AutoNation Inc (AN) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AutoNation second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. If you should require assistance during the call, press zero and the star. This conference is being recorded. I will turn the conference over to AutoNation. Please go ahead.

Good morning, ladies and gentlemen, and welcome to AutoNation's second quarter 2002 conference call. My name is John Zimmerman, vice president of investor relations. This call will be recorded and available for replay at 800-475-6701, code 642312, through August 8. Leading the call today is Mike Jackson, chief executive officer of AutoNation. Joining him is Mike Maroone, president and chief operating officer and Craig Monaghan, our chief financial officer. We will open the call to questions at the end of their remarks. I will be available by phone to address any follow-up issues.

Please let me read our brief statement regarding forward- looking statements. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause the actual results or performance to be materially different. Factors that could cause actual results to differ materially are contained in the company's SEC filings. Now, I will turn over to AutoNation's chief executive officer, Mike Jackson.

Good morning and thank you for joining the call today. In the second quarter, AutoNation delivered record earnings of 32 cents per share, 2 cents above the consensus estimate and 23 cent increase compared to a year ago. Of note was AutoNation's transition from Arthur Anderson to Deloitte and Touche, our independent auditor. The transition was seemless, allowing us to to report second quarter earnings on schedule. Further, Craig Monaghan, our CFO, and I are prepared to sign the SEC's documentation certifying the accuracy and completeness of AutoNation's most recent annual report and quarterly financial statements.

We will do so with the filing of second quarter 10-Q in mid-August. We support the steps that are being taken to restore investor confidence in corporate America and our peer group, AutoNation is at the forefront of providing transparency in our financial disclosure. As a pure play automotive retailer, our business model delivers solid cash flow that is easily understood. From a macro perspective, consumer demand was spurred by attractive vehicle affordability levels and wealth of manufacturing product offering. Despite decline in the market and only modestly higher revenues, AutoNation delivered 178 million in operating income, 6% increase versus last year on pro forma basis.

Once again, demonstrating the resiliency of our business model, combining geographic and brand diversity with multiple profit centers. Our first quarter acquisition of the Laurel Group and Ludeburg Chevrolet were integrated in the quarter, increasing total franchise population by 8 to 373. These acquisitions coupled with the acquisition of Lexus of Palm Beach in the third quarter, provided a lift in total store results, illustrating our philosophy of seeking acquisitions efficiently integrated into our operating model and add value immediately.

On a same-store basis, AutoNation continues to perform. In the quarter we delivered expanded gross margin despite decline in revenue. The margin expansion resulted from lower inventory carrying cost, coupled with improving performance in higher margin areas of finance insurance and parts and servings. We continue to leverage our cost structure in second quarter as evidenced by 180 basis point reduction of SG and A as percent of gross margin. As a result, store performance improved 16 million to 220 million, or 4.6% of revenue, an increase of 40 basis points.

Overall, we are pleased with the quarter and looking to expect the market to remain relatively robust compared to origin projections in the (inaudible) unit range for the year and AutoNation will continue to deliver value for shareholders. I will turn over to our CFO, Craig Monaghan.

Thank you, Mike. As Mike said, during the second quarter, AutoNation delivered another quarter of record EPS. In addition, we generated record 195 million of EBITDA. Strong cash flow that allowed us to reinvest 37 million in business and repurchase 115 million dollars worth of stock. Reviewing details of the performance, revenue for the second quarter was 5 billion, 1% versus second quarter 2001, despite contracting new vehicle market. This increase was due to the benefit of current year acquisitions, as well as growth in parts and service revenue.

Gross margin in the quarter increased by 28 million dollars or 4% to 751 million dollars. More importantly, as percent of revenue, gross margin increased 40 basis points to 15% versus 14.6% in the first quarter of 2001. Margin dollars increased on new vehicles. Parts and service and FNI. The primary driver of new vehicle gross margin was decrease in net floor plan expense, down $13 million versus the second quarter of 2001, as a result of lower interest rates and reduced average inventory levels.

Consistent with the increase in gross margin, store SG and A increased, all be it at a store up 2% to 521 million dollars, as a percent of dollar, SG and A improved to 16.4%, down from 70.7% a year ago. Store performance was up 9% to $230 million, this represented 30.6% of gross margin, improvement of 130 basis points versus first quarter of 2001.

Corporate SG and A increased by $2 million, or approximately 5%, versus the second quarter of 2001. Primarily as result of investments to drive our initiatives. We also benefited in the quarter from elimination of $14 million or four cents per share of goodwill amortization as we adopted new accounting rules effective January 1, 2002. That result of the foregoing was 20% increase in net income versus last year. Our net margin as percent of revenue increased 40 basis points to 2.1%.

Turning to asset management. On trailing 30-day basis, our new vehicle inventory at the end of the second quarter reflected 66-day supply. 7 days higher than a year ago, due mainly to lower interest sales in May and June. Used vehicle inventory was 38 days in line with expectations and up 2 days from a year ago. Looking at capital structure. We reduced non-vehicle debt, net of cash, by $120 million, versus a year ago, substantial decline. With stable and ample financing we are positioned to pursue various opportunities. For example, we have begun analyzing some of our higher cost operating leases.

Taking advantage of the attractive mortgage facilities in place to lower the effected financing cost. In addition, we anticipate the renewal of 364-day revolving credit facility in the next few weeks. As I mentioned earlier, capex were 37 million for the quarter, including $5 million of lease buyout. We repurchased approximately $7 million shares of common stock for $115 million and ended the quarter with 319 million shares outstanding. We were able to repurchase significantly more shares than expected due to receiving $55 million in proceeds from stock option exercises during the quarter. As of June 30 share repurchase of 109 million dollars.

I would like to note that during the second quarter we completed analysis of the impact of adopting intangible accounting standards. The result confirmed we have no goodwill impairment. We are pleased with our results for the quarter and overall financial condition. The transition of Deloitte and Touche has gone well. We continue to generate strong cash flow. We have tremendous capacity, financial flexibility and healthy balance sheet. We feel well position tod capitalize on market opportunity.

Let me turn you over to the president and chief operating officer, Michael Maroone.

Thanks, Craig. (inaudible). I am pleased to report in the quarter our store performance increased 8% to $222 million. As percent of gross margin store performance increased to 30.7%, improvement of 180 basis points compared to a year ago, illustrating expense reduction efforts are taking hold across the business. Now, I will comment on each area of the business.

Our parts and service business delivered increase of $4.7 billion in the quarter (inaudible). Our revenue was impacted by soft collision repair market and the fact we are comparing against a quarter last year that included Firestone tire recall. Revenue in the quarter did not meet expectations, we are pleased with our ability to increase productivity, resulting in increased gross margins, coupled with reduced expenses. In the second quarter our parts and service declined by 200 basis points, with the largest contributor being reduction of 150 basis points in compensation. Work continued in the lower core tile stores on cost of sale improvements. Focus on the revenue side continues to be service pricing and improving service sales process.

Turning to finance and insurance or FNI. The quarters reflected initiatives are on target. In the quarter we reached record FNI gross margin per vehicle retailed of 759 dollars, an increase of $73 compared to a year ago. Revenue increased 9.3 million in the quarter, record performance due in large part to our continued usage of menu-based FNI process and bolstered by improved sales of FNI products, standardized product pricing in each market and ongoing focus in the third and fourth core tile stores. In addition, progress continues in the area of compensation. We are through the emplimitation of standardized pay plans and FNI compensation in the quarter was reduced by 2tent basis points compared to a year ago.

Our retail unit sales were off in the quarter. New units retailed were down 3% and used units down 1%. We are off slightly compared to prior year, but feel our performance was in line with the market in used vehicles and are satisfied with our vehicle given the current challenging used vehicle environment. We are focused on developing best common processes in the area of new and used vehicle sales and will continue to work on gaining market share profitably.

Commenting on strengths and weaknesses across the market we noted stronger volume in north Florida, Atlanta and southern California and weaker volume in the Chicago, Cleveland and Houston markets. Our inventories are in very good shape. In the quarter we operated new vehicle inventory with a weighted average day supply of 62 days, down 1 day compared to a year ago. For used vehicles we are comfortable with our day's supply of 38 days, of which over 60-day units are 3.5% of the inventory. With our inventory in balance, we feel we are well positioned to take advantage of the summer selling opportunities.

Acquisition activity continued in the quarter with signing of a deal to add Claridge BMW in the San Francisco Bay area to the northwest district. It will join four other AutoNation dealerships in the Fremont auto mall. When added with the acquisition of Ludeburg and Laurel Group, combined revenue totals $550 million.

Turning to our branding initiative, to date we have branded 12 markets and are please wide their progress. Our total company store performance is a percent of gross margin is impressive at 30.6%, north Florida district where we branded in three markets under the names of AutoWave, Mike Shad and Courtesy, Maroone and Denver district under the name John Elway are running at approximately 33.5% store performance as percent of gross margin.

This performance demonstrates leverage gained by obtaining critical mass in key markets and utilizing common name with strong brand attributes. Our operating team is proud of industry leading net margin. We are working hard to continue to drive down cost as percent of gross while investing in initiatives to drive top-line revenue while expanding gross margin. Our goal is to increase industry-leading position.

With that, I will turn back to Mike Jackson.

AutoNation delivered a solid second quarter. Looking ahead, we are confident that consumer demand will remain in the mid-16 million unit volume range due to a market that remains hardly incentivised and interest rates and gasoline prices are stable and most importantly, manufacturers are rolling out exciting product offerings in 2003 model year. Given this, along with our confidence in our operations, we are raising our full year 2002 outlook for earnings per share at a range of $1.15 to $1 delineate.17. We expect third quarter earnings per share to be in the range of 28 to 30 cents. With that, I would welcome your questions. 00:22:26

Thank you. Ladies and gentlemen, if you wish to ask a question, press the 1 on your touchtone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself by pressing the pound key. If you are using speakerphone, pick up your handset before pressing the numbers. One moment for the first question.

We have a question from (inaudible) with Morgan Stanley. Please go ahead.

Two questions. Can you talk about which regions or product areas where you are gaining market share? Second, can you talk about the different brands how they performed if everything performed in line to better or any brands underperforming?

We have taken a regional perspective in market share. We did say our business was strong in north Florida, Atlanta, Las Vegas, southern California. It was weaker in Chicago, Cleveland and Houston.

No material changes in share. Mike has described how the markets have performed. On the macro level, what we are encouraged to see is stabilization of share by GM and Chrysler year to date. Ford continuing to be under share pressure. We have a great deal of confidence that Ford will stabilize its share position and have a positive future.

Great. Thanks.

We have a question from Rich Ruben with (inaudible). Please go ahead.

What is the average price that you guys have been buying back shares at?

We can get that for you. Just give me a second and I will come back to you.

Then, just a second question. I mean, I applaud you guys buying back shares, but you know, is there kind of a price target where you just you kind of leave it alone?

No announced price target. Where we leave it alone, we are evaluating how best to redeploy earned capital to create shareholder value. We always balance it against the different opportunities that we have and we will make a decision based on opportunistic decision.

Come back with the numbers for first half. The average price we paid per share was $15.36.

How much more capacity is there under buyback now?

$1.09 under the current program.

Thanks.

A question from David Tinol with Gabelly and Company. Please go ahead.

Mike, do you want to tell us how July has been week by week if that is possible?

That is Mike Jackson. with the disruption in the equity markets, we were concerned if that would impact the consumer. We see no indication of that so far. The month is not over in automotive retail, you never know until the month is over. Sales are tracking ahead of last year.

Okay. Then, in used vehicles, it looks like if I am doing math right, the revenue per unit was up. Gross margin was off. Is it a mix issue or is the auction market maybe rebounding a little bit?

David, it is Michael Maroone. The wholesale market was a little softer. From a mixed point of view, our revenue was up just slightly. It was softer market and certainly there was some pressure in used vehicles with the tightenin g of credit in the subprime area.

Okay. Then, last question on the for Craig, you have been at 650 million in debt for the last three quarters is that more or less where you want to stay and maybe prioritize redeploying the cash elsewhere?

The 650 is the number we are comfortable with. I point out at the end of this quarter, we are carrying 100 million in cash, as well. The net debt is lower than that. I think you could argue it might be a little lower than we would like even. Mike talked about redeploying cash. We will be opportunistic about how we move forward. One thing I mentioned. We have leases we paid back in this quarter. We had a opportunity to get a handsome return. We are looking at things like that, as well. We are comfortable with our balance sheet and feel we have flexibility.

Thank you very much.

Question from the line of Richard Nelson with Stephens.

Good morning. What are the significant factors that you see in the used vehicle business. Mike mentioned wholesale was softer and some typing of credit and is there anything else? How do you see those factors shaking out as we move forward?

It is Mike Maroone. We see the market being flat as we look forward into the third and fourth quarter. I think there is pressure on wholesale basis. Certainly there is attractive new offerings from the new vehicle side that are getting a lot of support from the captive finance companies. The used car business is not bad. We are off slightly year-over-year. We are not afraid of that business. Certainly the tightening of credit has impacted the business.

Are there other lending sources that are stepping up and replacing those that are leaving?

I don't think they are leaving, just credit tightening. As you know, the retail financing really has taken pretty good hits over the last year or so. I think there is just more conservative approach. I don't think there is any new lenders looking to take a liberal view. The same wonders are in there, just more conservative.

I thought Ford had pulled back on credit?

They are still out there and are a big source for us. I would say they are probably taking more conservative posture than a year or two ago.

Any comment on store traffic during the quarter? And we understand traffic may have tapered off in June?

This is Mike Jackson. We saw April was particularly strong. We all expected a very strong spring market for May or June. The manufacturers adjusted incentives somewhat, but not to the levels that existed last year during May and June. Incentive levels were below last year. There were sensitivity to retail.

What programs have been initiate - positive effect?

It has had a positive effect.

Thank you.

Question from the line of Domenic Martilotti. Please go ahead.

Good morning. Two questions. First touching on the inventory and the floor plan assistance versus expense. You showed net positive assistance versus expense. What is your outlook into the second half? Inventory is up on days and value. What do you see in the fourth quarter and also, looking at acquisition markets, how is the environment out there? Lastly, you said you are looking for light vehicle sales in the U.S. in the mid-16s. What are you guys using for the forecast now in the second half of the year and year over year total of 116 to 117?

It is Craig. You are right, we did benefit from assistance in the second quarter. We were at all about $15 million number there. That will begin to unwind as we flow through the rest of the year. What will happen is interest rates, which impact that, will get to the point where we start to lapse last year's low rates in the fourth quarter. We would anticipate that still being a net positive for us. It would be a single digit number.

In the fourth quarter?

In the fourth quarter.

On the acquisition side, we take disciplined, yet opportunistic approach to how we deploy capital. We are looking to create critical mass in the markets we have. In the acquisition we look at has to fit within that model. And when we apply initiatives, achieve a 15% after-tax return on capital deployed. We are looking for willing sellers where we can buy right and hit those targets. We have many discussions going on. If we cannot hit targets, we will not make the acquisition.

Last question was related to your forecast versus what you (inaudible) in the market to be in this year?

We are at the mid-16s. That is where we visit the market. Mid-16 will come to $1.15.

Thanks.

(inaudible).

Good morning. Sounded good on CNBC, Mike. Just kind of a follow-up with regards to the acquisitions and share buyback questions. You guys indicated at the beginning of this year you were going to do about 300 or 350 million in share repurchasing and/or acquisitions. Sounds like 150 million in share repurchases and closed Laurel Group this quarter. Can you update the first half of the year and where you stand?

It is Craig. We still are targeting to spend somewhere in the vicinity of $250 million on acquisitions this year. We think that is very doable and a realistic forecast. With respect to share repurchase, we think we will do something in the same vicinity, around 250. You have to remember we have seen pretty substantial cash flow from the options exercises. If I could put a stake in the ground, 260 would be the gross number, net of option proceeds like 150 or 160. We are still pretty much on track with where we were when we gave guidance at the beginning of the year.

Okay. Wait. 500 with accessions and share repurchases, combined. You are offsetting dilutions?

Let's do cash. 500 combined. 100 million of proceeds from option exercises. Net of option proceeds, we are talk being 400 million.

Okay. Higher maybe than where you started?

A little bit. We are in the same ballpark.

Through the first 6 months do you have totals where that is?

Yeah. Let me break that out and I will come back.

The other question I had, Group 1 Automotive just had their conference call and were indicating the Houston market was fairly strong. Just wonder why you guys are indicating that as a weaker market? Is there why the discrepancy?

I wasn't on the Group 1 Automotive call. But, I can assure you and you can check whatever source you want, the Houston market is not in good shape as far as economic activity and as far as registrations year to date for the Houston market. They are down significantly more than the overall market. That I can assure you.

Back to the numbers on the 6 month repurchase and acquisition activity. For the first 6 months of the year, share repurchase has been 151 million and roughly half of that of 75 million funded by option proceeds, option exercise proceeds. Acquisition cash flow was about $130 million.

Okay. So, like 280 out of the 500 million, more than half there?

Right. And we cannot forecast how fast options are exercised. That 75 million is little - 75 out of 100 projected for full year.

Okay. Final question. Maybe Michael Maroone can answer this w. parts and services at the lower end of 3%. Is there something going on in terms of the Firestone recall and everything last year that positively impacted you guys have (inaudible) you are coming up against? How long did that last for and how does your rollout of advanced productivity and can we see higher growth rate going into next year?

We are confident of our initiatives and have invested time and energy into the initiatives. Our number was impacted by Firestone. That runs into the early fall. It will be behind us after that. The other factor is the collision business nationwide has been softer. We are hearing double-digit numbers across the industry. Our core harts and service business is still good. We are confident both on full-year basis and for 2003.

Okay. So, like fall meaning like around the fourth quarter we start to see the tough comps abate?

Correct, in Ford stores.

Thank you.

Question from Nate Hudson (inaudible).

Wonder if you could give more impact on the ford stores during the quarter? (inaudible) they have posted and what kind of stame-store performance they posted?

It is Mike. Our results are in line with Ford. We are down about the same as they are. On national basis. In terms of profitability, the profitability has held up pretty good. Store profit as percent of growth has improved year over year. Our Ford stores are struggling from a new vehicle point of view. It goes back to the resiliency of the model. We have decent results in used and parts and service and FNI. Our profitability has held up.

If the market was down 10% for ford, our profits were down less than that?

Yeah. Retail sales were better than the 10%. I think about 9% down on same-store sales basis.

Second question. For Craig. On the lease buyouts can you give us a sense of how much savings are you seeing? What is the implied lease rate? What kind of financing rate do you have now and how much opportunity is there to do that? 20 million or 100 million or how much?

Craig question. We are just starting to get into it. What we have discovered, as leases are coming up for renewal, we have got some options. I will give you one example. We were able to buy a piece of property for a million and a half dollars that had current market value of 3 and a half million. We had another lease that because of escalation factors on the lease, the cap rate was 14%. We can finance that today on the mortgage facility at about libor plus 200. The returns on that refinancing are phenomenal. As a result, we kicked off initiative to dig into the leases in detail and understand the opportunities we have. At this point in time, I cannot give you a concrete number. We just want to call that to your attention it is something we are taking a look at.

Thanks a lot.

I want to clarify a number. We checked our records. Ford stores from a retail volume point of view were off 7.5%.

Thanks.

If there are additional questions please press the 1 at this time. We have a question from the line of Michael Millman from Salomon Smith Barney.

I have two questions. I apologize if you talked about this. Give us some idea what is in the 281 million of other. Secondly, could you share with us possibly a very rough rule of thumb and the effect of changes in SAR, 100,000 or 500,000 how that affects top and bottom lines?

That other line is driven by wholesale business. That dominate that is line and that is us taking used vehicles and selling them on the market, but taking them out to auction to get rid of them. The SAR impact, the simplest way to answer that is, a break-even SAR for us would be down around the 10 million unit level. You can kind of work yourself back down into that direction.

Thank you.

We have a question from the line of Jord Heimenwits (inaudible).

A good quarter overall. Quick question t. looks like you restated something differently. Unless I am confused. Floor plan interest expense is that in SG and A now, as well as the corporate interest expense? Order to the 555, does that include the floor plan and corporate expense of 34?

Floor plan back up in growth. Floor plan assistance and expense.

Are in the -

New vehicle cost of operations.

The 2763 would include that in p-5?

Yes, the 2763 includes interest expense and assistance. If you go back to the third page of our press release to the table, the third table, you see we have a breakout there of floor plan expense.

Yes.

We have the numbers there for you and are demonstrating the impact on margins.

So, the net number for the quarter is 33 minus 18 5?

That is the 15 million I spoke to earlier. 15 net assistance.

Okay. Thank you.

If there are additional questions please press the 1 at this time. I would like to turn it back to your host.

Thank you very much for joining us today.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and using AT executive teleconference. 00:43:03 You may now disconnect.