Morning, Rick.

Ask you about the new car sales with your heavy to pan exposure I thought we might see a little bit more growth there. Was there anything holding you back from an inventory standpoint? I did notice Lexus came into the quarter with very tight supply and came out of the quarter also --

Rick, this is Michael. I will answer, That is a good question. If we take a look at the overall picture, we performed with the market. In some of our brands we had a little bit of inventory constraint. We have had some hold back in that. We also have, because of our mix, I think that our particular brand mix, we performed well, but we had some not as much of a drop this time last year, and quite honestly, we had a couple of opportunities that we have identified on the volume side, and we are addressing those as we speak.

And to margin pressures, Michael, that we saw subsequently in year over year on the new car side. I realize that is a function in part of inventory's normalizing and mixing away from luxury. Is it getting more difficult to sell that incremental unit? Commentary on demand would be helpful.

Rick, yes, let me answer in two pieces. A little bit of makeshift affected the margin to a certain extent. I think we will see in the second half of this year a little bit of change in our makeshift that will affect that positively. Not that we are seeing resistance from the buyer. we are seeing a lot of competition out there.

I think there's a substantial amount of marketing new car sales as the new products are hitting the streets, the availability that we dis not have last year, and the products themselves, the more fuel efficient vehicles, the very attractive lease and finance rates. There is a lot of competition. We are seeing customers we have not seen for a while. All the dealers in the marketplace want to put that individual in a new car, and that continues to add on the pressure on the margin side.

And when do you expect the current level, 6.5 on a new car, gets just over $2,000 a unit. Would you think you can maintain that or do you think further pressures are coming?

Rick, we can maintain that. I feel comfortable with that margin level.

Okay. Thanks. Also I would like to ask you about the geographic strength and weakness and especially what might be happening in Florida.

I will answer that in a couple pieces. Geography-wise, Florida very strong for us as well as Texas. Those two markets attributed very, very strong results for us.

I will tell you also that in terms of brand mix, our local markets had quite a difference in a number of brands, quite a different growth pattern then other parts of the country. Some of our brands had national increases and our local markets were down, in fact. It is an unusual situation, but one that we are working through. So it is one of those situations where we have to see it as time goes on. To answer your direct question, Florida and Texas markets were very strong.

Thanks. Good luck.

Thanks, Rick.

Next we will hear from John Murphy, Bank of America, Merrill Lynch.

Good morning, guys.

Good morning, John.

I just wanted to follow up on Rick's question about these new vehicle margins, but in particular sort of the pricing and the incentive activity. It seems curious the strength in used vehicle pricing is not translating into better new vehicle pricing. It seems that new price something coming down to meet used vehicle pricing is where the pressure point is. Is that a function of some of the activity that is going on at Toyota or Honda, or are you seeing more of this activity at your luxury brands as opposed to just Toyota and Honda?

John, this is Michael. That is a good question. I mentioned it, maybe one, maybe two earnings calls ago, that as the transaction price, the true transaction price of new vehicles approaches used transaction prices, you will see either pressure on volume or pressure on margin.

As dealers we opt to sell the vehicle. So we will accept the pressure on the margin. In a number of the mid-line imports, we are seeing a substantial number of model changeovers that will happen as we speak and in this month of July, August, and September. There is a very strong push to move those models out a little different than manufacturers have done in the past.

As opposed to what we used to call model carryover allowance there are now stair-step incentives, cumulative bonus incentives, and when you take that and apply it to the vehicle along with very attractive manufacturer finance rates, the payment on a monthly basis for a late model used car approaches that of a new car and therein lies the pressure that we are seeing on the margin. A very good question, but it is not as broad based as you might think. A lot of it has to do with model changeover vehicles.

So it seems to me that at this point that you are getting consumers that are potentially coming in as late model used vehicle buyers then are tripping into buying new vehicles. Are you able to make that transfer as people walk in your showrooms?

John, that is very good observation. That is correct. We are seeing of that then we have seen in the past. We see it reflected in our sequential price increase of our used cars. Essentially the flat revenue on a per retail unit on the new retail car side. If you think of it from a consumer mindset, number one, some of the newer product that is coming out there, but even the models that are changing over, the fuel efficiency and the warranty to go with that, we are seeing some people that we are not able to switch from a late model certified into a brand new vehicle.

And then just on the SG&A at 72.4% you guys are getting really low in the spectrum of where you have been historically. As we think about that going into the rest of this year and 2013 and 2014, is there a lot of incremental gains to be made on the other efforts that you are putting forth to this point? Should we expect another 200 or 300 basis points over we go over the next couple years? What innings are we in in this realization of the benefits as a common-dealer managemernt systems and all your other initiatives?

I love the fellow baseball fanatic here. What inning are we in? I am not sure. Let me tell you what our thinking is.

One, a lot of what has happened and what you see, reflects vigilance on control, discipline as we have said here. It is not that we have cut things although we have cut things, but we have managed to produce a lot more output from the costs we got. So you see that in total SG&A is up only $2 million year-over-year in the quarter, but gross is up significantly more than that about $10 million. Therein lies the real magic here.

We continue to be vigilant, and we continue to look through things, and I won't tell you that there are not other areas that we can improve on. I will steal a saying from my collegue here, Michael that there is always a bottom third. There is always places we can improve, and we continue to look at that. But the real thing is to make sure it is as leveragable as possible. Looking forward through the year,second quarter was obviously a very strong quarter on a percentage basis.

Can we maintain that? It is probably as we look at the normal seasonality and sales and stuff difficult to perhaps improve upon that. There is probably a little more bias for it to relative to EBITDA or gross margin to get a little weaker, but we would still expect the full year to come in as a meaningful and significant improvement of what we saw at year end 2011.

Okay. And then just lastly, as we think about parts and service gross margin spiked up to 58.3. It is intriguing because you had the sale of a lot more tires which are typically lower margin, but then you had pretty good recon of 22%. Is that real improvement a function of mix or other efforts that you are making in your service lines?

John, this is Michael. I think there is a lot of factors that are involved here. We are selling some more tires. They are lower margins but ... the tire business was not put in place to sell tires, It was put in place to retain customers.

We are selling other services. When the customer purchases tires, statistics, national statistic is for every dollar of tire sales you get $1.50 in other sales and typically those are high margin maintenance type. We are seeing some of that. We are also seeing a little bit of shift in the type of work that we are doing, whereas for a number of years people were postponing a lot of work, high-dollar work.

We are seeing a little bit of that come back into the shop, and we continue to see the growth in our internal work. That is reflected in the higher margin. We will see a little bit of time lag for the tire initiative to really play in, but it is a long term initiative to bring customers back into dealerships.

But this 58% gross margin, is that be an aberration? Yoiu guys have been running in the mid 50s. I am just trying to understand if this incremental sort of structure of 300 basis points is something that sticks going forward?

I think we will stay right around that number.

Okay. That is fantastic. Thanks very much.

Thanks, John.

Next we will hear from Rod Lache of Deutsche bank.

Good morning. It is Dan Galves in for Rod. How are you doing?

Good morning, Dan.

I wanted to see if you could talk a little bit about how store traffic trended through the quarter? Did you see any changes through the quarter in new or used? And then looking forward, we have been kind of in this king of low to mid-$14 million range. What do you think it would take to move the SAAR up from that level? What type of economic environment do we need to continue to grow sales?

Hey, Dan, it is Craig. Maybe I can start with the second part of the question, and we will go back to Michael to talk about store traffic. I just put it into perspective. I think we look at the first six months of this year, all but one month, SAAR has been above $14 million. And that we, as we sit here today, that is the way things continue to feel in the store.

Our view like Michael mentioned on the call, we think things continue at that level. More broadly speaking, we feel like we are in a slow but an ongoing economic recovery. There are times when it is choppy.

He can have a good weekend and a bad weekend or a strong good month and a softer month, but generally speaking, we feel like we are heading in the right direction. It is interesting to us that this seems to be a recovery that is lead by the automotive industry not the housing industry. We have some concerns about the fiscal cliff. We know the election is going to be disruptive.

I will tell you, we will basically be out of the advertising business as we get closer to the election because we cannot make a dent when there is that type of political volume in the marketplace. What does it really take to get this moving and back to a $16 million SAAR, where we see it? is gonna take continued improvement in consumer confidence, the housing markets are going to have to coming back. We have to admit there are factors outside of this country that also impact our business. The situation in Europe needs to stabilize. As the world economy continues to make progress, we will enjoy that progress.

in the meantime, we feel that we are running a marathon. There are only so many things that we can control. What we will do is exactly what you saw in this quarter is we will work to continue to build a stronger company. I go back to what Scott said earlier. We demonstrated this period is that we are able to do more with the same level of resources and that is what led to this -- what we believe is a very healthy flow through, and we will continue to do the same no matter what the macro economy throws at us.

Dan, this is Michael. On your traffic question. Going back a little bit. The end of March was very strong, of course. April usually, and this was reflected as soft in the first couple of weeks and then much stronger towards the end. We saw a substantial up tick in traffic the last part of May. Not as strong through the first part of June.

But a very strong influx of customers both new and used, Internet traffic was up a lot at the end of June, and as I mentioned in the script, we see very favorable continuation of that into July. It is the summer selling season. July and August are typically in the industry very strong months, and we would anticipate that this traffic would continue. There is a lot of new product that is becoming available. We still see a little bit of tightness in the inventory on the used car side, but we take most of our cars from trades. So, it has been consistent, as the way I would describe it, and we expect it to stay that way the hot summer selling season.

Okay. Thanks for the color on that. Just one other question. Hoping you could give us some more color on the reconditioning and prep segment of parts. Is that purely a volume driven, driven by new and used volume growth? And could you give us a sense of kind of how -- my recollection is that it flows through at 100% gross margin into parts, and I want to confirm that. How do you see if volumes do flatten out, once we get tougher comps, and that settlement segment of parts, flattens out, do you see that impacting your growth margin in parts and service overall?

Dan, this is Michael again. That is a correct assumption on the accounting piece. We continually look at doing more certified business in our dealerships. Which will then be reflected in higher internal work as we spend more money on the cars. As we continue to grow our one to one program, it is not grown at the pace that it did at the beginning -- we never expected it would continue that -- but as we continue to reach to the 100% level, we will continue to grow that internal parts and service business as we just get more and more cars available. Near term, I think we will continue to see - - I do not know what kind of double digit growth, but we will continue to see strong growth in the arena as long as we push our used car program.

Is there any of that business driven by new volumes or is it pretty small?

It is fairly small.

There is not a substantial piece of what we used to call PD or new car re-con work. The vast majority of it is driven on the preowned side.

Thanks a lot. Nice quarter.

Thanks, Dan.

Next we will hear from Greg [ Palm] Craig-Halum Capital Group.

Hey guys. This is Greg. On for Steve Dyer. Good morning, guys.

Good morning, Greg.

Most of your questions have been answered. Just one quick here on the parts and services. We were sort of modeling a slight increase in parts and services revenue on a year-over-year basis. It came in flat. Any additional color there? How should we think about that going forward?

This is Scott, and then Michael can add to it. When you look at it, warranty work as we talked about on just about every call I have been on was down fairly significantly. Lots of things in that. It is somewhat unpredictable because of trying to predict recalls, but also the vehicles themselves are better. The decline in warranty really offset a healthy increase in customer pay. Customer pay represents about 60% of the business we do.

And on a revenue side, those two just about offset which is what led to the flat revenue. More importantly, if you look at the gross though, that is where you see the real -- at the end of the day, it is not how much you sell the top line, it is how much you get to the bottom line here, and we had a good healthy 3% improvement in the gross in parts and services in the quarter which is a result of this change in mix. Again, focus on customer pay, good growth in customer pay, and the fall off to offset at the revenue line, but the fall off in warranty work. Michael anything to add?

I think Scott answered that right on spot. The only thing, Greg, we mentioned a number of times over the different calls that predicting recalls is just about impossible. We are some facing pretty high comps. This time last year. We are in the middle of a couple them right now inthis quarter for some of our brands. So it is hard for us to tell what it is going to be. So we just deal with it as it shows up.

All right. Thanks, very much guys.

Next we will hear from James Albertine of Stifel Nicolaus.

Great. Thanks for taking my question, and good morning. I wanted to focus on the F&I per unit at $1,200, just slightly north of $1,200. Tremendous results certainly. I guess the first part of that I want to focus on is, number one, are there any drivers in particular that are more or less impact and as it relates to brand versus market specific commentary that you can provide that might be helpful. And separately, the obvious question, is given where we are now, and this is well above sort of where you would run historically, some sense of where you think thatnumber can go over time?

James, this is Michael. What is pushing the number. As I mentioned in the script, a lot is our educational program. On the monetary side of it, product sales and penetration forced the number up. As you get better and better at selling product, which provides real value to the consumer, that drive up the per retail basis. There is not any real geography split. Across all of our geographiesthe numbers are about the same. A little bit different mix.

As you might expect, some brand as little bit different then others. Some of that has to do with the financeable value o the vehicle, Some of it has to do with whether there is maintenance involved with the vehicle and whether you can sell maintenance to that or not. So I would say that there is a little difference by brand not by geography. To your point on how do you grow it from where it is, I mentioned it a couple of times. If you focus on the bottom one-third, we will in fact drive that number up as long as the banking environment stays where it is today. We have more room to grow on that. I do not want to put a number out there, but we have room to grow, and we will focus on the bottom third, and we will continue to see the improvement on that.

Very helpful. I appreciate the detail. Sort of as a follow up. I am trying to glean another degree of insight on the current consumer, right? So we have talked about now ad nauseam the slow persistent growth, but still, it is a struggling, and sometimes a choppier environment than typical. As the economy recovers, do you get a sense that more people are financing today as the economy recovers won't be, or there's any sort of anomaly shift to the positive that is helping to drive the F&I per unit higher?

So, James, I think throughout -- if you exclude 2008 and part of 2009, I think that the statistic is essentially 91%, 92% of all car purchases are financed in some way or another. Whether it is indirect lending, direct lending, leasing, or through a consumer credit union. So with the exception of any part of 2009, we are seeing a return. The biggest impact is not necessarily the amount of consumers financing as a percent of retail sales. It is a function of products available to protect the consumer, mechanical extend warrant and prepaid maintenance are bargains, they are convenience for the consumer. They are utilized, gap insurance is another product. It is very effective for the protection of the consumer. And as we continue to educate the consumer and create awareness for that more of those products are sold, and that does create an enhancement on the PBR line.

Very helpful. If I could just sneak one more in. Any update on the capital allocation priorities and that is it thanks, so much.

Yes, James, it is Craig. I will jump in on that one. Basically if you look at the quarter, we are continuing on the same path that we have been. We have paid down debt. We buyback leases. When we do that, we can get certainly high single-digits into the double-digit returns. We are investing in our stores.

We have a fairly heavy capital expenditure program this year at the $60 million we have targeted. We envision that dropping down next year and continue to lower basis. With our leverage at 2.3 times, we do not feel like there is a lot more debt that needs to be paid down. We will pay off the converts as they come due, but we are actually in a very good position, and we have been buying back stock. We bought back $9 million this quarter.

You should expect to see an ongoing share repurchase program. And thehn there is acquisitions. Our philosophy here as I would like to say as we get stronger it positions us to be in place where we can go hunting. We do look for acquisitions, but we are going to be disciplined. We are only going to go after acquisitions that make good economic sense. We seem to be talking to some one or another on a constant basis. I will tell you in the last quarter, we walked away from two potential acquisition targets just as we got deeper into the analysis, it was not going to make sense. You will continue to see us be opportunistic, and we will take advantage of opportunities as they come our way, but it is great to be in a position where we have got a number of different levers we can pull with respect to redeploying our capital. Always looking for the place where we are going to get the greater shareholder return.

Very good. Thank you. Congratulations, and good luck.

Thank you, James. That about wraps it up. We do not have any more questions. I would like to once again thank you for your time, thank you for joining us today. I would like to thank all the people here at Asbury and congratulate them once again on this record quarter. For everyone who is with us on the phone, we look forward to talking with you next quarter if not beforehand. Thanks again.

That does conclude today's conference. Thank you all for your participation.