AutoNation Inc (AN) 2003 Q2 法說會逐字稿

Welcome to the AutoNation 2Q '03 earnings conference call. (CALLER INSTRUCTIONS). I would now like to turn the conference over to the company. Please go ahead.

Good morning, ladies and gentlemen, and welcome to AutoNation second quarter 2003 conference call. My name is John M. Zimmerman, AutoNation's Vice President of Investor Relations. I would like to remind you that this call is being recorded, and will be available for replay at 1-800-475-6701, access code 691101 through July 31st, 2003.

Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer of AutoNation. Joining him will be Mike Maroone, President and Chief Operating Officer, and Craig T. Monoghan, our Chief Financial Officer. At the end of their remarks, we will open the call to questions. I will also be available by phone to address any follow-up issues.

Before we begin, please let me read our brief statements regarding forward-looking comments and use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the federal 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. Additional discussions of factors that could cause actual results to differ materially are contained in the Company's SEC filings. Certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by the applicable SEC rules, the Company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on the Investor Relations section of the AutoNation Website at www.AutoNation.com. And now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

: Good morning, and thank you for joining us for a discussion of our quarterly results. I am pleased to report that AutoNation delivered second quarter earnings per share of 37 cents, a 16 percent increase compared to a year ago, and a record EPS for any second quarter. As a result of this performance, we are raising our full-year 2003 EPS guidance, excluding the benefit of the Company's first quarter tax settlement, by 7 cents to $1.28 to $1.33 per share. On a GAAP basis, the increase in our full-year outlook translates to $1.77 per share.

While the economy showed some signs of improvement in the quarter, market conditions for auto retail remained challenging. In this environment, AutoNation responded with second quarter results that included year-over-year increases in revenue, operating income and net income. In addition, we delivered a strong operating margin of 4.1 percent and a net margin of 2.1 percent. Once again, the resiliency of our business model, (inaudible) ongoing intense focus on the cost side, coupled with increased revenue and strong share repurchase allowed us to deliver a solid quarter.

During to new vehicle inventory, we made progress in the quarter by reducing our days supply to 72 days, seven days lower than where we ended in March. In order to align our reported days supply to the automotive industry standard, we will now report our new vehicle days supply on the basis of selling days including fleet versus our prior measurement of calendar days excluding fleet. With the move to the industry standard, AutoNation's new vehicle inventory stood at 65 days at June 30 compared to the industry, at 63.

Of note in the quarter, two new independent directors, Alan Dawes and Fred Schwab joined AutoNation's Board of Directors. These gentlemen bring significant automotive knowledge, business experience and financial expertise to the Board. Alan Dawes is Vice Chairman and Chief Financial Officer of Delphi Corp., a leading automotive electronics and component supplier, and Fred Schwab recently retired as President and Chief Executive Officer of Porsche Cars in North America. The addition of Alan and Fred bring the Board to ten members. While the New York Stock Exchange proposed government rules are not yet final, we believe that a substantial majority of our Board will qualify as independent under the final rules.

Overall, we're very pleased with our results for the quarter. Not Craig will take you through the numbers in greater detail, and then Mike will walk you through our operational results.

Thank you, Mike. As Mike said, during the second quarter, we delivered record earnings per share of 37 cents. We generated operating profit of 207 million and cash flows from operations of 142 million. Strong profits and cash flows have allowed us to reinvest in our business, and aggressively repurchase shares. We repurchased $149 million worth of stock or another 4 percent of our outstanding shares. Year-to-date, we have repurchased $353 million in stock, or 9 percent of our outstanding shares. Over the past 18 months, we have bought back almost 20 percent of our company.

Our revenue was up 1 percent for the quarter, driven by new vehicles. Gross profits were essentially flat, as gains in F&I and new vehicles were offset by compression in new vehicle margins. The main driver of our operating performance is our continued focus on controlling and cutting costs. SG&A declined $7 million in the quarter, primarily from productivity improvements and reductions in other store operating expenses. As a percent of gross profit, SG&A improved 110 basis points to 71.1 percent. This is the continuation of similar reductions in Q1, 2003. All in all, we were able to improve our operating profit margin as a percent of revenue, by 20 basis points to 4.1 percent, the third consecutive quarter of year-over-year operating margin expansion.

Our liquidating consumer loan portfolio contributed just under 1 cent per share of profit during Q2. On July 3rd, 2003, we sold the finance receivable portfolio at essentially book value, generating approximately $50 million in cash proceeds. This concludes the chapter of AutoNation's underwriting vehicle loans.

At June 30th, we had approximately 235 million in cash. With the $50 million inflow from the sale of the loan portfolio plus continued internal cash generation, we have approximately $300 million in cash today. This cash, combined with our available credit capacity, gives us approximately $900 million of available liquidity. Given our liquidity, we anticipate prepaying the $350 million net IRS payment that was originally due in March, 2004. This will generate net interest expense savings.

We anticipate full-year capital expenditures to remain on target at approximately $150 million. We continue to view acquisitions and share repurchases opportunistically, and estimate second half combined spending on acquisition and share repurchases of 150 to $250 million. Our strong cash flow and significant liquidity affords us the opportunity to reinvest at these levels. Including the IRS payment, year-end non vehicle debt is forecast to be approximately $900 million. We are more than comfortable with debt at these levels, considering that we would maintain incremental borrowing capacity in excess of 400 million, and still have the lowest debt leverage of our auto retail and peer group. In fact, most of our key debt ratios would be considered investment grade.

In conclusion, in Q2, we have solid operating results, tremendous cash flow and we continue to enjoy strong financial flexibility, all of which puts us in great shape to capitalize on opportunities in the market today.

Now, let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Craig, and good morning. My comments this morning will be focused on the operational side of the business and will be on a same-store sales basis. We were very pleased with the efforts of our stores in the quarter. We continued to drive costs down, revenue was up and we gained traction in our new and used vehicle volume. We are showing modest improvement in parts and service versus the first quarter.

First, in the area of new vehicles. We came through the spring selling season in good shape. Revenue increase 3 percent to $3 billion on volume of 108,000 new vehicles, which was down just slightly year-over-year. At the same time, we experienced new vehicle gross profit pressure in the quarter as we competed for market share in what remained a challenging economic and retail environment.

Turning to used vehicles, we are very pleased with our results in the quarter. Our same-store used vehicle gross profit increased 4 percent, on unit volume that was up 2 percent or 1000 units. We attribute this improved performance to our used vehicle management system that focuses on having the right inventory at the right price. Our efforts to stock older vehicles and widen the price gap between our used inventory and heavily-incented (ph) new vehicles continued, as evidenced by the average cost of our used inventory declining 5 percent to $11,750 compared to the quarter a year ago. And the average selling price declined 3 percent to $15,000, resulting in a slight revenue decline on improved unit volume. With the 34-day inventory supply, at June 30th, we feel that AutoNation is well-positioned to take advantage of a used vehicle market that is showing signs of stabilizing.

In the area of parts and service, our overall same-store business was flat, quarter-over-quarter. While our performance improved slightly over the first quarter, it was impacted by continuing trends of softness in the collision market and reduced warranty revenue on the domestic side, as GM, Ford and Chrysler continued to make significant improvements in quality. In light of this, increasing our customer pay service business remains our most significant opportunity. The work of our parts and service team in this area includes implementation of best practice that include a common service drive process, optimizing in-store pricing models and refining promotional campaigns.

Turning to finance and insurance, the second quarter marked another record quarter for F&I gross profit per vehicle retail with $804 per vehicle, an increase of $42 or 6 percent compared to the period a year ago. We attribute the ongoing progress of our F&I profitability to increase product penetration that's achieved through consistent menu presentation, along with increased share of business with captives and preferred lenders and our F&I training specialist program, which places training specialists in underperforming stores, who remain until the stores demonstrate sustainable improvement.

Our continued progress in the area of expense control aided us in the quarters, as same-store SG&A was reduced by $4 million compared to a year ago, driven in large part by improvements in productivity and other SG&A expense. This more than offset the modest gross profit shortfall that resulted primarily from compression in new vehicle margins.

As a percent of gross profit, store level SG&A improved 40 basis points to 66.9 percent illustrating that we continue to leverage our cost structure.

Also of note in the quarter, AutoNation branded two additional markets, bringing our branded market count to 13. In May, we successfully introduced the Power brand in Southern California, and the Champion brand in Houston, Austin, and Corpus Christi. We are the dominant brand in each of our branded markets, where we have created a higher aided and unaided awareness, resulting in stronger purchase consideration.

In summary, we are really proud of our associates, who drove increased efficiency and productivity in the quarter. The payoff is an outstanding performance in a difficult market. With that, I will hand it back to Mike Jackson.

: Thanks, Mike. Looking to the second half of the year, the manufacturer product pipeline is loaded with new and innovative product offerings, and some key economic indicators are showing signs of improvement. However, we believe the automotive retail environment will continue to be challenging in the coming months and maintain our outlook that the industry volume will come in over 16 million units for the year, somewhere in the range of 3 to 5 percent behind last year. As such, our focus on cost reduction, operational improvement and the efficient allocation of our capital will continue.

We're offering EPS guidance for the third quarter of 34 to 36 cents. And to reiterate our full-year guidance, based on our second quarter performance, we are raising our full-year 2003 outlook for earnings per share by 7 cents to a $1.28 to $1.33, excluding the benefit of the Company's first quarter tax settlement. This translates to $1.70 to $1.77 on a GAAP basis.

With that, I'd like to open it up for questions.

Rick Nelson with Stephens.

Good morning and congratulations. Mike, you've made a lot of progress on the SG&A front. I am wondering where those expenses are coming from, and what you see as future opportunities with SG&A?

: I'll have Mike Maroone talk about the details. But we have two approaches. One, recall the variable cost, and to ensure that we have variability in all our different business segments, that the cost all structure moves with the velocity of the business. Generally speaking, there has been a significant lag between volume and cost, and we now have changed that that the costs are moving lock step within a month, and certainly within a quarter. The costs in the variable block are primarily compensation and commission plans (ph), and other variable type costs -- within our whole effort on the fixed costs side, which range everything from property taxes to telephone costs to the cost of overhead here in Fort Lauderdale.

We see continued opportunity on the productivity side. And, it's a tremendous focus on productivity. And, as most of the disruption from these efforts are behind us, we feel better about our revenue opportunities at the same time.

Thank you. And, where do you come out on the trade-off between acquisition, stock buybacks at current share price levels, and did the Board contemplate a dividend? And what is the thought process there?

: We will continue to take the same approach that we have in the past, that we evaluate it on an opportunistic basis. Now, on acquisitions, we have said that we had a target of acquiring about $500 million worth of revenue this year. I think we closed about 250 million thus far. We're certainly in negotiations on other deals that could bring us to that number. But, they are not signed or closed as of today. If, at the end of the day, it doesn't hit our return threshold, we will not do the deal. And our returns threshold is at 15 percent after-tax return for capital deployed, and we consider everything we have to pay for that acquisition and then we combine that with our scale and productivity. So, we have deals in the works; whether they will close or not, I cannot sit here today and say. We still feel that our stock is undervalued, even at prices that it's at today. And, we will continue to acquire it. I cannot, though, sit here and predict exactly what will happen over the next 90 days and the balance of the year. But, I think if you look at our past performance, I think we have a pretty clearly defined approach to this.

As far as the dividend, I think we are still a young company, that has been a tremendous concentration on operational discipline to generate cash with a strong balance sheet no matter what the environment, and then redeploy that cash in a very disciplined way. We still see more opportunity in capital opportunity, either within the company, acquisition or share repurchase than we see from putting a permanent dividend -- and let's face it, if you put a dividend in place, it is a permanent dividend -- at this time. So, it's not something that I would rule out forever, but I don't see it in the near future.

Carly Cassello with J.P. Morgan.

My questions relate to the inventory. Do you have a comfort level -- where I thought that a target DSOs used to be about 60 days. Are you still comfortable that you can get back down to 60 days?

Yes, it's Mike Maroone. I believe we can get in the '60s to mid '60s. Right now with the carrying cost of inventory being so low, we are allowing our inventories to move up slightly. It's a very competitive marketplace. It we believe our inventories are correct for today's marketplace. I'd say the other factor is at the end of Q2, you are nearing the peak of inventories from model year buildout. So I think those factors really influence the day's supply level. But we are comfortable where we are, but I think you could see 60 to 65.

Okay. And the reason that it's up year-over-year from this time last year would be just because of the lower carrying costs and your carrying more -- you're allowing yourselves to carry more inventory?

That is correct.

Okay. What percentage of your sales -- or what is your total fleet revenue?

: Craig, do you have that number?

We will have to come back on that.

Okay. Because we're trying to get a sense (multiple speakers) --

There is no fleet in our reported revenue number.

The fleet that was referenced is part of the days supply calculation. But I would say our fleet business in the quarter was very modest.

Okay. But it looks like it was in -- significant enough on the inventory side that it does change the days significantly, based on how you calculate it.

The biggest change is moving to the daily selling rate from --

Oh.

I will just come back with a number for you.

Okay.

In our revenue line, we have got $1 million of fleet revenue, and that is reported on a net basis.

Okay. I think that's it for now. Thank you.

Jeff Black with Lehman Brothers.

Good morning. Could you talk a little bit about parts and service? You know, we saw some weakness in the margin there. How should we look at that going forward? How significant are the quality improvements that you mentioned from Ford? And are there other factors that are influencing profitability there?

There is no question that the domestics have significantly improved the quality of their products. We mentioned Ford last time because they had particular year-over-year changes. But it's a trend we see from all the domestics. And, once again, we applaud the OEMs. And it is a win for our customers. Certainly, we have to change our strategy, or emphasize within our strategy, of more maintenance and more customer retail to offset that, and we are doing that.

Jeff, it's Mike Maroone. On a manufacturer basis, from a warranty perspective, this is Q2 '03 versus Q2 '02. Ford was down 16 percent; GM was down 8 percent; DaimlerChrysler was down 15 percent. The imports did not reflect -- imports and luxury actually showed increases. So there was pressure there. And again, our effort is really on the customer pay service side, and we are confident that we can grow the business from that perspective.

I have a follow-up question on used as well. You know, it looks like used improved, obviously. But, where are we in the used cycle? Have we turned a corner regarding, you know, the way we should look at margins over the next couple of quarters in the used business?

It's Mike Maroone. I believe that the used vehicle market has stabilized, but it's only been a couple of months. If you look at the Manheim (ph) index, it had declined steadily for a year and a half or so. And it's now inched up. But year-over-year, there's still a lot pressure in the used business. I think from a margin point of view, I think we have stabilized it also along with the pricing. You know, we're pleased having gross margins at $1664 per vehicle in this environment with such heavy new vehicle incentives. In the wholesale market, also, it is much stronger than it was. So, we're pleased with the used vehicle business. But, I don't think after two or three months that we can say that we are totally out of the woods there.

Ned Hudson with Banc of America Securities.

Good morning. A couple of questions. First, I wonder if you could comment on what you think happened to your market share in your regions during the quarter? Were your sales in line with what happened? Or, how would you characterize them?

We were in line.

Any regions which were kind of particularly good or bad?

Our stronger region, Nate, continued to be Florida, both North and South Florida and Southern California. And I would put Vegas -- Las Vegas as a fourth very strong market where we took share. The tougher markets for us, continue to be Houston and Atlanta and the Bay Area, and Denver to a lesser extent. But there are some great regional differences.

Okay. Two specific questions. Number one, I was hoping you could give us your brand mix for the quarter. And number two, I was just wondering what your -- under your bond covenants, what's the maximum available for share repurchases at quarter-end?

: Craig (multiple speakers) --

Let me jump in on the bond covenant. At quarter-end, we had about a $115 million of share repurchase capacity remaining in the basket. And then, if you'll recall, as we move forward, we are able to repurchase 50 percent of our net income.

Okay.

Then the brand mix, from a revenue point of view, we were about 55 percent, domestic and about 15 percent premium luxury, with the balance being the major imports.

All right. Thanks, very much.

(CALLER INSTRUCTIONS). Lee Matheson with AIC Funds.

I just have one specific line of questioning, just regarding on the used sales. Can you give us some numbers with respect to how many sales in the used cars were through certified used car programs, obviously, exclusively for new car franchises.

We don't have those broken out by certified pre-owned. We can probably get back to you. But certainly, there's two segments of the business that we feel are expanding. And certified pre-owned would be one, especially on the luxury side. And, the other would be what we call C-cars, which are our less expensive higher mileage cars; that segment continues to be very, very strong.

Okay, thanks. And just another comment on F&I on the used car side -- I was meaning particularly with regards to certified pre-owned. But, just in general, can you give us some numbers?

I think, as you continue to grow the older, higher mileage segment, it does put some pressure on the used vehicle F&I segment. It is more than offset by the strength of the CPO market, where F&I margins get stronger, and of course, the new vehicle side where the F&I margins continue to grow also.

Okay. I will give you guys a call in the next couple of days and we will talk about it.

Carly Cassello with J.P. Morgan.

I'm wondering if you can talk to the concerns we've been reading about lately about rising interest rates impact -- impact that this is starting to have on your unit sales? Or any impact you would expect rising interest rates to have on unit sales?

We have uh --

I know we haven't really seen it yet.

: We have not seen any sign of rising interest rates yet. While the overall environment is difficult, the product offering from the manufacturers -- and we have exciting new models coming this fall, everything from the Ford F-150 to the new MyBop (ph) at 300,000. The product (inaudible) is what brings the consumers into the marketplace. And, then the incentives and the financing gives a compelling value story. And, if you compare this difficult period we've gone through with the past, I would say that the trough is not as deep as what you typically see. And therefore, I think the recovery will be more gradual because there is not a great deal of pent-up demand that will be suddenly unleashed. So, I think it'll just be a gradual recovery. We are still above 16 million units, which is a fine level, but a very gradual recovery.

Okay. And then on the acquisition front, are you targeting any specific -- are you trying to reach more into the luxury mid-tier, or the premium luxury brands away from the domestic with acquisitions? Or are they pretty much across the board?

: Our acquisition strategy is to have density or critical mass within a market that we have infrastructure. So, we will consider acquiring any volume brand or any luxury brand in a market where we have infrastructure. That is our concentration; that is our focus. We are not moving to new markets at this time.

Gerry Marks with Raymond James.

Good morning. Most of my questions have been answered; I just have a couple of quick ones. First of all, Mike, maybe you're aware this. I guess, in California, they are going with a new law that's going to require more reporting and disclosure on F&I and record-keeping, and some are saying it's going to start to eliminate the potential of getting spreads on the F&I rates for your loans. Do you guys see that as a potential impact?

You know, (inaudible) I am aware of the law, and we already have very good record-keeping. So I don't think it's any new exceptional hurdle for us. And, Mike, are you aware of how it would --

I think it's proposed. I don't know that it's implemented at this point in time. But I really think, Gerry, our focus has been on improving our product penetration and really leveraging our scale by creating relationships with preferred lenders that provide is with incremental revenue. So if that's been our focus in F&I, and increased disclosure, I think is good for the customer, and I don't think, long-term, it will have a major impact on our business.

: This is Mike Jackson. First, we have genuine added value for lenders in the F&I business. The work that we do in originating these loans, we do more cost-effectively than they could ever do with themselves. And so, a fee for this efficiency that we provide is genuine added value. And therefore, this will remain a profitable part of our business. And I think our approach of basically having a menu approach with fair margins and put the consumer in charge, and let them select the products that fit their needs also is the right approach. And as Mike said, as more transparency comes, I don't think it's an issue for us; it may be an issue for some others.

And kind of on that note in terms of your relationships with your preferred lenders, are you noticing some of the sub-prime lenders coming back and more willing to loan in the market?

It's Mike Maroone. I think they're coming back, but I would not say they are coming aggressively. They're coming slowly back in the marketplace. Sub-prime is still a significant part of the business. But we do not see some of the ultra-aggressive buying policies that we've seen in the past.

Okay. Last question, Craig, why such a high number in the other line item -- that $5 million?

We had some assets on the balance sheet that we were able to sell and it drove it up a little bumpy. It's all there.

Was that some of the mega-used stores that you guys used to have, and so is that a gain that added to earnings for the quarter, or?

We had a business that was basically a junk yard business, where we had equity position we were able a piece of it off that drove most of that gain.

Okay.

It was a very small position and just events occurred in such a way that we could get rid of that position.

You guys have -- it was what 10 or 20 percent that you had that equity interest in and that's all done now?

It's not all done; we've got a small piece left, less than $10 million or so.

David Siino with Gabelli & Company.

Good morning. GM, on their conference call, made a point of saying July, to the extent they could tell, had been running at a SAR (ph) in the high 16's to date. Do you have any thoughts on that?

As we all know, last year, for July and August, the SAR ran about 18 million for some very specific reasons. So, that will be a very tough comp. That's why we say all in, we think when all the dust settles for the year, it's going to be down 3 to 5 percent, but still a 16 million plus year. Our sales, to start the quarter, are on-line for the guidance that we've given.

Okay. Great. And just a housekeeping question. The 15 percent you call premium luxury -- is Cadillac in there?

We have a very small position in Cadillac. That's primarily Mercedes-Benz, BMW and Lexus.

Okay. So that's all foreign (multiple speakers) --

Yes. It is a very small -- Cadillac -- piece of our business.

I'd like to turn the conference back over to the presenters. Please go ahead.

Ladies and gentlemen, thank you, very much for joining us today. We appreciate you taking out the time. Thank you.

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation, and you may now disconnect. (CONFERENCE CALL CONCLUDED)