AutoNation Inc (AN) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to AutoNation's First Quarter 2020 Earnings Call and Audio Webcast. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Robert Quartaro, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, and welcome to AutoNation's First Quarter 2020 Conference Call and Webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions. I will be available by phone following the call to address any additional questions that you may have.

Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

And now I'd like to turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning, and thank you for joining us. Today, we reported adjusted EPS from continuing operations of $0.91, down only 4% year-over-year despite significant headwinds caused by the coronavirus. I would like to thank all AutoNation associates across the country for their tremendous effort during these challenging times. Only their hard work and dedication continue to support first responders, essential workers and the communities in which we live and work. On behalf of AutoNation, I would like to say thank you to all who have put themselves on the front lines of this battle, pandemic. We are forever grateful.

The health and safety of AutoNation's customers and associates is our top priority. AutoNation stores are cleaned and sanitized multiple times a day. The company has implemented social distancing best practice within the workplace in all our associates and customer interactions and our store delivery program for customers who feel safer at home to complete their transactions.

Even with the pandemic and related shelter in place orders across the country, AutoNation delivered strong results in the quarter compared to the prior year. Same-store first quarter 2020 revenue was $4.7 billion, a decrease of only 5%. Same-store first quarter 2020 gross profit totaled $812 million, a decrease of 3%. Same-store variable gross profit was $423 million, a decrease of 5%. Same-store Customer Care gross profit was $389 million, a decrease of 1% compared to the year ago period, and customer pay, down 2%.

The automotive recovery is underway. As of May 8, states from which we derive roughly 50% of our total revenue are largely still under shelter in place or stay at home orders compared to 95% the beginning of April. In the month of April, we began to see the recovery in our sales. Same-store new and used retail unit sales were down approximately 20% in the final 10 days of April compared to down approximately 50% in the first 10 days of the month. We continue to see improvement in our largest markets: Florida, Texas and California. At the end of March, same-store retail unit sales for Florida, Texas and California were down approximately 50%, 40% and 70%, respectively. But by the end of April, retail unit sales in Florida, Texas and California were down approximately 25%, 5% and 30%.

We expect most manufacturers to resume production in May and credit is readily available and affordable for our customers. We are also seeing customers return to our service lanes. At the beginning of April, our custom repair orders were down approximately 50%. And at the end of the month, repair orders were down roughly 30%.

I'd now like to turn it over to our Chief Financial Officer, Joe Lower.

Thank you, Mike, and good morning, ladies and gentlemen. Before discussing our first quarter financial results, I would like to provide perspective on the impact COVID-19 and related actions have had on our business and financial position. In response to the dramatic sales decline during the last 2 weeks of March, in early April, we implemented a series of cost reduction and capital preservation measures in an attempt to mitigate the economic challenges we were confronting. We placed approximately 7,000 employees on unpaid leave, implemented temporary pay reductions for our executives and associates, suspended 401(k) matches and froze corporate new hiring. We also took actions to significantly reduce our advertising expenses, discretionary spending and capital expenditures through the second quarter of 2020. Our Board of Directors also temporarily waived their retainer fees. These actions were swift, severe and necessary given the uncertainty we faced. Fortunately, we have a business model that can quickly adapt to these types of business challenges, coupled with a strong balance sheet. Currently, we have in excess of $1.4 billion of liquidity, including over $750 million of cash and approximately $650 million of availability under our revolving credit facility. We also have access to other sources of capital, should it be needed. As such, we believe we have more than adequate liquidity to weather the current situation.

Turning to first quarter results. We reported adjusted EPS from continuing operations of $82 million or $0.91 per share. First quarter 2020 adjusted results exclude noncash impairment charges of $315 million after-tax or $3.49 per share associated with goodwill, franchise rights and other assets. These noncash charges were triggered by COVID-19-related impacts to the business and our market valuation at the end of the first quarter.

During the first quarter, same-store revenue decreased $238 million or 5% compared to the prior year. On a total store basis, revenue decreased $315 million or 6% and gross profit decreased $36 million or 4%. Of note, we began the year strong with combined same-store January and February revenue up 10% year-over-year before COVID-19 and related shelter in place order caused almost a 30% decline in March. SG&A as a percentage of gross profit was 73.9% for the first quarter, which represents a 50 basis point increase compared to the year ago period as disruption to our business from the coronavirus caused significant SG&A deleveraging in March following positive year-over-year trends in both January and February.

Floorplan interest expense decreased $26 million as compared to $39 million in the first quarter of 2019 due to lower interest rates and lower average floorplan balances. Nonvehicle interest expense decreased to $24 million as compared to $28 million in the first quarter of 2019, primarily due to lowered average debt balances. At the end of March, we had $2.5 billion of nonvehicle debt, an increase of $418 million compared to the end of the fourth quarter as we partially drew on our revolver and increased cash on the balance sheet as a precautionary measure given the uncertain outlook.

The provision for income tax in the quarter on an adjusted basis was an effective rate of 27%. With COVID-19 and shelter in place orders significantly impacting our operations, we halted our share repurchases before the end of the first quarter. Prior to that, we saw an attractive opportunity to acquire AutoNation stock and invested $80 million for the purchase of 2.5 million shares at an average price of $31.95. Under the current Board authorization, the company has approximately $139 million available for additional share repurchase. And as of March 31, there were approximately 87 million shares outstanding.

Our covenant leverage ratio of debt-to-EBITDA increased to 2.8x at the end of the first quarter compared to 2.2x at the end of the fourth quarter 2019. Including cash, our net leverage ratio was 2.4x at the end of Q1. Capital expenditures were $30 million compared to $40 million in the prior year, reflecting actions we started implementing in March that will continue through Q2.

We will continue to remain disciplined over costs and capital as our markets continue to reopen and business recovers. We believe our resilient business model and strong balance sheet position us to excel going forward.

I will now turn the call back over to Mike.

Thank you, Joe. While there's certainly unpredictability, especially through 2020 on the pace of the recovery, we believe the automotive recovery is underway. Customers are motivated. They told us they want personal space rather than share space when it comes to transportation. We are prepared to meet all of our customers' transportation needs in a safe and responsible way. AutoNation is focused and well positioned to perform during this auto retail recovery.

We're now delighted to take any and all questions.

(Operator Instructions) Your first question comes from Rick Nelson with Stephens.

Curious what you see happening in the used car market. Seems to be a lot of inventory out there, dealers inventory reduction mode, how you're responding to that? Are you taking early and aggressive markdowns or are you preferring to wait on the sidelines for how pricing develops?

Rick, this is Mike Jackson. Retail pricing in the used vehicle market has been very stable. I would say it's moved by 1% or 2% thus far. And what we've also seen now with the disruption to production on new, if the customer can't find what they're looking for new, they're very flexible to consider nearly new and preowned. Obviously, the wholesale market is a different story and it's very hard to judge, particularly with the auctions disrupted and with the rental car companies rightsizing their fleets, but I think a lot of that has already been done without disrupting the retail market. So the ability to acquire vehicles for inventory at a very attractive pricing is good. And retail pricing is, I would call it, stable, all things considered, and we're in a good position to manage come what may.

Great. Also, curious how you see consumer behavior changing post-COVID. I know you've made lots of digital investments. Maybe you could talk about the profitability of a digital sale versus in-store. And F&I, how you see social distancing affecting the F&I business.

So this is Mike. I think for digital, this whole disruptive period with corona is an inflection point from which there's no turning back. While there's been a strategic trend towards digital, and we certainly have invested in those capabilities, this is an accelerant from which there is no turning back. And I think the bar has now been raised for any company that wants to perform in this marketplace and you need first-class digital capability, you need a safe environment for your customers and a safe environment for your associates. That is the holy grail going forward. We see no difference in profitability between the digital channel and the traditional channel whatsoever. And as far as our performance around finance and insurance, on a PVR basis, I think we're at near-record levels. Joe, could you talk about that, please, and see no impact there.

Yes. Thanks, Mike. So we've continued to see strength in F&I start through Q1 and continuing to see it in April and continue to see it in May. So all signs are very positive on that front.

Your next question comes from Bret Jordan with Jefferies.

On the comment about digital being at an inflection point, do you see the independent used market changing dramatically? I mean, obviously, a lot of them are not as sophisticated from an online execution standpoint. Do you think we're going to have a meaningful reduction in stores?

I think that trend was already underway where the value of a brand, an experience and a warranty guarantee had all been expressed by the consumer as things that are valued, and there's been a movement towards companies like AutoNation with One Price, CarMax, Vroom, Carvana. You see it. I think that is a trend that is there. That will continue now. I think there is an acceleration toward companies that have, as I said, first-class digital capability and the scale and the ability around the brand and the ability to deliver a uniform experience. So this preowned market, which is dramatically at retail larger than the new market, somewhere approaching over somewhere between 35 million, 40 million in a normal year. I don't know what it will be this year with the disruption of corona. I think there is a consolidation into first-class digital, branded, warrantied, known entities from consumers. And I think that means those that are competing with that will lose share. And what's happened now will only accelerate it.

And I guess a macro question, I guess, given your perspective, a lot of years with cars. Do you think this pandemic is followed by a recession? And I guess do you have any outlook as far as sort of a guesstimate for SAAR for 2020?

There's no question, the United States is in a recession, that there is no -- absolutely no doubt about. The employment level in the United States is now lower than the bottom of the '08, '09 recession. We've given it back in a month, 10 years of job growth. Now having said that to as far as 2020, to give it a number on 2020, while I say the automotive recovery is underway, I think 2020 is a very unpredictable year. I think there'll still be twists and turns and bumps and surprises through 2020. So I'm not going to give a number for 2020 other than saying, if I go back a month, a little over a month ago, we were looking at, we were down 50%, and were we going to be down 90% or was it going to be something else? And today, we're only down 20%. So obviously, the drumbeat of demand for personal transportation is strong and exactly how that plays out for 2020, I can't tell you. But this is a multiyear recovery in automotive retail, retail that is underway, and I'm highly confident that 2021 will be better than 2020. That I guarantee, but I'm not willing to give you numbers on either considering the level of uncertainty and unpredictability, but directionally, I'm quite confident that an automotive retail recovery is underway.

Your next question comes from John Murphy with Bank of America.

Just a first question here, Mike. I mean inventory on the new side appears to be a little bit high given the run rate of sales that we're looking at right now. But with a lack of production, can quickly get whipsawed into being very tight or deficient in your ability to actually deliver the new vehicle demand. I'm just curious how you're navigating that and thinking about that. And maybe also sort of in conjunction, how the automakers acting in this kind of environment relative to history. It seems like they're being a little bit more collaborative and supportive, but just curious your view on that as well.

John, we're very satisfied with our inventory position. We think we're in good shape. As you know, days supply is a trailing number, where it's one of those numbers you can't look in the rearview mirror, but rather you have to look forward. And I like our position and I don't see anything that we can't manage.

When it comes to the manufacturers reopening the plants, I'm fully supportive. And you know I'm a hawk about watching floor overproduction and oversupply. But we have shortages already and I am well aware that this resumption of production will be difficult, complicated. They will introduce social distancing in all of the plants and all the supply chains. It is a massive undertaking. So I'm looking down the road 60 days from now looking at a difficult resumption of production. I think it's very good that they're starting now. And I support the reopening of the plants in the United States and elsewhere. And while it's appropriate, I would even go so far to say, I think Elon Musk has a point that he's got a plan to keep his employees safe. He wants to reopen with 30% of the employees. So even though I don't sell new Teslas, I think the plant should be reopened. So I like our position on inventory. The days supply as a rearview mirror doesn't worry me too much. If there's a bump in the road, I don't see anything we can't manage.

Okay. And maybe just a follow-up on that. GPUs were reasonably strong relative to fears. Given the backdrop you just described, I mean, do you sort of envision an environment, both on the new and used side that you can manage reasonably strong GPUs and there's not going to be any degradation and if anything, there might be some upside over time, in the near term anyway?

I like your assessment, John. I think we have a very manageable situation. So if I look at the preowned side, retail prices are stable. Wholesale prices, the way I think about it, are attractive. My cost of acquisition is going down, but the retail prices is holding. That's a very manageable situation. Now exactly how it shakes out, I can't say. I'm not going to promise higher gross profit per unit, but it's in a very manageable situation. And we see opportunity on the new side where there are shortages in terms of vehicles where we will adjust pricing upward. It's nothing as severe as we had when you had the earthquake in Japan and production was stopped then, where there was a significant pricing opportunity. I don't see it as big as that, but my whole point is it's very manageable.

And on finance and insurance, we are in an excellent position. And Joe, I think we're at record levels. Do you have the exact number?

Yes, that's right. I won't give an exact number, but it's north of $2,400.

North of $2,400? Yes. So I think -- listen, I'm not calling out an improvement, but I think we've got the downside risk in a very manageable situation.

Sure seems like it. Maybe just one last one. You shifted gears and moved away from PPP loans and/or have gone to sort of furloughing workers. I'm just curious what sort of dynamics drove that decision? I mean maybe the PPP loans were a little bit too restrictive and you got handcuffed on what you may be able to do with the business. And if we think about those furloughed workers coming back, are they coming back one for one or may you be just structurally more efficient going forward and you might not be hiring all those workers back?

Excellent question, John. So paycheck protection was launched to try to mitigate the damage from a avalanche, unprecedented history of America, avalanche of unemployment, people being put out of work. And I thought it was an enlightened and inspired, almost a European-type plan where you're looking to companies to, despite the circumstances, to sustain the same payroll as the prior year.

So PPP was launched with that in mind, protecting jobs. And for us to qualify for forgiveness, basically, the vast majority of the money had to go to employees. And we either had to bring the 7,000 back -- so companies either had to bring everybody back and give pay increases where you would make cuts, whatever. You had to go back to the same payroll you had before. Now that's not something we would have done for the business because it's not affordable. But in the spirit of looking at our furloughed associates standing in unemployment lines that are as far as the eye can see and not being able to get unemployment, we did it for our associates, and it was basically a pass-through from the government to try to stabilize the employment situation in America.

We are clearly eligible. They had suspended the small business association (sic) [Small Business Administration] rules around aggregation, and they clearly had not excluded the publicly traded companies. So it was in that sense that we went forward. Now government can change its mind as happened. I've observed that with administrations. And we woke up with new guidelines a couple of weeks later that said, basically, you can do everything we've asked. You can give all this money to the associates, but we're not so sure we're going to forgive you when it's all done.

Well, that is a nonstarter that once there was no clear path to forgiveness, we are not in a position to go down that road. And so we suspended our applications and returned whatever PPP money we've received thus far, which was, I believe, $79 million, something like that. And said, okay, we have to run the business for ourselves rationally where we've protected and ensured the company would be on the other side. And participating in PPP put that at risk with no clear path to forgiveness because I think that's very understandable.

Now as far as how I view the number of associates we have and who comes back when, here's the way I think about it. If I go back to March, early April, our sales were down 50% during that period, and we had reduced the staffing of the company by 26%, 27%, something like that, 7,000 employees. And we were prepared that it could go either way. We really didn't know. We're prepared to do more. And of course, we are always happy and delighted to manage better news. That's far easier than managing more bad news.

So at this point, business, as I said, is now running around down 20%. We've brought back 1,000 associates thus far, meaning that our staffing reduction is around the same as the business reduction. Now exactly there is no predetermined cadence or plan as to when we bring back additional employees. That is going to be absolutely almost a daily discussion. And if I look back to '08 and '09, I would observe it was, the restaffing trailed the improvement in business. That's the way you have to think about it. And what other efficiencies and effectiveness around digital is figured out or we come to grips with whether that leads back that we hire everyone when we ultimately have a full recovery in our backlog, I can't answer that today. Other than I can say, rehiring will trail the growth of the business.

Just the simple characterization there is, the PPP created undue risk on the grant turning into a loan, where the furlough just gives you a lot more flexibility to operate more on a market basis. Is that just a fair characterization? It just seems like there's a lot of risk out there with the PPP loans that people don't realize.

No. Very good point, John. So we actually had a very strong debate within the company about PPP that we were bringing back 7,000 associates that we clearly could not afford and did not need. And we really did it because of the overwhelming unemployment situation. The crisis and the drama that these associates on furlough faced, and we did it for them. And I said to the Board right from the beginning, every dollar around PPP will go to associates. We don't need it to pay rent or any other expenses. This is something we're doing for our associates. However, your point is well taken. And for the way we run a business, this is actually more straightforward and normal than the PPP route. So look, it was a decision we did for our associates when we said, yes, let's do it. And it was a very clear decision when the path to forgiveness was muddled that it was an unacceptable risk. And as far as running a business, it's more straightforward without PPP than with PPP.

Your next question comes from Rajat Gupta with JPMorgan.

Just wanted to follow up on a couple of the previous questions, starting with the online initiative. Could you give us a sense of where you are in your partnership with Vroom? How that's progressed? How that's changed during this crisis period? Like how could it look like when we are out of this? Any material changes or any changes in strategy or anything you've learned through this process that can help the company coming out of the other side? And I have a follow-up.

Yes. We admire Vroom as a company. We're very satisfied with our investment. We discuss things between the companies, whether I would say there's any strategic learnings there for either company, I can't really say other than we're satisfied with our investment. That's all I have to say today.

Got it. Got it. And no, that's helpful. And then on the SG&A side, just a follow-up to John's question. Any sense of the run rate of savings you're seeing right now on a monthly basis that you can provide just to quantify the impact just so we can model the rest of the year?

I'm very sorry. The line broke up. I did not understand the question. Did you? Joe, were you able to get that?

Monthly savings. He's basically asking about the monthly savings.

Then take it, the ball's in your court.

So obviously, it's a fluid situation and that we took a series of actions in early April reflecting a business environment that, as Mike indicated, we're already seeing recovery. But the magnitude of savings that we potentially had was in excess of $40 million a month if you look across both the store and the corporate operations. And obviously, we'll manage that in a very disciplined fashion as we go forward based upon the business recovery.

Your next question comes from Armintas Sinkevicius with Morgan Stanley.

Great. You talked about the improvement you've been seeing here into the end of April and beginning of May. Maybe you have some numbers around May, that would be helpful. And then also, where are you seeing the improvement coming, both on the sales side as well as the services side? What are people looking to -- what services are people looking to do? And is it the incentives driving the sales or is there something else?

So the sales side is improving more rapidly than the Customer Care side. I don't have an exact figure for May, but I think 20%, minus 20% is an acceptable working number, about what we saw at the end of April. The product line that's holding up the strongest is pickup trucks, only down 10%, 11%, 12%. We have a severe shortage on the General Motors Silverado because they got the double whammy of the strike and the corona. The brand is in short supply. F-150 is in reasonably good supply. You will notice that the sales in Premium Luxury are down more than the overall market, but I'm not too concerned about that. As you know, that's primarily a leasing business, 75%, 80% leasing, something like that. A significant percentage of that clientele extended their leases a month or 2 just to see where the uncertainty is going. They've all told us they're going to be back in the market.

Now on Customer Care, it's been essential services that we've been performing to really keep those who need to be out and about, keep their vehicle running. There's no question that miles driven is starting to recover as shelter in place is lifted. The consumption of gasoline is going up. And as people begin to move about, once again, we expect the recovery to get underway in Customer Care. But as of this moment, sales are only down 20%. And Joe, what would you say Customer Care is down so far in May?

In May, I'd say it's high 20s.

High 20s, high 20% if not 30%.

Okay. And then you mentioned this being an accelerant for digital. What are some concrete actions that you're taking on the digital side? I know you made the investment in Vroom, but are you deploying capital or making decisions to push the digital side because ultimately, it seems like financing is still the challenge when it comes to fully online transaction.

So our investment in Vroom, which was $50 million, is relatively minor relative to AutoNation's investment in digital over the last 3 to 5 years. We have made a significant investment in digital capability, which we're very thankful for today. And I would say the surge of activity to digital is remarkable in a very short period of time. And I don't think it's going to go backwards at all. So we continue the investment in our digital capabilities.

Now we have really found a marvelous blend between what the customer does digitally and what we do on the telephone, what we do interactionally personally or e-mail with the customers that you see our performance around F&I that we've really found the optimal line there that the customers are delighted. They love the products that they've received. I don't see sight line to the finish line as of today that we could have the same performance in a pure digital transaction. There is a lot of added value and skill that is in our associates, processes that we've developed and built over the decades that are a win-win for the company and for the customer. And I don't see where there is a -- I don't know anywhere in the industry where a pure digital solution can match what we do, but we don't need to end up there. We have found the optimal line of -- and I said this from the beginning, where you move back and forth between digital and interpersonal interaction. So I like where we are. We'll continue to invest in digital and I think we found the optimal line.

Okay. And then my last question around AutoNation USA. I'm guessing that's probably not at the forefront of your priority list at the moment, but any updated thoughts would be great.

So obviously, it was disruptive for the USA stores as anything else. So you have to say that when we pushed out capital decisions, the USA decision also got pushed out. And I would say that for the entire auto industry that if I look at the manufacturers, I think capital decisions have to be delayed until the sight lines are very clear. And so I think that's pushed out the decision point as to when we build more USA stores. And as of this moment, I wouldn't want to give you a date. The performance of the stores has been fine. I have no issues there, but it's a big decision to build more, and we're not prepared to make that at the moment and this situation has pushed out that decision.

Your next question comes from David Whiston with Morningstar.

Staying with digital, I was going to ask, do you think post-COVID people will still want to come into the store and do a test drive or are we going to move to a kind of what you already can see on Tesla's website, where you can buy online in 5 minutes. It sounds like you don't feel that's how the whole industry would move. But any more thoughts there, please, let me know. But also, does this post-COVID world accelerate the move to no haggle?

Yes, I think I said that. I think this is an inflection point that is a permanent change. That you're going to need first-class digital, the ante to be in the game for any business in any industry post COVID-19 or in the midst of COVID-19. And I don't care whether you're in the hotel business, the airline business or the auto retail business, the issue is that you need first-class digital capabilities that delights customers. And when they choose to actually interact with your business, either because you've come to their home or because they've come into a store, you absolutely must have provided them a safe environment, and you must be providing your associates a safe environment wherever they are interacting with customers, either face-to-face, digitally or online. You're going to have to provide social spacing different than what you did before, and it's a new ball game. And I don't see that changing. We've embraced it going forward and I think we're well prepared.

So with that, I'd like to thank everyone for joining us today. Thank you for all your questions. I wish each and every one of you and your families, please stay safe, stay healthy. I would say that I look forward to the reopening of America being done in a safe, responsible way and thank you for your time today.

This concludes this conference call. You may now disconnect.