ALLETE Inc (ALE) 2003 Q1 法說會逐字稿

Please standby we are about to begin. Good day and welcome everyone to the Allete First Quarter 2003 Earnings Results Conference Call. Today's call is being recorded. Your line will be muted for the presentation. Then we will conduct a question and answer period. At that time, you can press the star or asterisk key followed by the digit 1 to signal you have a question. This conference may contain forward-looking statements within the meaning of Federal Securities Laws including statements concerning business strategies and our intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the earnings release distributed this morning reflect management's best judgment at this time, but all such statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed and/or applied by the statement therein. Additional information concerning potential factors that could affect future financial results is included in the Company's annual report and from time to time in the Company's filings with SEC. At this time, I would like to introduce the Chairman, President, and Chief Executive Officer, Mr. David G. Gartzke. Please go ahead sir.

Thank you. Good morning everyone. With me again is Jim Vizanko, our Chief Financial Officer. Today we are pleased to report our earnings per share for the first quarter of 54 cents compared to 44 cents for the same period last year. More importantly, continuing operations contributed 47 cents compared to 42 cents last year. Jim will give you the details for the quarter and I will make some additional comments before we take your questions. Jim?

Good morning. Energy services had a 34% increase in net income over the last year. This year we saw higher wholesale prices, power prices due to higher gas prices, and more normal weather than last year's mild winter. We also had more megawatts to sell this year because of the additions we made last year to our non-regulated generation portfolio. Our retail kilo hour sales were up 5% over last year as well. Vehicles sold at a debt of wholesale auctions were about the same as last year and the conversion rate was down about 3%. Bad weather affected sales and expenses in some of our sites. In spite of this, automotive services net income was up 7% from the same period last year. Lower interest rates combined with reduction in working capital borrowings resulted in lower interest expense. Bad debt expense at AFC declined due to the improving credit quality of it accounts receivable portfolio. We also were able to implement modest fee increases and had efficiency gains in our ADESA auction sites. Vehicles sold at ADESA Impact were up about 9% over the same period last year. Some of this increase is attributable to our March 2002 acquisition of Sadisco East in North Carolina. The receivable balance at the automotive finance corporation was up about 4% while the number of vehicles financed declined by about 2%. The change in the receivable balance reflected in increase in the average price of the vehicle finance.

Net income from investments and corporate charges were virtually unchanged in total. Our real estate operations increased its contribution over last year first quarter. On the other hand, last year we had earnings from the securities portfolio that has since been liquidated. Discontinued operations included the operating results from our water services businesses, which were down slightly from last year. This quarter also included a couple of large one-time items. First was the $9.8m after-tax gain from the condemnation sale of the water system in Amelia Island, Florida. This was partially offset by $7.4m of after-tax expenses related to our efforts to sell our water services businesses. Last year, we recorded $2.3m of charges as we exited a couple of non-strategic businesses. Dave.

Thanks Jim. We are continuing the analysis of our lacking the value of our company. If we ultimately reach a decision to separate these businesses, we will inform the market at the appropriate time through a filing with the Securities Exchange Commission and not before. We will also inform investors through an SEC filing in or press release if we decide not to separate, but until such time we have no comment on any specifics of the evaluation process or the timing of any announcements. As it also relates to unlocking value, we are continuing to explore ways to sell our water services assets. A couple of weeks ago, Florida Water representatives met with governmental leaders of the communities in Florida where about two-thirds of the Florida water assets are located. The local governments at this meeting discussed acquiring these assets. If we proceed with this course, our plan is to offer the remaining third of the assets to other interested local governments and anything that is not sold in this manner will be offered for sale to a private buyer. We will update you if and when any transactions occur, but again until then we have no further comment.

With regards to our salvage auction business ADESA Impact, we have opened two new facilities this year, a green [inaudible] was opened in Long Island market and a combination site was opened at ADESA, New Jersey. This summer we also plan to open several facilities in California, which is the largest regional salvage market in the United States. Approximately 20% of the salvage cars are sold in that market. This would give us presence in four of the five largest salvage markets in the U.S., with the Texas market remaining.

Related to performance, at the beginning of the year, I stated an expectation and added net-income from energy services in 2003 may decline slightly from 2002. In automotive, net income would grow by approximately 15%. We continue to be very, very comfortable with these expectations. Energy Services is off to a good start this year and we are looking forward the summer months when the wholesale prices and the demand as well will normally or typically increase. We still anticipate cars sold at the ADESA auctions to increase by 4-7% over last year. Much of automotive services growth is expected to occur in the second half of this year. For those comments, I will now -- Jim and I will now be happy to answer any of your questions.

Question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the "*" key followed by the digit "1" on your touch tone telephone. If you are using a speaker phone please make sure that the mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we will take as many questions as time permits. Once again, ladies and gentlemen that’s "*" "1" on your touchtone telephone to ask the question. We will take our first question from David Schanzer from Janney Montgomery Scott.

Yes, good morning everybody.

Good morning.

Couple of questions about the conversion ratio, you mentioned in your comments that the conversion ratio was down about 3% quarter-to-quarter, could you give us the actual numbers and also could you give us an idea of where the conversion ratio has been recently, sort of like mid to late April?

As far as with the actual numbers, the quarter ended last year was 65.6 and quarter ended this year at 62.4.

Okay.

And also those numbers are relatively high what we expect over the entire year, the normal rate is 60%. If you remember last year, there were a lot of cars sold from inventory from September 11 of the prior year to which the 65.6 was a very high relative conversion rate.

I suspect that’s true also the first quarter this year, even though it was a little lower? You get the cars leftover from the fourth quarter last year?

Yeah.

Yeah. And what was it most recently -- what was the number like, conversion ratio system line?

It continues to run above 60%.

Okay. Could you also give us any color about how many days -- I don’t know what measures you use, but how many days you lost in the quarter, auction days you lost in the quarter or what kind of impairment you had because of weather?

Specifically, David, I can’t answer the question but I know at the time that we had some snow storms, I did call in the week that they had those troubles, difficulties, and they said that they lost a couple of sale days in three or four major markets.

Okay.

And it’s not only sale days, somewhere is obviously higher cost of snow removal and higher expenses, even if you have a sale. And sometimes you have a sale and there are less dealers, so our conversion rates change even if we never lost a day.

It will be interesting then how will be able to measure that. And then lastly, if you could also tell us a little bit more about AFC and how it performed during the quarter. You indicated that cars finance were down just a tad.

The vehicles finance was -- went from last year 237,000 for the quarter to 233,000, so around 4,000. The receivable balance was up slightly because the average car financed is up in value. The statistics are very good as far as quality portfolio and their statistics are so good that the bad debt expense was lower, which generated higher income for us this quarter versus last year.

You have to keep in mind, David that the AFC business is generally with independent dealers. The auction business is dependent upon independent franchise dealers and then of course on the supply side, a lot of other sources like manufacturers of commercial accounts that triple into that. But we have seen its totally driven by the turnover of the independent dealers, and the independent dealer, more than anyone else, are effected by the turnover of the lower value cars and any gridlock that may occur due to people just not going to the market to buy cars at all. And that did effect our auction a little bit, but certainly with AFC, it slows things down tremendously when the turns drop down like it did.

But you are generally I think convinced that your estimates as far as AFC’s growth for the year are still in place.

Yes we are.

Yes.

Great, thank a lot guys.

Once again ladies and gentlemen to ask a question, press “*” “1” on your touchtone telephone. We will go to Matthew Burg (ph.), Labor Management (ph.).

Good morning gentlemen; how are you?

Just fine, sir; how are you?

I just wanted to ask I guess a question about automotive services and then a question about energy services. On automotive services, the top line number looked impressive despite the, I guess, slight increase in volume, but then the net income number was lower. Revenue was up 12% on flattish volume, and net income was lower than the revenue growth. Can you just give some specifics on how you drove the top -- the strong top line performance and why more of that didn’t flow to the bottom line?

The top line revenue piece is two things; one is there were some price increases that went into the quarter. But the larger piece is during the quarter, we had more commercial cars relative to the year before and less dealer cars. And when that mix changes, the commercial cars use other services. They use more reconditioning, they use more bodywork paint, they do more things with the car than dealers. So that drives up revenue, also obviously drives up expenses associated with doing that work.

Okay.

And that’s why it all isn’t brought to the bottom-line.

Okay.

We may have different margins for different customers, but certainly more quantity even with lower margins is very good for us with our investment being fixed on the assets.

Okay, any sense on what kind of growth you had year-over-year on the additional services? Can you talk about volume growth, price growth, can you quantify additional services growth?

Well some of those -- we don’t break out additional services that we offer and the revenue associated with that. But what drove the revenue here was not necessarily new services but just services reconditioning the things that we’ve had for many years, but that the commercial accounts use them more often than do dealers.

Okay. And then on the energy side, you seem to post pretty strong performance. And when you gave your guidance on the previous call, you had been pretty conservative about where energy services would come in this year. Based on the strong performance this quarter, I mean, is there reason to believe that there might be outside the original -- your original forecast in energy services?

It’s only been three quarters, Matthew, and I --

Three months.

Three months, I’m sorry, thanks. I was hoping it was, and I think it would be premature to speculate just on three quarters. But we’re certainly pleased with the significant improvement in the foreign markets to last year.

Okay. Is -- drivers was mostly the weather, but also some, you know…?

Gas prices too. Gas prices affect the clearing price, they cost spark spread, and the cost of the spark spread to coal relative to gas is, at least for LTV, a big component of our profitability.

Okay. Thanks a lot you guys.

Thank you.

We’ll go next to Gary Steiner with Awad Asset Management.

Yes, hi good morning. A couple of questions; maybe just as a follow-up to the -- one of the last questions. I always thought that the services that you provided on the auto side, some of the body shop work and stuff like that; I thought that that was actually higher margin than the existing business. Is that not the case?

No, I mean our best margin is the auction because all of the costs are essentially fixed. And as the car runs across the line; it’s all essentially pure profit, if it’s sold. Whereas in the reconditioning, we need to provide parts and other pieces that lower that margin.

But we do a lot of reconditioning body work, there’re certainly across too, it’s relatively expensive labor, but it’s certainly a lot less expensive for the sellers than taking it to a local body shop. So that does add a lot of value to them. But the margins -- the incremental margins of doing work in the body shop to us aren't as high as other services we provide. But again, as I made the point, even though the margins might be less, our investment is fixed. And so, the more we do of that business, I think, the more profitable we become. But you will see swings like that time to time depending upon the mix of cars that come to us.

Do you guys know what the gross margin is on some of those reconditioning services that you provide? I know a lot of the auto dealers who provide, you know, kind of service on for warranty service and stuff, and they generate mid 40s sort of gross margin.

I think the best way to handle this is -- the first answer is we don’t know specifically, and I think we should get back to you off line with that information if we can give it you.

Okay. That’ll be great.

Gary, to get the whole of it, just this call Tim, and we’ll get that for you.

Super. I was wondering in terms of used car prices continues to deteriorate, you know, in the last three to six months, you guys have managed to grow your earnings through that environment, which is terrific. I’m just wondering what the impact of the continued deterioration in used car prices is having on your business?

Well, as far as our revenues, I mean, they’re certainly not tied to prices. But on the other side, on the dealers, it certainly has an impact on dealers, and that impact on dealers does translate into some of our business. I think some of the price shocks that we’ve had in the last few years have certainly affected our business, some of the incentives. But I think a slow decline doesn’t have as big a direct impact as some of those events, but at the same time to get into dealer’s head as their inventory continues to go down in value, they sometimes and can run their business different, which could impact us. But --

I was going to add one thing that we also monitor when those events occur and they take these price adjustments and the dealers are stuck with a lot of inventory, that they have to take losses on to reestablish their inventory, to move on to start to become profitable again. From time to time, it's hard for them to do that. We also monitor the inventory -- the size of the inventory that we have on our auction lots, as well. And during those times, our inventories typically build, and then we wait for them to make the decision of accepting these lower prices before they flush them, and that’s what happened to us last year.

Do you guys actually see a decline in the number of vehicles from dealers this quarter? It sound like that was --

Yes of course.

Yes. Because we had flat volume and as we have discussed, our revenue went up because we had more commercial accounts which then were offset by less dealer business.

What drove the increase on the commercial side?

Commercial side we have – we have been maintaining an increasing market share and some of those cars have increased just in volume over the quarter versus last year.

Is any of that the rental guys coming back now that the economy is slowing again and them wanting to get rid of cars?

Unfortunately I don't think so. I think it is mostly our manufacturing accounts that are giving us more of lease cars and program cars.

Okay. This is the last question. Do you have the profit from the real estate business in the quarter?

We'll see please hold on -- $2.9m, about $3m.

Do you have the number for the last year as well?

No. It is slightly up from last year.

Okay, great, thanks a lot.

We'll go next to George Rebus (ph.) with Andrew Gordon (ph.).

Good morning, guys. In the energy services, is it possible to get a sense for what drove the increase in that income and particularly, how much was weather, how much was pricing, how much was volume, and at the same time how much was the trading operation that I think you guys still have, or any sense for that?

I can tell you that you know, now James may give you some specifics, but you have to keep in mind that we had LTV or Taconite Harbor available for the quarter and we did not have access to that asset at all last year. So when you look at the kilowatt-hours sold in our release, I believe, in the non-reg side being significantly up from last year, most of that is kilowatt-hours capacity and energy coming off of Taconite going into the market that we didn't have last year and I think we have mentioned because it burns coal that the dispatching cost is around $6 a Megawatt hour into markets that today are maybe on a on peak basis north of 40, last year they were north of 20. So we have a quantity opportunity that will run all the time anyway at that low dispatching price telling into the market that twice is good. Now as it relates to the weather component, certainly the weather had an impact on the amount of power that was demanded in the market. But it also has an affect if you are not prepared for it with the laws of supply and demand that drive prices up to which were unable to really quantify and sold out.

To put the kilowatt-hours sold in perspective, in the first quarter last year was about 84m kilowatt hours sold on the non-regulated side. This year was 419. So the volume increase as David mentioned and Taconite Harbor being up for the entire quarter was certainly a large piece of that -- largest piece.

You still have the trading operation?

The power trading, sure.

Yes.

Yes. And I remember correctly that had a very good yield last year as well as -- well at least first quarter, as well as in 2000, so how is that doing currently?

Very well, I mean, we don't break out that but number but that we continue to operate that and it continues to perform well. And with the same logic I think as Taconite Harbor is that prices are higher and we make larger margins.

Okay. I guess I am just wondering, because if you look at 2000, you also earned about 12m but that was without LTV and Taconite so what is the difference there now, is it lower trading or what am I missing?

I am not certain I understand your question, maybe I am missing something in the question.

Get back to the year 2000 comparison in the literature.

You didn't have LTV back then, so you went back a couple of years.  

Well, couple of years ago the market, the sparks spread situation was significantly greater than it is today. I think there were fewer competitors as well and there were more opportunities. It is a much more competitive market now then it was then because of many more sophisticated players.  

And you guys didn’t list an EBITDA number for automotive, what is your EBITDA number?  

We will do that in the Q new accounting regulations.

Oh, I see.

They don’t prevent us from doing it but if we show an EBITDA, we need to reconcile it to net income. So, instead of doing all that reconciliation in the 2-page release, we will be doing it in the Q.

Thank you.  

And I want to correct my real estate. The real estate operation is closer to $4m and not 3.  

Alan Trainee (ph.) from Camper Beach Capital (ph.).  

Hi thank you. Can I -- is this what you are talking about, is that dependent on your sale of the water business?  

No it is not.  

Not dependent. And any -- can you may be update us as to what stage you are and your evaluation of splitting the company?  

I am sorry, we are unable to make any comments with respect to any activity timing wise or anything at this time.  

In your last conference call, you talked about July. Is there any reason that it would be later than that?  

I am sorry again, I hate to do this to you, but we are just not in the position to comment on anything at this time.  

Mr. Gartzke we are standing by with no further questions. I would like to turn the conference back over to you for any additional or closing comments.  

Thank you and thanks again everyone for listening in this morning. My closing comments are maybe a bit redundant from our comments that we made earlier this morning; just want to make some points. We do expect the operating performance in 2003 to be good, and I say that in light of the current economic environment. I know we have talked about how resisted, resilient we believe our business is to the economy, but I think you would [have to admit] in this environment that we are having this extreme environment depending upon the market share, and I guess perhaps, but most markets -- if you have any exposure to the retail market or disposable income spending, you are going to be affected by, then I think that we performed quite well in those environments. And I really look forward to hopefully return to normalcy this summer. We have discussed the separation proposition to our unlocked value and while this is important, I want you to know what is also important to us is the continued performance of our businesses, we believe that relates to value. For energy to me, the value driver for that business is having low cost power. Certainly to dispatch into the wholesale markets as we have explained this morning and how important that is as well, but it also is incredibly important to all of our retail customers but in particular our large industrial customers as it relates to their economic viability, and that is our strength and we continue to focus on it, we are very proud of it. We purchased the low cost asset of LTV this last year, and I think that is going to position us extremely well for this year. For automotive, service is the key to its success. It is a value driver, and I feel very good about its competitive position. We have great facilities, wonderful locations, and probably most important experienced employees who are very good at what they do. In conclusion, we look forward to a recovery in the economy this summer and to the end of the war for many obvious reasons. Thanks again for listening to us, and I am sure that we will be talking to most of you soon in the next 3 months.  

This does conclude today’s conference. We thank you for your participation. You may now disconnect.