AutoNation Inc (AN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AutoNation fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to the Company, AutoNation.

Good morning, ladies and gentlemen, and welcome to AutoNation's fourth-quarter 2004 conference call. My name is John 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 765878 after 12:30 PM Eastern time today through February 10, 2005.

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

Thank you, John. and good morning. I'm pleased to report that AutoNation had a strong finish to 2004 with a solid performance in the fourth quarter. Today we reported record operating income of 193 million. Net income from continuing operations of 116 million or 43 cents per share, which when adjusted to exclude certain items, equates to record fourth-quarter earnings of 34 cents per share from cooperations, up 17 percent versus a year ago.

Our performance was largely the result of a 9 percent topline improvement and leveraging a lower-cost base. We are particularly pleased with our same-store sales results in the quarter where we delivered revenue growth that ranged from 5 to 10 percent in each of our business lines, new vehicles and used, parts and service, and finance and insurance.

Our SG&A was down to 70.8 percent of total gross profit, demonstrating continued improvement on the cost side. I'm also pleased to report that at the end of December our new vehicle inventory has been reduced to a 53 day supply versus 71 days at the end of '03.

Reflecting on the quarter, we saw an improved retail environment compared to a year ago, although the marketplace remained highly competitive. We saw a rebound from the disruption experienced in the third quarter as a result of the four hurricanes that struck Florida in the Southeast United States, generating 2 cents per share benefit to the fourth quarter.

For the full-year 2004, the Company reported revenues of 19.4 billion, a 4 percent increase versus the prior year, operating income of 767 million and net income from continuing operations of 396 million or $1.45 cents per share. Excluding certain items, 2004 EPS from continuing operations was $1.36 cents, a 2 percent increase on a comparable basis from $1.33 in 2003.

Looking ahead we believe that the automotive retail environment will remain stable and have monthly volatility and continue to be highly competitive as we move through the spring and summer into the model year changeover.

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

As Mike mentioned, we had several onetime items that impacted our results in the fourth quarter. Excluding the impact of these items, we reported operating income of 193 million, up 21 percent versus a year ago and as Mike said adjusted EPS of 34 cents per share up 17 percent.

I will now review these items and other selected financial data. A reconciliation of our reported results including the impact of each of the onetime items I am about to discuss can be found in the financial exhibits of our press release.

During Q4 we recorded income tax benefits and continuing operations of 9 cents per share related to the settlement of various income tax matters. The resulting tax rate in Q4 was 22.9 percent. We also recorded 19 cents per share of tax benefits as part of discontinued operations related to similar tax matters. Our underlying effective tax rate for the full-year 2004 before adjustments was 39 percent.

As we have mentioned in the past, we expect additional tax adjustments over the next 6 to 12 months as we continue to work through various tax matters. Once we resolve our open tax matters, we expect our base tax rate to be approximately 39 percent.

During Q4 we recorded approximately 1 cent per share of additional litigation reserves for an expected settlement related to our previously disclosed Texas dealer inventory tax class-action litigation. In addition, included in discontinued operations are 2 cents per share of losses related to the divested share of several stores during the quarter.

For comparison purposes, we had several items that affected our results in last year's fourth quarter. These items are listed in the attachment to the press release and have all been disclosed previously. Our strong cash flow during Q4 allowed us to payoff the remaining $80 million obligation from the 2003 IRS settlement, repurchase $46 million worth of stock, reinvest 52 million in our business through capital expenditures and spend 44 million on acquisitions.

We remain disciplined on our cash outlay. We are targeting 2005 capital expenditures of approximately 130 million, excluding any acquisition-related spending of lease buyouts. As you know, we view acquisitions and share repurchases opportunistically. Our full-year 2005 target for combined spending on acquisitions and share repurchases is approximately $300 million. As for capital structure, at December 31st, 2004, our non-vehicle debt was 813 million, essentially unchanged from where we ended 2003. Our cash at December 31st was 107 million. We have available cash and incremental borrowing capacity of 580 million and a 16 percent non-vehicle debt to capital ratio.

In conclusion we believe that our best-in-class operating and net margins combined with our strong balance sheet put 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. As I begin, please note that my comments this morning will be focused on the fourth quarter and are on a same-store sales basis.

We are very pleased with our performance in the quarter where we recognized same-store sales growth in each segment of our business, while reducing inventory levels and expanding gross margins. A strong showing by our Florida stores, aggressive manufacturer to dealer incentives and our new field structure contributed to our record fourth quarter.

Let's take a look at the results. Starting with new vehicles, our same-store unit volume of 96,400 in the quarter, an increase of 4 percent compared to a year ago. New vehicle revenue increased 5 percent to 2.9 billion, and gross profit as a percent of revenue was 7.3 percent, an increase of 10 basis points compared to the period a year ago, and an increase of 40 basis points compared to the third quarter. This in spite of what remained a very competitive environment.

Gross profit per new vehicle retail grew $51 to $2181. Progress continued in the quarter on new vehicle inventory levels. Our overall day supply was 53 days at December 31st, a reduction of 18 days compared to a year ago. In the quarter, our domestic day supply was down 16 days, and on a unit basis, domestic inventory was reduced by 20 percent.

Turning to used vehicles on a same-store basis, AutoNation retailed 55,500 used vehicles in the quarter. This is a 5 percent increase in volume, generating a 7 percent improvement in revenue and a 16 percent improvement in gross profit. As a percent of revenue, gross profit grew to 11.3 percent, an increase of 90 basis points compared to the period a year ago, and gross profit for used vehicle retail reached $1708, an increase of $175. Our used vehicle day supply was 37 days as we closed the quarter, down six days compared to used vehicle inventory levels a year ago. Our used vehicle management system coupled with an improved used market drove this performance.

Overall in the quarter Las Vegas and our Florida and California markets were strong for the brands we represent, while our Baltimore, Cleveland, Dallas and Houston markets were all off. In the area of service parts and collision, we're encouraged with our strong results in the quarter. Same-store revenue increased $31 million to 615 million, and gross profit was up 13 million to 268 million, both increases of 5 percent compared to a year ago.

Our focus on increasing customer pay service and parts remains a priority. In the quarter we recognized an increase of 6 percent compared to a year ago, attributable to the continued implementation of best practices that include our service drive process, our customer friendly maintenance menu and our service marketing program. In addition, work continues on optimizing our in-store pricing models and intense training of our service associates on our customer-focused initiatives. We look forward to the continued growth potential in our service operations.

Turning to finance and insurance, the fourth quarter marked yet another record quarter for F&I gross profit per vehicle retail with $983 per vehicle on a same-store basis, an increase of $52 or 6 percent compared to the period a year ago. The strong and continued improvement was driven by our fully transparent process that is supported by the AutoNation pledge, along with ongoing concentration on our fourth quartile stores.

In the quarter, we completed the acquisition of what are now Maroone Volkswagen and Maroone Volvo of Delray Beach, Florida, as well as Maroone Cadillac of Palm Beach, Florida, which brought the annual revenue run-rate of the eight franchises that we acquired in 2004 to $465 million. During the year, we also divested stores that did not fit our business model. At year-end divested stores represented approximately 400 million in annual revenue run-rate.

Our corporate development team continues to work toward optimizing our portfolio of stores, which today numbers 358 franchises in 281 locations. We are aggressively pursuing acquisitions that meet our disciplined market brand criteria, as well as our return on investment thresholds.

In closing, our efforts in 2005 will be on further implementation of nationwide common processes, supported by common element pay plans and a robust training initiative. I would like to thank our associates for a very good quarter and look forward to building on this performance in subsequent quarters.

With that, I will hand it back to Mike Jackson.

Thanks, Mike. To recap we had a solid performance in the quarter and a strong finish to the year despite the fact that 2004's full-year adjusted EPS growth of 2 percent was not to our satisfaction. Nonetheless, the year was marked by a number of accomplishments, including the launch of the AutoNation pledge, the implementation of a streamlined operational structure, and the successful transition from a low rate environment to a rising interest rate environment, especially in regards to inventories.

I would also like to highlight some longer-term accomplishments since this marks my completion of my fifth year with AutoNation. Over the last five years, we have driven a 600 basis point decrease in SG&A expense as a percent of gross profit, further diversified our brand mix with imports including luxury brands, representing 55 percent of our profit in 2004 versus 39 percent in 1999, and our financial discipline has allowed us to repurchase 1.6 billion worth of common stock while reducing our total debt -- that is non-vehicle debt, lease obligations and tax liabilities -- by over $1 billion. As we look ahead, we will maintain our financial discipline, and for 2005 we believe that the market will remain intensely competitive and that industry sales of new vehicles will be near 17 million units for the seventh consecutive year.

That concludes our remarks, and let's take some questions.

(OPERATOR INSTRUCTIONS). John Murphy, Merrill Lynch.

I had a couple of questions here. First on gross margin, what was the real improvement that we saw here in the fourth quarter? Was that a result of inventory reductions, or is it a result of the decline in incentives by the big three? What was really driving that improvement?

On the new vehicle side, it is driven by factory to dealer incentives. There was more dealer cash in the quarter, and we were able to bring back that to the bottom-line. I also think it is improved mix, and certainly the leader inventories helped our gross margin. Plus, the dealer cash was a big factor in Q4.

Is that something you expect to continue going forward? Obviously you have done a great job with inventory here. Can you keep that going in the first quarter and the second just going forward into '05?

It is tough to predict, but clearly to have any ability to influence front end to gross in a positive direction you have to have the inventory in a good position, and at 53 days we think we are well-positioned. We still have to perform, but I think the starting point is having the 53 day supply.

That is certainly a good position versus the rest of the industry. Then just looking at -- the SG&A performance was also great in the quarter. How much of that is repeatable, and how much of that was a result of the pretty good sales level in the quarter? How much of it is operating leverage and how much is structural?

I would say as regards the SG&A improvement we have on the fourth quarter was driven by leverage. We are a low fixed cost business as you are well aware, and when we see revenues increase, it impacts our SG&A. There is a continuing effort within the Company to drive down costs and results coming out there as well.

As I already called out, we have achieved 600 basis points over the last five years, and over the next two years, we believe we can achieve another 110 basis points.

And then just one housekeeping question. The shares outstanding were relatively flat from third quarter to the first quarter. Is that just a function of options grants?

Exactly.

Rick Nelson, Stephens.

Thank you and congratulations. What accounts for the improvement in the used car business? We saw good comps and much better margins.

The market was stronger. I think we leaned up our inventories some, and I think we just did a better job. We improved about $42 from our full-year number. The major improvement in gross was over last year's fourth quarter that was a very difficult environment. So I would say it's a stable environment. We continue to work hard at our used vehicle management system, and I think the market helped us also.

And the improvement in Florida and the Southeast, I'm wondering if that is continuing through January and how you feel about January sales?

We saw a lot of strength in Florida, in South Florida particularly, which was not that affected by the hurricane. So we will have to see how that develops into the first quarter, but Florida we think is stronger than just the hurricane recovery.

Thank you.

Rod Lache, Deutsche Bank.

It is Mike Heifler. I have just a couple of questions for you guys. First, I want to follow-up on an earlier question on the new vehicle business. You have clearly been effective at reducing inventory, but the rest of the industry has not really followed your lead. I think you guys said that the domestic units for you were down 20 percent, but if you look at the big three, there were up overall 6 percent. You know under these circumstances I would have expected your sales and margins to be under pressure in the quarter and they were not. Now how much of this was really Florida and how much of this was (technical difficulty)--

There is no question you were on the point that we are not an island. But having your island in order is a good first step. We clearly see that domestics have taken prudent steps on production, and both Ford and GM reacted in the first quarter, with GM ending up with a 9 percent production cut and Ford with a 7 percent production cut. So they are clearly taking steps, and it is only a matter of time before the industry figure becomes more in line.

And as far as other automotive retailers, they are going to be dealing with the same issues that we are. We may be a little bit ahead of the parade, but they are going to have to come to grips with the same interest -- issue that we are in a rising rate environment and you cannot manage inventory the same way.

Next question.

Charles Grom, J.P. Morgan.

Congratulations on a great quarter. In terms of the overall market, I was hoping you could provide some insight on a couple of hot button topics. First is the incentive climate, particularly on the domestic side, and second is negative equity and if this has become more of a problem for you guys over the past two months?

You know incentives are a structural part of the business. They remain stronger and larger than ever. We are not advocating dramatic increases in incentives. I think they are at a level of diminishing return. So I think they are at a level that will continue for this year. And what was the other question?

About negative equity.

Mike, do you want to talk about negative equity?

Negative equity has been an issue in the industry for quite some time. I don't see it as being a greater and greater issue. It seems to have stabilized. Our average finance contract now is in the low 60 month, low to middle 60 months, and we are seeing similar trading cycles as to what we have seen in the past.

Okay, great. I appreciate the insight. You did not comment on '05 guidance. I know it's going to be your forte going forward, but I just want to confirmed that you are comfortable with 10 to 12 percent for this year.

We are not giving specific guidance for the quarter or for the year.

Okay. But your long-term target I believe was 10 to 12 percent, is that correct?

Long-term target is the average over the year's EPS growth of 10 to 12.

Okay. And just one last question. Floor plan assistance per car sold was about 277, and the benefit per share after tax is only a penny, which is surprising. Given how quickly you turned your inventory during the quarter, could you comment on the credits you are receiving and how much this may change going forward?

Craig will talk about that. What we do is we only recognize the credit upon the retail sale of the unit. So it is retail sales that drive us to recognize the credit.

Yes, you know we break out in the attachment to the financial statements I released the full-time assistance and the full-time interest expense so we can see the components. But clearly in a rising rate environment, like Mike said, the expense will rise more rapidly than the assistance.

So it's likely at some point later this year that benefit actually may be a loss per share potentially?

I don't know that we're willing to go there.

Okay, great. And congrats again on a nice quarter.

John Tomlinson, Prudential.

Congratulations on a very good quarter. A couple of questions for you. In terms of January, have you seen the domestics with their high levels of inventory increase their incentives, or going into February, have they increased it? What do you expect the impact to be on your domestic stores with potentially increased incentives?

We have seen some tweaking of incentives in the last few days. You know the incentives in many cases are being applied regionally as opposed to nationally. I think the market is still going to be intensely competitive, and I think it is going to be a share war. So I don't see major changes in the incentive program, but certainly there's some tweaking and some ratcheting up in some key product lines.

All right. Thank you. One other question I think just a follow-up on the floor plan. Have you seen any response from the domestics and their willingness to match great increases on the floor plan? Are you seeing them just kind of stay status quo on the number of days they are giving?

I think broadly speaking we are pretty much on a status quo basis. Ford is the one domestic that has a floor plan assistance program that pretty much moves in line with what is happening with interest rates in the marketplace. The others to a large extent are pretty much on a status quo basis.

And just one other follow-up. Do you guys have any SG&A impact for I guess this adoption of FAS 123, and starting in the second quarter, is that going to be material, or can we kind of rely on what is disclosed in the footnote in terms of an EPS impact?

I think you should anticipate an expense somewhere in the neighborhood of about a penny a quarter.

Matt Nemer, Thomas Weisel Partners.

Good morning. Just a quick question for Mike Maroone. What is your outlook for used car sales for this year? Do you think that things are -- have we rounded the bend and things are getting better, or what do you see happening?

We certainly had a strong used car performance in the fourth quarter, both in terms of retail volume, in terms of revenue, in terms of gross margin. I see the market being stable. We continue to see the opportunities in the market in what we call the C-Car, which our less expensive cars along with a certified preowned. But I don't think the market is going to grow a lot. I think it is really up to our performance within the market.

And then a follow-up on an earlier question about negative equity, do you think that you are may be taking share in the used market because of negative equity? Do you feel like because you have more finance options that you are able to close more deals than in, say, an independent used car dealer?

I really think the opportunities for the new vehicle dealer comes from the number of vehicles we have traded and the fact that we don't need to go to an auction to go buy our inventory at higher prices as others do, as the independents do. So I really see that is where the advantage is.

Okay and then one last question. Can you give us an update -- I guess Mike Jackson -- on private market values for dealerships?

I think they remain expensive, and that is why we have been very disciplined on acquisition. And unless they hit our return threshold targets and our planning of 15 percent after-tax, we don't make it. So we have to hit the right combination of valuations in the marketplace, combined with the scale and productivity we bring to an acquisition to hit that return target. I would say they remain expensive.

Jerry Marks, Raymond James.

Just a couple of quick things. The 17 million that you cite in your outlook, Mike, is that light vehicles I assume, and so you are assuming vehicle sales are up about 1 percent this year?

Yes, that is light vehicles.

Okay. In terms of your wholesale revenues on the used, why did that go up about 12 percent?

Somebody will look at that, and we will try to get you an answer.

Okay. And then just the last question I had was, in your other revenue line item, that kind of popped up from 8.2 to 21.5. I was just kind of curious why that moved up as well?

What we have done here this year is we have broken out our AutoUSA business essentially where we are in the business of selling leads to other dealers. We report that net. Now we are breaking it out gross unless we have seen the revenue go up on that line item.

And, Jerry, it is Mike Maroone. Back to your earlier question on used wholesale, on a same-store basis, we are up about 8 percent, and I think it's really a reflection of just the higher new and used volume that we did.

Okay. Are you guys starting in terms of your days supply, starting to feel more comfortable with stocking some of your lobs (ph) with used?

We have always kept our -- we always targeted a range of 37 days. That happens to be exactly where we hit the quarter, but we are in the 35 to 37 day. That has not changed. We really want to turn our inventories, keep them fresh, keep them on the market.

Mark Irasari (ph), Banc of America.

Good quarter. Just this first question for Mike Jackson. If you could just talk about your outlook longer-term? You mentioned the term, intensely competitive, and that is kind of new from what you were talking about previously. Can you just describe kind of the characteristics of what you're seeing now versus when you originally put that longer-term guidance that makes you kind of think that the environment or you use the kind of term, intensely competitive, what has kind of changed?

Well, I think actually have been using the term intensely competitive for several years. And if you look at the inventory levels in the industry, as long as they are high like they have been in '03, '04, and of course the competitor is going into '05, it is going to remain that word, intensely competitive. And I think you're really going to need to see a day supply in the marketplace around 50 to 60 days before you would have a more orderly situation.

And then --

One more question.

Jonathan Steinmench (ph), Morgan Stanley.

I just wanted to try to disentangle on the comp growth how much of this was from Florida and specifically South Florida versus the rest of the Company. So if I were to pull out South Florida, were the comps positive for the rest of the Company?

Yes, they were. And as I mentioned -- it is Mike Maroone -- as I mentioned, we were very strong in California also. We saw a recovery in the Bay Area and continued strength in Southern California, which is also a huge market for us. We did have other strong markets. We certainly benefited from Florida both with a hurricane recovery and an overall very strong economy that has really continued on well beyond the hurricane recovery. So we did show growth outside of Florida, yes.

Basically as far as the hurricanes, we lost 2 cents in the third quarter, and clearly in the hurricane impacted areas we see that 2 cents came back in the fourth quarter.

Thank you, everyone, for joining us today. We appreciate it very much.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.