AutoNation Inc (AN) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 2004 earnings release conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to AutoNation. Please go ahead.

Good morning ladies and gentlemen and welcome to AutoNation's first quarter 2004 conference call. My name is John Zimmerman, AutoNation's Vice President of Investor Relations. I'd like to remind you that this call is being recorded and will be available for replay at 1-800-475-6701, access code 728416 after 12.30 PM Eastern time today through May 6, 2004.

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

Before we begin let me read a brief statement regarding forward-looking comments and the 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 risk which may cause the actual results or performance to be materially different. Additional discussions of the 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 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 AutoNation's website at www.autonation.com.

Now I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Thanks you John and good morning.

AutoNation is also off to a great start in 2004. Today we reported first quarter earnings of 32 cents per share, exceeding the analyst consensus estimates by 2 cents. We achieved record first quarter operating income of 181 million, up 6 percent compared to a year ago, driven by 8 percent top-line growth and continued cost containment. We're very pleased with our same-store results in the quarter, where we delivered revenue growth that ranged from 6 to 11 percent in each of our business lines are business lines -- new, used, parts and service and finance and insurance.

In SG&A we had an 80 basis point improvement as a percent of total gross profit, demonstrating continued improvement on the cost side. Over the past several years we have made tremendous strides on leveraging our cost structure. In 2004 we have turned our attention to striking a balance between investing in revenue expansion opportunities and continued cost work.

Reflecting on the quarter, we saw a stronger auto retail environment compared to a year ago, albeit still highly competitive. Looking ahead, we remain excited by the manufacturers' new product offerings and believe that the auto retail environment will continue to improve as we move through the spring and summer selling seasons and the model year changeover. However, with past presidential election cycles we believe that the market could moderate as the fourth quarter approaches.

Based on our Q1 results and our view of the market we are raising our 2004 full-year EPS guidance by 3 cents to the range of $1.43 to $1.48. We anticipate second quarter earnings per share in the range of 38 to 40.

With that I will turn it over to Craig Monaghan, our Chief Financial Officer.

Thank you Mike.

Mike has covered the highlights of our financial results for the first quarter. I will now review selected other financial measures.

During Q1 we repurchase $58 million worth of stock, invested $22 million in our business through capital expenditures, spent $88 million on acquisition and had $78 million in lease buy-outs. The cap rate on these particular leases was approximately 9 to 10 percent and our mortgage rates were effectively more than 300 basis points lower. The level of lease buy-outs in Q1 was higher than prior quarters due to timing, and we do not anticipate additional lease buy-outs being this high going forward.

We remain disciplined in our cash outlays, and continue to target 2004 capital expenditures of approximately $130 million, excluding any acquisition related spending or opportunistic lease buy-outs. As you know, we view acquisitions and share repurchase opportunistically. Our full-year 2004 target for combined spending on acquisitions and share repurchases remains the same, estimated to be approximately $400 million.

On March 31st our non-vehicle debt was 822 million, essentially unchanged from where we ended 2003. Our cash at March 31st was $31 million, down approximately $140 million from year-end, primarily due to cash use of funds, the lease buy-outs, capital expenditures, share repurchase and acquisitions I just mentioned. We're comfortable with debt at these levels considering that we have incremental borrowing capacity in excess of $550 million. At a 17 percent debt to cap ratio, we have very low debt leverage.

In conclusion, this quarter brought the return of strong same-store sales growth, continued cost control and disciplined cash flow reinvestment. With our best in class operating margins we're 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. My comments this morning will focus on our operational results for the quarter and will be on a same-store basis unless otherwise noted.

As Mike stated at the top of the call, we're off to a great start in 2004, delivering significant improvement in each segment of our business -- new, used, parts and service and finance and insurance. Let's begin with new vehicles.

In the quarter we retailed 97,000 new vehicles, an increase of 4 percent compared to the period a year ago. Our business was strong in the South Florida, North Florida, Denver, Las Vegas, Phoenix and Southern California markets. We saw improvement in the Northwest, specifically in Spokane and Seattle. Our Texas markets remained challenging in the quarter. Total new vehicles same-store revenue increased 8 percent to 2.8 billion in the quarter, with revenue per vehicle retailed increasing by $1100 or 4 percent as consumers utilized incentive dollars to upgrade their purchases. Gross profit increased by nearly $2 million to 198 million compared to the period a year ago, and gross margin as a percent of revenue at 7.1 percent marks the third consecutive quarter of stabilized margins despite excess supply in the industry and a very competitive marketplace. On a year-over-year basis we're pleased to reduce our new vehicle days supply by 4 days to 68 days, which was 3 days lower than the industry. We focused a lot of attention on our inventory mix, and feel comfortable with our days supply levels as we had into the spring and summer selling seasons.

Turning to used vehicles, we were very pleased with our performance in the first quarter. We retailed 63,000 units on a same-store basis, an increase of 7 percent compared to the period a year ago, outperforming the industry and delivering an increase of 6 percent in use vehicle revenue in the quarter. Same-store gross profit as a percent of revenue was off 30 basis points compared to the period a year ago. However, sequentially our margin recovered nicely from last quarter at 11.4 percent this quarter compared to 9.9 percent in Q4 of 2003. We attribute our progress in used vehicles to improved pricing in the market, coupled with strong store processes, the utilization of sophisticated inventory management software and management and sales training. At the end of the quarter nearly all of our used vehicle managers had participated in a new comprehensive training program focused on our used vehicle management system. As of March 31st our used vehicle day supply was 36 days, within our targeted range, and leaving us well positioned for the spring and summer selling season.

Our parts, service and collision team delivered a great quarter. On a same-store basis both revenue and gross profit grew 6 percent compared to the period a year ago, with revenue at 628 million and gross profit at 274 million. Customer pay and warranty revenue for parts and service both increased 6 percent, contributing to the 35 million increase in revenue. Gross profit as a percent of revenue improved 20 basis points to 43.7 percent. The extra service day in the quarter compared to a year ago contributed approximately 4 million of gross profit in the quarter. Our performance was aided by the increase in used vehicle volume, as well as our growing luxury business.

We remain focused on opportunities to improve customer pay revenue. We've implemented an aggressive service marketing program and are in the process of rolling out a best practice service drive process to all of our stores. Work also continues on optimizing our in-store pricing models and training our service associates on our customer focused initiatives.

Turning to finance and insurance, we achieved a record F&I PVR of $939 in the quarter, an increase of $51 or 6 percent on a same-store basis compared to the prior year. In the quarter we saw F&I revenue increase $15 million or 11 percent. In addition to increase unit volume, we recognized approved preferred lender and product penetration in the quarter. We attribute our ongoing solid performance in F&I to continue intensive sales and compliance training of all F&I associates, including extra emphasis on our under-performing stores, as well as continued growth in our manufacturer sponsored service contract program.

During the quarter we acquired a Toyota and a Honda dealership in Leesburg, Virginia; a Mercedes-Benz dealership in Sarasota, Florida. In addition, we signed a definitive agreement to acquire the assets of John Roberts BMW and MINI in Dallas, Texas. Combined these deals represent approximately $350 million in annual revenue. We continue to pursue other acquisitions that meet our market and brand criteria, as well as our return on investment threshold.

In closing, our strategic initiatives generated strong organic growth, our cost efforts reduced SG&A expense as a percent of gross profit by 80 basis points and we continue to generate the best operating and net margins in our peer group. Special thanks go to our 28,000 associates who produced these outstanding operating results.

With that I will turn the call back to Mike Jackson.

Thanks Mike.

We're very pleased with our performance in the quarter and are encouraged by our ability by generate top-line growth coupled with our continued cost reductions and the discipline redeployment of our significant cash flow to improve shareholder value. As we look to the balance of 2004, we believe that the market will remain intensely competitive and that industry unit sales will range from the high 16s to 17 million units.

In closing, we reiterate that we've increased our 2004 full-year EPS guidance to the range of $1.43 to $1.48, and provide second quarter 2004 EPS guidance in the range of 38 to 40.

That conclude our remarks. Thanks for joining us today. Operator, please open the call to questions.

(OPERATOR INSTRUCTIONS) Rick Nelson, Stephens.

Thanks you and congratulations. New vehicle same-store sales growth was near the top of the pack this quarter, Mike. You gave up some gross margin. I am wondering if you're getting more aggressive from a marketing standpoint on new vehicles; if there's some strategy change.

I think I called it out in the fourth quarter last year that going into '04 this would not be the typical AutoNation year where the improvement would be simply on the cost and productivity side. While our efforts will remained there, we know feel the combination of the operating discipline we have with the better overall economic environment that the return on investments and initiatives on the revenue side will pay off for us. So we're making those investments and we clearly have demonstrated now the ability to drive revenue based on these initiative investments, and that is the more balanced approach that you'll see from AutoNation this year.

So we should look for continued above peer group same-store growth?

No, I can't speak for how everyone else is going to perform. I can't speak exactly how it will unfold for us quarter by quarter. But that is the approach we're taking for the year.

On the SG&A front, you have done a great job. I'm wondering what the opportunities are there and what programs you have in place to narrow those ratios further.

As you know, Rick, we've achieved 500 basis points improvements of SG&A as a percent of gross over the last four years. That's $150 million per year now in savings. We've called out that over the next several years we will achieve another 200 basis points for a total of 700 basis points. That will come primarily on the productivity side, primarily as the result of technology investments. The level of difficulty and complexity is very high, but we're very confident we can achieve those targets. The technology improvements will not only give us the productivity gains, but it will give us the ability to operate the business better. We're making those investments.

Thank you.

Jeff Black, Lehman Brothers.

I had a couple of quick questions. Nice quarter guys. On the inventory, could you give us the number on a trailing 30 day basis for new cars on the days supply?

That is trailing. Trailing 30 days -- 68.

New and used.

No, that's new.

Mike Jackson New is 68, used -- but the calculation is the same.

The calculation is the same for both.

Is the calculation the same as with used in the year ago quarter when you were at 79?

Yes.

No, a year ago we were at -- or today we're 36 on used and 68 on new.

A year ago we were at 33 on used and 72 on new.

So 72 versus 68.

Got it. And on used you mentioned you're seeing pricing power, but if you look at the revenue per vehicle, the gross profit per vehicle retailed on used it doesn't indicate that. Are you talking about you're seeing the pricing in the wholesale market primarily?

We're seeing strength in the auction. I think you see the Manheim Index has really strengthened. I think issues that you're pointing is we're continuing to move to lower-cost used vehicles. Our revenue per used vehicle continues to drop, and that's a conscious attempt to move down to a more affordable used vehicle and I think it's really helped our volume.

In terms of profits, when would we -- are you taking a hit on gross profits as well with this strategy or would we expect at some point in the year for gross profit for used to improve?

The margin was off about $51 on a same-store basis than used. We've picked it up in F&I; we were up 51 in F&I, so it was kind of a wash. But I think as you move down into those lower-priced used cars you do feel a little bit of pressure. But we really likes the volume and felt that we had a very balanced approach to the business and showed growth that was really above the rest of the market.

One final question and then I will turn it over to the others. On the F&I where do you attribute the strength in F&I? You have also shown a break from the pack in F&I -- comps in F&I per car year-over-year. Could you just tell us where that strength is coming from?

I think it is in two places. One is we worked very hard in developing a preferred lender network that generates significant dollars to us and gives our stores, we believe, a competitive advantage. The other is we've worked very hard on our product penetration. We've partnered with the manufacturers and we are selling the manufacturers warranties and negotiated some nice deals there. And we really think the value added products are the future of F&I.

Thank you very much.

Gerry Marks, Raymond James.

First of all, your net inventory carrying costs, you got a benefit it looks like on higher inventory levels. Are the automakers extending out payment terms on the floor plan assistance?

The only one that's changed their program is GM, and they've moved an additional 30 days over the past twelve months.

But none of the other OEs have shifted that?

No.

So would this benefit primarily just be because of your GM exposure, because I thought you guys were under-weighted with GM?

We've got a total of 90 GM franchises, so I haven't done the exact calculation but certainly GM's more liberal program has helped some.

If you look at the net floor plan number in (indiscernible) assistance quarter-to-quarter, we've got just a very slight improvement. We're essentially in line with where we were a year ago.

If I look SG&A as a percentage of growth, you continue to push it to industry-leading numbers of -- I think it were 73 percent or something. Is part of this due to the lease buy-out now or can you quantify that?

The lease buy-outs definitely help as we continue to drive down SG&A, but it is not a major factor. The cost savings are really coming across the board. We're attacking our fixed costs; we're looking at our compensation costs. As Mike said, our technologies spend is driving some benefit for us as well. But there is not a significant piece of it that I would attribute strictly to lease buy-outs.

Last question, Mike, I heard you allude to a new service and parts best practice that you were going to be rolling out this quarter. Could you elaborate on that a little bit?

We're instituting using some third party trainers and some in-house trainers to service drive process that is giving us a nice lift. You saw that we have strong same-store growth in parts and service, and it is both on the customer pay side and the warranty side as we have really focused on our service lanes, menu process and a very defined well-trained process and we're getting some lift there.

Thanks.

Jonathan Steinmetz, Morgan Stanley.

On the new margins, I believe in the past you've talked about a 7 to 8 percent range for gross margins and I'm wondering if you see a return towards the 8 percent type level anytime this year or what you think would have to happen on a macrolevel or an AutoNation level for that to happen.

First, in this intense environment we're satisfied that most margin compression on the new side has stopped and it's been stable for the previous three quarters. What it will take to move back towards the 8 percent will be a combination of new product and lower inventories. Exactly when that's going to occur, I can't say. But those are the conditions that would give us the opportunity to move back towards 8 percent.

The second question is on parts and service. You had a nice comp there. Are you able to break down on either on the -- I guess on a customer pay side how much was a traffic increase and how much was dollars per repair order and more repair orders, that kind of thing?

I don't have it in front of me, but I would say your hours per repair order, which translates into dollars per repair order, is where our growth is. I don't think our raw traffic has improved a lot, although we have instituted in the last two months a very comprehensive service marketing program that we believe will drive increased traffic. But thus far we believe we've done a better job in the service lanes with our new process.

Finally, how is April going?

You know we never comment on business during the current quarter.

Thank you very much.

Domenic Martilotti, Bear Stearns.

Good morning guys. Just a couple of questions on your uses of cash. Looking at the share repurchases, has the Board set any sort of range in terms of purchase price where they see different types of or volumes of purchases?

The way we think about it is very much more on a multiple basis than a specific price point. We have a view of the type of business we're building and where we think we're taking it in the future, and we look and where the multiple is today and the value of the stock today at that multiple, and think it's a very attractive purchase. We think the stock is undervalued. We do not have any specific target where I would say we wouldn't repurchase shares, but it something that we always discuss vis-a-vis of course what kind of opportunities we also have on the acquisition side. Obviously, over time these parameters could change and the multiple could move relative to what we could do with acquisitions, and there you would see us make more acquisitions than share repurchase.

Could you update us on what the approved purchase allotment is right now?

Give me one second, I will look up. I will tell you this, that it is not a restriction that holds back our program.

We've got the exact number for you. The remaining Board authorization at the end of the quarter was $237 million.

I would tell you that is a technical issue. We could get Board approval if a share repurchase opportunity was there, no problem.

Secondly, on cash you did significant lease buy-outs in the quarter. I'm sure you targeted other leases you want to buy out for the remainder of the year. Can you give us an idea of what that number is roughly?

I don't think you would see us do more than maybe 30 or $40 million in the rest of the year, and then if you look out to next year I don't think we would do more than $50 million. What we do is we go after what we feel are the high cost leases; we can refinance them much more effectively. But typically you have to wait until these things hit a renewal period before we are able to buy them out in an intelligent fashion.

Lastly, on the F&I business, with all the attention that has been given to the dealer reserves, have you guys had any internal kind of analysis where you're above the traditional cap rates -- I know the captive companies tend to cap it at about three percent -- to see what volume of your business is above that and what potential affect that could be if legislation were to force you to change that across the board?

We really don't see an issue there in the sense that we are offering a value to the consumer, the finance institution and receive a very reasonable fee for having done that. Our average rate commission to us is around one percent. We already have caps in place within our company and the final rate the consumer pays is fully disclosed to the consumer. And in the future we will even go to further disclosure to make sure the consumer is aware that they can negotiate that rate. So we feel we have tremendous added value in this business. We feel over the past year we've already taken the steps with a menu process capped in place and excellent disclosure that we have limited exposure on this issue.

So you said you had an internal cap for AutoNation?

Yes we do.

Could you give us that number?

Caps vary according to finance institution so I can't give you a definitive number.

Could you tell us what percentage of your finances goes through captives?

Yes we can. We finance about 70 percent of the business; arrange the financing for about 70 percent of the business, half of which goes to captives and other half goes to other lenders.

Thank you guys.

Matt Nemer, Thomas Weisel Partners.

A quick question just to follow up on what Gerry asked about on SG&A line. Can you break out sort of the change in rent expense year-over-year?

I don't have that in front of me. We haven't broken it out. You could almost do a quick calculation on $70 million worth of lease buy-outs at these 9 percent cap rates; you could fall back into it.

Okay.

There clearly is some rent expense that's being moved down to an interest expense. But that is not what's driving the SG&A improvement.

Okay. And then on the F&I issue, I guess the Attorney General in New York is pushing for a dollar disclosure on F&I contracts. What do you think the impact of that would be if the consumer were to see the actual dollar amount as opposed to the APR markup?

I think it would be in our case negligible. I think it is a fair charge for the services that we're rendering and the final rate that the consumer is paying in most cases is below what they could get on a direct basis from finance institutions. So it's a win-win for the consumer.

Just lastly, can you just comment on what you're seeing in the Texas market? I think you mentioned it was a little bit week and I'm just wondering if it is sort of counterintuitive with energy prices up. Just wondering what you're seeing there.

I think the Houston market overall is off about 11 percent. I think the Dallas market is off about 5. We also have pretty good presence in Corpus, Austin and Amarillo, and Austin and Corpus are relatively normal and Amarillo is a little bit more challenged. I wouldn't begin to go into the root causes. There's a lot of big companies and big industries in those markets. Not all are energy-related. But certainly it's a more challenging market than the rest of the country today.

Thanks very much.

(OPERATOR INSTRUCTIONS) Charles Grom, J.P. Morgan.

I was wondering if you could comment on the used car market, particularly in geographic markets where you compete with CarMax. Have you seen any difficulties there or if you think you're starting to gain share against the KMX.

We don't benchmark CarMax alone; we really look at the entire market. Our used car business is really strong throughout the country. I think as we reflected on what our strong markets are in new, for the most part they are same in used, although in Texas we performed better on the used side than we have the new side. We really believe that the things we've put in place with our inventory management, with our training, with our pricing and our marketing that is really driven that business, and we're very pleased with our efforts and our results across the country. There's not one particular market that in our mind has under-performed in used.

Second question, Craig, could you remind us what's in the other revenue and gross profit line? You have got about a $14 million swinging there. Could you just go through that?

That's primarily our fleet business.

Thanks a lot.

Michael Heifler, Deutsche Bank.

You mentioned earlier, Mike, than the strength in the used car market was helping used car revenue. Can you comment on the outlook for the used car market in terms of pricing? And how does strength in used car prices help the margins in the used car business?

I think as you look out we see a nice stable used vehicle market. There's less vehicles coming off lease, there's less vehicles coming out of rental, so the values have held up pretty nicely. We will continue to direct our efforts to lower cost used vehicle that maybe don't have quite as much margin, but certainly will give us the velocity in the F&I and increase our customer base.

Where it gives you opportunity on the gross margin side is obviously if the index is moving down, that means your existing inventory is depreciating, which will compress your margins as you retail that inventory. So obviously in a stable valuation market you have less volatility on the value of your existing inventory.

So you guys see ongoing strength in the used car market? The outlook remains positive?

Certainly in the spring and summer season we think it's positive. Model changeover is always a little bit more challenging, depending on what the manufacturers are doing on the new side. We like the used car business right now and are pleased with our efforts and our results.

Thanks.

Thank you for joining us today. Appreciate all your questions.

Thank you ladies and gentlemen. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.