AutoNation Inc (AN) 2002 Q1 法說會逐字稿

First I'd just like to go through a couple housekeeping matters. If everyone would be so kind to turn off your cell phones during the presentations, cell phones and beepers.

Also I want to remind people that they are company presentation materials are located in the south lobby. And then lastly, I'd like to make a note that there is a reception at 5:30 in the hill ton room, and like to have people join us for cocktails if they can.

Like to kind of turn over the presentation to the company. And it's my pleasure to introduce AutoNation. There's three members of the management team that I would like to introduce. First, pat McKay, a senior vice president in the finance area. Mark Boris, a vice president and treasurer. And also, with us, is John Zimmerman, a vice president in the investor relations area. With that in mind, I'll turn it over to the company.

Thanks, Dan. You all look real cozy there. Nice, tight room. Try that. Okay, John. Okay.

Let's try something else.

Looks pretty.

There we go. Oh, good. Okay.

Thanks. All right. It's real pleasure to be with you here this afternoon to talk about AutoNation. I'd like to talk about our overall business fundamentals. Mark Boris will take you through the financial position and talk about the bond transaction and then talk about our future on a go-forward basis.

Okay. The forward-looking statements disclaimer. First of all, let me share with you who we are, who AutoNation is. We're the largest automotive retailer in the country. And actually, in fact, internationally, around the world.

Today, we actually fell about 2,000 new and used vehicles every day. We service about 25,000 vehicles at all of our dealerships across the country every single day. And what that results in is in about $20 million of revenue in -- billion. A billion 8 facilitated off of the web and had customers doing research and executed transactions with us within the company.

I think fundamentally I think the thing we like about our business model is making sure diversified in terms of location, in terms of brands, and in terms of our capital structure, as well. So as a consequence, our company's been able to generate very transparent results, transparent earnings and substantial EBITDA. $636 million. Operate in the sun belt and 31,000 employees and this year one among fortune 500 list. I think one of the important things coming into 2002 is we're -- where is new vehicle sales to go? Exited 2001 recognizing that we were in a mild recession. And the question that the pun did its had, okay, what will sales do? We finished with 17 million in new vehicle sales in 2001.

What would 2002 bring? A number of the industry analysts had sales figures dropping to 17 million sales levels. We never saw it quite that low.

We thought that fundamentally there was basic economic end cease to keep it from dropping to that level. Overall, looked at 5-10% decline in new vehicle sales. Where we are today is with a probably 5% decline to first quarter results. In fact, fairly positive. And why is that.

First slide attempts to do that. Portrayal the indices. Interest rates. Look over the time horizon, interest rates at all-time lows. How does that translate to the consumer and marketplace?

If you look at the average weeks it takes to actually afford a car, see over the time horizon from 1992 '01, all-time level ins terms of vehicle affordability.

One of the other fundamentals not in place in prior economic down cycles that we felt very comfortable with in terms of helping to buoy up on the new vehicle sides is the fundamental existence, if you will, of leasing.

So, there is a natural level of consumers in the marketplace each and every year because phenomena of leasing. One of the things we don't have a slide on but a shift in terms of the consumer and their activity in the marketplace has been the proliferation of new vehicle models quite an attraction for customers coming back into the marketplace to drive the levels up. So again, as we see the year 2002, look at more of a 5% decline in overall sales opposed to 5-10 and others had it lower previously.

The other thing I think fundamentally we spent a lot of time talking to folks about is we're an automotive company. We don't want to say we're not. One of the things to differentiate ourselves is what happens when the sales on new vehicles moves up or down.

The o and e suppliers on the slide here, they have a much higher percentage of fixed costs. Ours is low and the cost is invariable.

Importantly, we have a very diversified model. New vehicles aren't selling, we have the other profit area ins a store of servicing vehicles, as well as the failed use vehicle and diversified our ability to be able to perform profitably and move within the economy.

And lastly, the fact we have few unions in the organization, the fact there's virtually 61 or 161 unionized employees across the country, 31,000, gives a lot of variability in the cost structure. See how it's translated over time in terms of performance of ourselves and the eom.

In the last 20-odd years. You can sigh the automotive retailers had a fairly flat performance in terms of the overall margin. In contrast, see the movement in terms of the eem's and profitability. In terms of a break even perspective, that's an a 10 million sales level and break even point. For us, we see it much higher -- 10 million about our break even level and about 15 million, the sales level of eem with an issue in terms of being able to be profitable at those kind of sales levels.

Let's take a little look at our opportunities within the overall marketplace. Automotive retail actually is an opportunity for a trillion dollars in the marketplace with used vehicles, parts and service and new vehicle sales. But the pie that's on the right hand side show you I don't say what AutoNation at 20 billion plus and the rest of the automotive retailers publicly traded actually represented the pie.

So 43 billion in total combined of that trillion dollar marketplace, so there's plenty of opportunity for us to continue to expand and grow into the future.

So in terms of our vision of executing with that opportunity that exists in that pie, is quite simply with the pyramid or this parthenon if you will, we look at the base foundation of doing what we do operational excellence.

Helping to make sure we're selling well to the customers in 2000 sell vehicles to every singing day. Servicing the 25,000 cars and trucks on an excellent basis day in and day out.

And then if you look at the pillars to our execution strategy, capitalizing on the experience. Making sure you as a consumer going into our stores are absolutely thrilled with the experience and we can create an environment a repeatable and referral type of a business.

Secondly, leveraging scales. Certainly at 20 million dollar -- billion dollars, we can leverage scale. Some of things in the last number of years to take a look at likes financing and leveraging the stores, making sure to provide the financing for their needs.

On top of that, looking at insurance costs. Managing and purchasing insurance on a macrobasis and benefit programs with professionals at the corporate level.

And then certainly going forward, areas not capped in and represent opportunity are national purchase contracts with vendors and beginning to scratch the surface on that.

Increased productivity an area we think is the biggest opportunity we see as a company. Because fundamentally if you look at the average ma and pa dealership, great entrepreneurs, a terrific job working with the model they have in place but what we're bringing is the best practices that we see across the country in all areas of our business. Saying to all of our dealerships, all of our management teams, the way to execute against our business model, the best practices and increase productivity, whether a number of vehicles sold by sales men or whether it's the effectiveness in terms of how we're able to service customers in the service lanes of the dealership. Another big area of opportunity is productivity.

And looking at dominant local brands. We'll go into a marketplace where we would own 10, 15, 20% of a marketplace, rebrand the market and make sure you as the consumer when you're in the market to buy a vehicle, you can't make a good decision in terms of buying a vehicle without coming to one of our dealerships. I'll show you the examples of rebranding markets in a moment.

On top of that is the information with scale as a consequence of being that $20 billion company brought to an enterprise for the large part has really not been tapped into in terms of technology over the last 20 years or so. And then on top of this, a constant customer and consumer focus.

So in the last few years, we've branded a number of markets. Some of these you may recognize. South Florida and Denver and this is our opportunity to be able to go into a marketplace, rebrand the stores, typically with local market brands with a dominant presence in the marketplaces, and again, with able to create that constant image within your mind of going to buy or service a vehicle.

And enables us to add the power of advertising behind the brands that each store is individually advertising but again, a brand concept behind all the advertising spent.

We talked about diversification earlier. One of the things, again, we feel very good about is diversified across the country in many locations. On the slide, this is where we locate the physical stores, 371 new vehicle franchises and worked arrangements with some of the major portals in terms of e-commerce business that will actually lead into our system and the leads we can't service with our own facilities, own stores and physical locations, we actually have subscribers that actually will pay for those leads to be able to leverage our scale and leverage our cost structure. So very pleased with the overall infastructure in place and the number of locations in which we operate.

So how do we look compared to the average dealership? Across the country, the average dealership has about $32 million in average sales. With a little bit over two times of that on average. We buy big stores and operate bigger stores in metropolitan areas. Even two plus times in terms of the sales, look at the average in terms of the pretax to bring to the bottom line and able to expand the bottom line position to four times opposed the two times on the top line. Getting into a little bit how the business model works, remember, we're $20 billion company, and on the left hand side, you see the distribution in terms of the where the revenue stream comes in. 60% of our revenue an actually comes from the sale of new vehicles. The average sale of a new vehicle is about 25, $26,000 from a transaction basis. So it causes that bucket to be rather large. But importantly, even though that represents a larger part of our sales, take a look at these bottom part of the slide, 34% of the revenue scan over to the right hand side actually generates 68% of our gross margin. Again, smaller per unit and much higher driver in terms of gross margin performance. So, as we looked at our opportunities in terms of expanding our business and growing our bottom line, we saw that on the new vehicle side, gross margins of 7% very slim. And with the relationship that we have with the manufacturers of all retailers have with the manufacturers, that percentage isn't going to expand.

That's going to be where it's going to be. Our opportunities for growth and margin expansion and sales really across the right hand side of the page between used, parts, collision, and service labor. We go up to a 64% gross margin percentage on service. So again, remember that we generated $3 trillion, 2.9 in gross margin. 20% of that is really what we are able to keep, if you will, or retain of gross margin at the operating income line.

And let me show you what the costs are in that blue section that are applied to get that 20% retention. And this is really how we look at the business is what is our gross margin and the starting point for measurement.

Again, this slide will show you that of the cost structure, about 100% of cost, breaks down to 54% of which is fixed and 46% is variable. You can see the components of those cost elements off to the right side of the page. Again, as sales move up and down, the costs of our business actually flux waits with that, as well. In addition to that, one of the ways that we look at our business is on the parts and service side to the extent that you are able to cover, if you will, the fixed costs so it's a win-win proposition and already at 86% so to the extent we're -- and what we're striving for is 100% correlation between those two. If you're at 100% argue bring, not needing to sell one vehicle to break even.

So with that as a backdrop, the road map to growth looking internally and looking where should we be focusing and where's the opportunities and where does our road take us to, these are the areas to get significant returns from our focus.

And one is in the parts and service area. Additionally, used vehicles. S and i and reinvestment of that cash flow. That EBITDA that I mentioned earlier. With looking at those opportunities, that we can clearly grow business on EPS basis of 10-12% basis year in and year out.

So let me take you how we see that playing out. The parts and service area, I referenced earlier we manage our business by nine districts. What we have done in the areas where we have opportunities for growth and for expansion and for best practices distribution, we focus in on piloting opportunities and piloting business practices in one or two of our marketplaces in our districts.

So, as an example, in parts and service, the left hand side of the chart shows you the focus areas that we actually have been working through and the right hand side is the results that we've experienced in 2001.

The focus areas really basic business practices, but they haven't been deployed necessarily and entrepreneurial world of the dealership in the past. Introducing tracking tools. What that means simply is we make sure to breakdown our service teams -- service teams technicians into teams. They're teammates and then the teams held accountable for the hours spent. Making sure that if they have x number of customers coming through the service lanes in a given day, they're managing that group of customers together opposed to one tech by tech by tech.

Amazing that accountability and that management or team-based approach with the results yield as a consequence of that.

We have a tremendous amount of capacity. About 4,000 technicians and 8,000 service bays. So, brick and mortar is not a problem. We have capacity to deliver expanded business to our customers across the country.

The other thing, the traditional car dealer might not have done is focus on marketing programs to consumer and just a key component of day in and day out being able to track and manage our relationship with our customers.

And lastly, also we're looking at increasing our work within fleet businesses within a market. So again, opportunity is 4-5% and revenue growth and in the results on the pilot basis, have been quite extraordinary. 6.6% growth level during the 2001.

Let's talk a moment about used vehicles. Same thing. Slide puts up the same concept. We talk about the opportunities in the focus areas. Again, basic business practices putting forth best business practices. The most important of which is inventory management. Making sure to manage to a certain day's supply. In our case, 35-37 days and making sure at 60 days, an unit in inventory not sold is moved out of the system wholesale. With doing that, keeping the inventory fresh, you're able to make sure you have the right inventory on the lot for the customers and making sure you don't have potential profit erosion in terms of the product on the lots.

We again here have focused in on making sure we have a marketing program like the parts and service area. Not just new vehicles in terms of marketing but the used vehicle side. And again, with our market penetration and dominant divisions in the markets operated in, we can create a closed auction system, if you will. So vehicles that are not otherwise destined to be retailed at one store, maybe a good product for another store and we move inventory and right-size within the marketplaces from one store to another before it's actually wholesaled to third parties in our marketplace. Our growth objectives 35%, our same store results have been impressive. Nonpilots last year actually generate same store growth of 1.1% and the pilots a 10% growth.

And last but I want to share with you today is the finance and insurance part of our business. This is really a commission-based business that operates within each one of our stores. Take as an example you go in to potentially buy a vehicle. Many times you're financing. The commission that's earned on the sale of that track is recognized in our dealerships as income and part of the -- that's the income represented on this slide here. So, one of the fundamentals that we saw is a huge opportunity for us in our business was putting in full disclosure, to the customers so you come in, can see not only do have an opportunity to finance a vehicle with you, but also, warranty products to explain and disclose to you to make a choice as to what best suits your needs. Interestingly, when you do that, the disclosure with customers in all of our experiences demonstrated is that consumers tend to buy more.

They tend to spend more fully disclosing the opportunities to them. So if we look at what our performance has been in the last couple of years, see the chart on phenomenal from 540 dollars up to $687 per vehicle retail. The focus today looking at the bottom quartile of stores. The stores not achieved those metrics and being able to continue to pull them up and we believe there's plenty of opportunities in that area, as well.

What I'd like to turn the program over to mark Boris and share with you the last year in terms of bond transaction and review the financial performance and conditions.

Thank you very much, pat. Good afternoon to everyone.

As pat indicated, at this point in the presentation, like to shift the focus from our business model and operating initiatives and review financial strategy of AutoNation, the capital structure and a little bit of historical perspective on the $450 million 9% note issued last year trading since that statement.

Auto retail sector in general is a margin-driven business. To be a successful competitor, one must be able to leverage their business model, control costs and be able to operate or enhance operating efficiencies to grow bottom line margins. The beauty of this model, even a modest increase in margins translates to significant cash flow. And through that effective deployment of the capital that AutoNation delivers long-term, sustainable growth and benefits to the stake holders.

To help ensure we're going to achieve the results that we'd like, more investment alternatives, broken down the bucket of investment alternatives to three diverse groups. What's important to note is across any of these decisions, we will achieve what we try to achieve at least a 15% return and that's paramount importance in any of our decision processes and always keep a close focus on the financial structure and implications or impact on a basis to have on the financial ratios.

Look across the three elements, the store infastructure, basically, the cap ex, running at about $150 million per year. Over the next three years, four years, our business models indicate that would decline to approximately $100 million completing the major improvements that are currently underway. Acquisitions, here we focus on either expanding to new markets or completing or filling out current markets. As pat indicated, looking at markets to 25-30% penetration and critical for us. Here we're selective to assure they fit into the model appropriately.

And finally, the purchase. We do share purchase on an opportunistic basis. In the last few quarters, purchased about $300 million and in others, over $100 million. And driven by the price of the stock and alternatives to use the capital for.

Relative to AutoNation's retail competitors and retailers in general, I think we're in a very enviable position. In general, we're a segment leader in all those groups. Strong income, tremendous cash flow.

Maintained a conservative balance sheet. That's a very significant part of our balance sheet but it's something we can convince and educate the agencies, our major bank relationships and I think significant portion of the investment community viewed differently than straight debt, and that given the unique relationship we have with the oem's and that they finance the vast majority of the floor plan with support in terms of assistance and the fourth quarter, if there's ever a blip in the market, incentives to move the inventory and that's an accounts payable. Having said that, the nonfloor debt is $465 million and equity nearing $4 billion. The results of the income and balance sheet is we have investment grade like financial ratios. Debt to capital of 14.6%. EBITDA of 19.1. Now, as you'll note in the footnotes, we have been treating, again, the floor plan as a payable and therefore, the interest part of the gross margin. Even if you were to pull that out and have the interest as below the line in the floor plan as debt, the debt to capital ratio increases to approximately 40% and still I think in line with high grade retailers and EBITDA interest ratio to 4.4 times. Still very strong overall financial ratios.

Further evidence of the position in the auto retail sector, instructive to compare on several key parameters where AutoNation stands versus its four -- excuse me, five other publicly traded competitors and do that on a combined basis. Look at the chart on a market cap basis, 4.7 billion collars and now traded on the 16th. I believe over $5 billion with the recent moves. That's an approximately 18, 20% improvement or enhancement versus the combined competitor base and without a doubt, the major player in the market. Revenues with the recent ipo for Asbury, that group has rev news and auto revenues combined about 14% but what's more telling is that on a net income basis, we continue to outstrip the combined net income of our publicly traded peers by over 28%.

So, as pat indicated, a lot of the initiatives to bring it down to the bottom line.

So, where did our capital structure stand prior to the restructuring that took place last year? Sometime in se mid 2000, we were looking at the capital structure with a very careful eye, if you would. We noticed several things that were keeping us up at night.

One, an excessive exposure to the banking community. Especially in a market with a pro-ride up. Market deteriorating rather rapidly. The maturities terrifiably short. We had gone through I say significant restructuring and uncertainty in the markets.

And overall, the prospects for the markets to improve in the near term were not very attractive.

So what do we do at that time? We decided we had to and we did obviously an accelerated basis is develop our financial strategy. Our philosophy, enhance the philosophy with the prevailing market conditions and what we needed to do -- looked at our five core objectives was obviously cure liquidity, extend the average term out borrowings, diversify the funding markets, managing the costs, obviously, enhance our capital flexibility and also, our operating flexibility going forward the operations strategic initiatives not ham strung.

What we saw as the primary or at least highest priority objective out of the box to restructure the balance sheet and specifically the capital structure. At that time, going through several initiatives to exit nonperforming assets, spin off certain operations required too much management time and through that process, plus the just natural generation of cash flow to the business, able to generate $1.7 billion of cash between 2000 and 2001. Employing the matrix on the few pages earlier and investing it, this is how we broke out that redeployment of capital. 700 million into capital improvements and continuing the growth, the continuing the improvements in the operations. Most importantly, perhaps, for the restructuring $600 million to pay down debt. Very realistic and able to attract the capital from the markets with a public markets and that we had to be realistic with what we could do with the banking community and buy back between $400 million.

Secondly, with that positive momentum in place, with clearly articulated operating strategy and support of the core relationship banks, went to the rating agencies on a corporate basis for the first time.

And, we were extremely pleased with the outcome. We reset the benchmark, if you would, for the entire sector. With regard to s and p, received an investment rating for a corporate unsecured basis, and a single notch down for a bank and bond deal. Moodys conservative than that. But again, I think respectable as a ba 2. As a result of the discussions and I think a tremendous amount of education that went on regarding cap structure and the floor plan, s and p moodys went out at the same time there were issuing the rating and rerated or upgraded the entire sector and very pleased with that and I think it's with a tremendous impetus for a successful transaction that took place later on that month.

So, what was the results of the efforts? Left hand side, again, you see where the capital structure stood prior to the renegotiations with the bank and capital market. On the right hand side, the final results. Versus our, you know, desire and objectives. inaudible) we look at this and went from a $2 billion of capacity and 1.25 billion dollars and recall we paid down prior to this happening $600 million worth of debt. The differential smaller, only about 150 million and refocused the business, only four line, that was sufficient now for what we needed to do. We were able to execute very successfully, a $450 million unsecured even-year note. Able to go back to the banks and put in place a $500 million facility and see reduced significantly their event prevailing outstanding with us and shrunk that relationship group and to everyone's benefit and went to the -- (inaudible) to look for certain mortgage facilities. We had spoken to numerous finance institutions with various lease structures and we felt they had probably the best understanding of our business, best understanding of the property itself and put in place very attractive financing.

And what we see at the bottom for the profile of our maturities probably one of the biggest clues for us. Rather than less than a year, able to stretch it well over five years and have that laid out in what we feel now is a minimal rollover risk for us and we're very pleased at that whole structure.

To give you additional specifics of the deal itself, again, $450 million senior unsecured notes. Coupon of 9% with an effective yield of 9 and a quarter. The ratings discussed.

Mainly, used to repay other debts and general corporate purposes. The guarantees were upstream guarantees from the material subs. In line with what we see from the banks, as well. We worked very diligently to minimize the guarantees, not to the detriment of the investors, obviously, but to keep a clean balance sheet and minimize the security that was provided to the banks.

And at the end of the day, we were able to distribute to 95 institutions which was I think very positive statement especially at that time still uncertainty regarding the retailers or greater uncertainty. 4 1/2 times over and at the low end of the price talk at the end of the day.

Approximately, and an estimate at the time, we estimated 25% of the investors were investment grade institutions who were obviously looking for ultimate capital appreciation as the credit profile improved.

Having said all that, that was back in July. How have we traded since then? I think this chart almost speaks for itself. If you look to the purple-ish blue line, that's representative of the AutoNation deal.

We issued at the beginning of August. We traded at that time in line with the index, telecommunications. We were trading inside of our peer group by approximately 200 basis points and over treasuries by 400 basis points. No question approaching or went through the September 11 tragedies, significant selloff. And uncertainty about the economy as a whole.

And specifically what would happen to the auto retailers and manufacturers. As me move through the fourth quarter and people start to appreciate the true relationship between the retailers and manufacturers and bore the risks for liquidating the inventory, very rapid appreciation in our issue answer and saw that across the entire sector as people felt comfortable with the models proposed.

And continued appreciation through the first quarter and recognized or the market recognizes that the industry not falling out of bed. That profits were being maintained and expanding margins. At this time, trading right on top of triple b index. We feel very good about and with yield currently at 7.8%.

So, tremendous appreciation. We're about 105 from 106 trading at this time. So, with that turning it over to pat for closing remarks. inaudible).

-- Could -- I showed you before. Again, I think mark shared with you the cash flow and with that in line, we're very comfortable with what (inaudible) taking the company and I think importantly for this group is cash goes with it. John's handing out here with earn -- released earnings yesterday for the quarter and the guidance with -- on the slide here reflective of the guidance shared yesterday in our earnings release. Again, as I've chatted earlier, we're looking at about 16 million sales level this year. Revenues slightly down from prior. We did have (inaudible) in coupled with reduction in the overall new vehicle sales levels and see the diminishing of the revenues. Importantly, looking at taking the earnings guidance for year over year, from an 87 cent up to 1.12 to 1.15 and save you reading the footnotes. About 17 cents of that uptick as a consequence of the goodwill accounting standards out there. But none the less, solid growth in terms of EBITDA in the company, growing the gross margin despite the decline in revenues and overall increase the net income year over year by 53% and pleased with the performance in the first quarter and comfortable with the full-year earnings prices on the slide.

And with that, open it up to any questions that you might have. There's another couple of slides and you're back. Nothing? If not, we thank you for your attendance and look forward to seeing you in the future opportunities.