AutoNation Inc (AN) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AutoNation's first quarter earnings conference call. At this time all participants are in a listen-only mode. Later, we'll conduct a question and answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded today, Thursday, April 28, 2005.

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 2005 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 778614, after 2:30 p.m. Eastern Time today, through May 5th, 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 our remarks we'll open the call to questions. I'll also be available by phone to address any follow-up issues.

Before we begin, let me read our 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 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 has 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'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Thank you, John, and good morning. AutoNation is off to a solid start in 2005. Today we reported first quarter earnings from continuing operations of $0.33 per share, which, when you exclude the $0.03 per share impact of our debt repurchases, translates to EPS of $0.36 per share, up 13% from last year.

We achieved record first quarter operating income of $199 million, up 9% compared to a year ago, driven by strong revenue growth in part from service, improved gross margins for new and used vehicles and continued leverage of our lower cost base.

Our results were driven by an increase in gross profits of 10% in used vehicles and 5% in parts and service. In SG&A we had 140 basis point improvement as a percent of total gross profit, demonstrating continued improvement on the cost side.

These efforts continue to produce best in class margins, with record operating margin of 4.3% and a net income margin over 50% higher than the competitor peer group.

Also, in the first quarter, AutoNation celebrated the sale of its 5 millionth vehicle. We are the only automotive retailer to have ever recorded this milestone. Even more remarkable is that AutoNation achieved this milestone in only 8 years.

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

Thank you, Mike. As Mike mentioned, we reported record first quarter operating income of $199 million, up 9% over a year ago, and excluding the $0.03 impact from our debt repurchases, adjusted EPS from continuing operations of $0.36 per share, up 13%.

Other financial items of note in the first quarter include the following. We experienced a $9 million increase in our floorplan interest expense versus a year ago, due to higher interest rates, partially offset by lower average inventory level. We expect this negative trend to continue as we experience increased interest rates versus the prior year. Although the effect will be partially mitigated by lower inventories during 2005.

Also during Q1, we recorded $12 million, or $0.04 per share of tax benefits as part of discontinued operations related to the resolution of certain tax matters. As we have mentioned in the past, we expect additional tax adjustments over the next 18 months as we continue to work through various tax matters. Once we resolve our open tax matters, we expect our effective tax rate to be approximately 39%.

Our cash balances at year-end 2004, and strong cash flow during Q1, allowed us to repurchase $70 million worth of stock and reinvest $20 million in our business through capital expenditures. We also repurchased $95 million of our senior note and paid down about $30 million of our outstanding mortgage debt.

We are targeting 2005 capital expenditures of approximately $130 million, excluding any acquisition-related spending or lease buyouts. As you know, we view acquisitions and share repurchases opportunistically and anticipate that our full-year 2005 combined spending on both could approach $300 million.

As for our capital structure, at March 31st, 2005, our non-vehicle debt was $686 million, down nearly $130 million from December 31st, 2004, due to our debt retirement. We have available cash in unused credit lines totaling $500 million, and a 14% non-vehicle debt to capital ratio.

In fact, over the last five years, our financial discipline has allowed us to reduce our total debt, defined as non-vehicle debt net of cash, lease obligations and tax liabilities, by over $1 billion. This financial discipline and strong balance sheet, when combined with our best in class operating the net margins, 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. As I begin, please note that my comments are on a same-store sales basis unless noted otherwise. In the quarter total sales for the industry were off just slightly. However, when adjusted for fleet, industry retail sales were off approximately 7.5%. Despite what remained a challenging auto retail environment, AutoNation delivered strong results in parts and service, improvements in gross profit as a percent of revenue for both new and used vehicles, and improved gross profit per vehicle retail for new, used and F&I.

Our efforts relative to inventory management, cost control and nationwide common processes continued to pay off.

AutoNation generated first quarter same-store new vehicle revenue of $2.64 billion, a reduction of 3.4% on 91,000 new vehicles retailed. Year-over-year, our new vehicle gross profit per vehicle retailed increased $68, to $2,134, and gross profit as a percent of revenue was 7.3%, an increase of 10 basis points.

At March 31st, our new vehicle inventory stood at 60 days, a 7-day reduction, or 12,000 units, compared to the quarter a year ago, and 9 days lower than the industry at 69 days.

Turning to used vehicles, on a same-store basis, AutoNation generated $1.1 billion in revenue, up 1% compared to the period a year ago. In the quarter, used vehicle gross profit of $113 million improved 8%. Gross profit per vehicle retailed of $1,859 improved by $162, and retail used vehicle gross profit as a percent of revenue was 12.5%, an improvement of 70 basis points compared to the period a year ago. This, on the sale of about 60,000 used units in the quarter.

Our used vehicle days supply was 39 days at March 31st, an increase of 1 day compared to the quarter a year ago, with just 1% of our used units over 60 days.

We attribute our strong used results to the continued disciplined management of our used business in an overall used pricing environment that continued to improve. In the quarter, Florida, along with the Houston and Las Vegas markets, were strong for the brands we represent, and Cleveland, Denver and Seattle were off.

In the area of parts, service and collision, I'd like to note that the quarter had one less selling day compared to the period a year ago. Parts, service and collision revenue in the quarter increased $25 million, or 4%, to $642 million, and gross profit of $277 million reflected and increase of $7 million, or 3%. However, on a daily selling basis, revenue was up 5% and gross profit was up 4%.

Specific to service, customer pay and warranty both showed strong improvement. On a same-store daily selling basis, customer pay increased 5% and warranty increased 6% compared to the period a year ago. We continue to benefit from our customer-friendly service drive process, our competitive pricing initiatives and our service marketing program.

Turning to finance and insurance, our same-store gross profit was $970 per vehicle retailed, an increase of $23 compared to the period a year ago. This was achieved on revenue that was off $3 million, or 2% in the quarter, as a result of lower unit volume.

As we continue to optimize this area of our business, our focus remains on improving our fourth quartile stores and continuous training of our F&I associates.

Also of note, at the beginning of April we branded our 15th market when we introduced our Power brand to Phoenix consumers, with the renaming 11 of our Phoenix area locations. The launch was well received and we're looking forward to fully leveraging the scale of a common brand in this market.

And finally, during the quarter the 2005 Ward's eDealer 100 was announced and AutoNation was proud to earn 44 of the top 100 spots in the online ranking, up from 27 the previous year. Our multiple eCommerce initiatives continued to drive this rapidly expanding segment.

In closing, we're pleased with our performance in the quarter, where we expanded margins, reduced inventories and continued our solid work on the cost side. Our associates are excited about the initiatives underway to lead the industry in terms of the customer sales and service experience.

With that, I'll hand it back to Mike Jackson.

Thanks, Mike. While the auto retail environment was challenging in the first quarter, we are pleased with our operating performance, our continued cost reductions and the disciplined redeployment of or significant cash flow. As we look to the balance of '05, we believe that the market will remain intensely competitive and the new vehicle industry sales will be in the high 16 million units.

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

John Casesa, Merrill Lynch.

Just two questions, guys. First on inventories, Mike, how do you expect the year to go? Companies are cutting production now, and I guess, do you have an inventory target or at what point--how do you characterize your current inventories and what do you think will happen for the balance of the year?

John, we've been very pleased with where our inventories have been for now three quarters in a row, as we moved into a higher rate environment. And we think we're well positioned going into the Spring-Summer selling season.

For the rest of the industry, we are very pleased with the production cuts that have been made. I think there's short-term pain involved in that for the manufacturers, but I think long-term for them to rebalance the equation between supply and demand will put them in a much better position to deal with the challenges of the marketplace.

So, I think by the end of the year, we're hopeful by the end of the year that the industry inventory will be in line with more normal levels. But we, AutoNation, intend to be there for the balance of the year.

Okay. And by your measurement, are your inventories high, low or normal on a days supply basis or whatever metric you use?

I would call them satisfactory for the time of the year where we are. I think we like to run somewhere between 50 and 60 days.

Okay. And what are you, by your measure right now?

60 days.

Okay, thanks. And just secondly, on divestitures, did you divest any stores in the quarter and what would your expectations be for the balance of the year?

John, we did divest a couple of stores. It was not a significant number, either in terms of the number of stores or revenue. I think that you'll see us divest of a few here and there, but there's no massive divestiture plan. We also intend to acquire stores also, assuming they hit our return targets.

Okay. And so, Mike, would it be fair to say that you would expect acquisitions to be a bigger contributor to the brand mix shift that's occurring than divestitures would be?

I think we have to wait and see, depending on what we find in the acquisition side. We've got enough deals in the pipeline that we're looking at, it's just a matter of whether we bring them to fruition.

(OPERATOR INSTRUCTIONS.) Steve Girsky, Morgan Stanley.

Can you talk about why the used looked good, and you mentioned the strong versus the weak markets, was there a lot of variability in those markets, the strong versus the weak or was is sort of pretty close?

Steve, Florida continues to be very strong for us. We've seen continued strength in Vegas. The down markets aren't as far down. I would say the bandwidth has narrowed some. We've started to see recovery in the Houston market, which had been a tough market for us for about three years.

And can you talk about, maybe this is for Craig, the philosophy of buying back the bonds? It just seemed like a large number to me. Is that unusual or no? I know you've done this before.

We've been in the market before, but we're very opportunistic with bond repurchases, just like we are on the share repurchase side. I think there are two things that you saw in the last quarter. One was, we ended the year with a tremendous amount of cash and we continue with our strong cash flow. We had an arbitrage opportunity when you cut to the chase. The excess cash was on the balance sheet, probably earning close to 300 basis points less than what we were paying on the debt, and we had some large traunches offered to us and we took the opportunity to take them out of the marketplace.

And that is a better return than buying car dealerships?

As far as the number--a senior note we retired, I think it was an availability issue. We've been knocking on doors a long time and really couldn't get anything. So we just had an opportunity to buy a big block so we bought it.

It's certainly debt. If we had an acquisition opportunity tomorrow that we wished we had that $90 million or $100 million, we'd have no problem getting $90 or $100 million immediately on our credit line.

Okay. And what's your target debt to cap these days?

Our debt to cap these days is in the low teens. We're comfortable with it there. We are under-leveraged. We could certainly put more debt on the balance sheet. But the fact of the matter is, we are a cash flow positive Company and we're spending more time looking for where can we redeploy that cash than we are thinking about how much more do we have to borrow to create a redeployment opportunity.

Great. And can I just ask you one more thing? This negative equity situation that we hear about a lot, with the customers coming back, is that easing at all, do you think?

When you do all the research, and you know all this, Steve, there's a lot of positive trend lines out there from demographics and everything else. But, I think the negative equity is something that we're going to deal with for the next several years. I don't see it going away as an issue.

Rick Nelson, Stephens.

Thank you and congratulations. Can you breakout the days supply, domestic versus foreign dealers?

I would say that our domestics are probably around 80 days. I would say your imports are probably in the 40s. A couple of them might get into the 50s, and a premium luxury would be in the 30s and 40s.

And where would you like to be with domestic inventories, in that 60-day area?

I think our target is in the 70s. And I think depending on where you are in the build-out cycles, sometimes it's going to spike up and other times it's going to be reduced. In the fourth quarter I think you'd like to see if less than the 70s, and I think in buildout you're going to approach high 70s.

And the sequential rise, inventories improved year-over-year, but we did a sequential rise from year-end. Is that a seasonal issue, gearing up for the--?

Yes, Rick, that's definitely a seasonal issue. They [want] to be heavy going into January, February, not a lot of upside there. But certainly once you hit March, you're in the strong selling season and we're comfortable with a 60-day supply going into the strong selling season and then model year changeover.

I'd also add that you have to remember that the December selling rate was quite brisk and I think it impacted those numbers also.

Got you. Any comments on April, what you're seeing to date from the sales in both new and used?

No, we never comment on the current month.

John Tomlinson, Prudential Equity Group.

Just a quick question on used. Nice performance on the used margin. Where do you see that going? Do you think that continues to stay strong throughout the rest of the year or maybe you could expand on where you think those trends are heading over the next couple of quarters?

I think it's a little bit difficult to say. The used market has certainly been much stronger in the first quarter. The values as measured by Mannheim and other indexes are up. We also believe that our execution was better. We think our inventory management was better. We really focused on having more core vehicles in our inventory and we actually moved about 3,000 cars in the quarter from one store to another to try and get to the point where we could optimize our dollars in a retail basis.

I think the market's good. It's difficult to say whether it's going to continue throughout the rest of the year. We know that lease returns are down, so that there's a little less product available, and I think that's helped push the valuations up.

Okay. And then a follow-on for F&I. You continue to do very well there. How high can that number go and do you have any concerns with leasing creeping up here, that it might flatten out on a per unit basis?

I think that there's still some growth available in F&I, and it's really in tightening the bandwidth and performance within our stores. I think the growth has moderated some. We still see some level of increase. I think we're up $23 a car. I think the leasing is now in roughly about 20%. It's crept up very slowly. I don't see it as having a huge impact in F&I and there is some profit opportunities in leasing.

Charles Grom, JP Morgan.

Good morning and congrats on a good quarter. Just a couple of questions. Clearly, the low-cost operator are in the industry, but a general concern we hear is how much more low-hanging fruit is out there and how much lower this can go. And I was wondering if you could address this topic for us?

I would say, Charles, the low-hanging fruit's been gone for several years and we've been into a much greater degree of complexity and sophistication. I think our size is an advantage there, because we can tackle certain opportunities and issues that others can't, and it's very difficult for others to follow.

It's driven by process implementation, enabled with cutting-edge proprietary technology. That's really where we're making our gains today. And that's an important distinction. If it's pure cost savings, sooner or later you hit a wall, both from what you can do and also from morale within the Company.

And here, it's a productivity drive where you improve the performance of the Company at the same time that you make it more efficient, it has a very positive effect on morale. It has a very positive effect on the performance of the Company. And therefore, it is sustainable. And that's why we're very confident that over the next years we'll get on a run basis, another 140 basis point improvement in SG&A as a percent of gross. We're very confident that we're going to be able to do that.

And let me explain it. It's not low-hanging fruit. That's long gone. It's very complex. It's very tedious. But for our size and scale, every time we make a stride that is sustainable, renewable and we apply it to our run rate, it's big.

And another big motivation for us is it's a double win. It's not only for the current business, but it's always designed to apply to future acquisitions, which will take out some risk in hitting our return rate. It's 110 basis points over the next couple of years.

Great. And then just another big picture type question. With rates rising and the auto market as competitive as ever, do you expect private valuations to start coming down? I know they've been holding in for the past few years. And if this were to happen, what would your thought process be on acquisitions? Would you potentially accelerate your growth on that area?

Well, we're certainly looking for that day when we have an intersection between more rational valuations available in the marketplace and the scale and productivity we bring to acquisitions, which means we can hit our high return threshold with low risk.

I have to be perfectly honest with you, so far, I don't see it. The valuation certainly has come down from the peak land rush years of '97, '98, '99, but they remain pretty strong. Now, we could be right. The rising interest rates could turn it, but if you look really in a 20-30 year horizon here going backwards, the rates we have today, even though they're rising, are still very low. So they have a ways to go before that could be the trigger to change valuations.

Great. And then just one last one. Just to clarify, Mike, on an earlier point you made. You guys did have a $0.04 tax benefit in the quarter. I missed that. Could you just add color on that for us?

It's in discontinued ops is where we had a $12 million tax pick up.

Okay. So it was in the discontinued ops. Okay, great.

There was a small piece that hit operating income. That was only about $1 million. The vast majority of it is in discount.

Gerry Marks, Raymond James.

Craig, actually just to follow-up on that, that's why we had the 37.8% tax rate in the first quarter, but going forward we should just keep on kind of looking for about a 39% rate unless some of these anomalies occur again?

Exactly.

Okay. What was your basket for your share repurchases at the end of the quarter?

Going into the second quarter, we'll have about $55 million-$60 million basket, so we had a carry over of roughly $15 to $20 million at the end of the prior quarter.

Okay. And you bought out $20.5 million worth of leases. What's your ownership percentage of owned versus lease right now?

We own about 70% of our stores.

And back to Steve's question, in terms of the debt buy down, I understand you kind of had that 300 basis point arbitrage, but from an ROI standpoint, it doesn't seem to meet your 15% hurdle. Is it also kind of more strategic that if it could help get you out of the junk trade rating, where you can start getting some real economies of scale there on the debt side of things?

Gerry, I would say two things first. For debt, we don't think about ROI, because with our balance sheet we can re-borrow it tomorrow. It's not like a capital expenditure or an acquisition or even share repurchase, where that money has been committed for the long-term. We can re-borrow that money tomorrow.

So, clearly an arbitrage. If we have an opportunity tomorrow that we need $100 million, it's not an issue, it's a phone call away.

It certainly was not part of any strategy with the rating agencies, what so ever. The only activity with the rating agencies during the quarter was to be reaffirmed by positive outlook by Moody's. As you all know, we are investment grade with Standard & Poor's. We've been on positive outlook for quite some time with Moody's.

It's nice to be confirmed we're still on positive outlook. But I sort of feel like the bride coming down the isle, that the music's playing, I'm trying to get to the alter and they just keep making the isle a little longer. But, in my view we should be there.

Last question. I just wanted to make sure that this [unintelligible]. You ended last year with $443 million in the 9% senior sub notes. You bought down $95 million of it, so you're at about $350 million now, the last of the senior sub notes, so that gives you about a 50/50 variable to fixed rate spread or mix?

You're hitting me with some numbers and you know I'm not going to do them all at once. I can confirm that the notes are about $350 million. The 50/50 is about right. I'd have to do the calculations.

Michael Heifler, Deutsche Bank Securities.

I was wondering if you could share with us what you're seeing in terms of margin trends by category, by brand category mix?

I don't know that we've ever gone that deep, but in general, our margins have expanded on the car side. They've contracted slightly on the truck side. But all in all we had nice margin expansion in both new and used.

Okay. Can you comment on how margins are doing, domestic, import and premium luxury?

No material movement during the quarter. Other than up.

Okay. Mike, you kind of touched on this earlier about longer-term cost savings, but I was wondering if you could perhaps point to one or two items that you guys are really focusing on now as a big opportunity?

I think if you just look across the board, we're very focused on process, whether that's in our S&I area or service drive areas. That helps us drive up efficiency, productivity. We've got a consolidated purchasing initiative under way. We've got a share resource initiative under way.

Just on the share resource initiative, that drives cost savings in itself, but it also enables us to do things like consolidate our vendor files and do more centralized purchasing. The regional offices alignment, we're seeing the benefits of that. So, it's no one area. It's an across the board drive to productivity improvements, like Mike talked about earlier.

Matt Nemer, Thomas Weisel Partners.

First question is, on the floorplan assistance, it didn't look quite as variable as the expense and I'm just wondering how quickly the assistance rates are adjusting? And then also as a follow-up to that, what's been the private dealer reaction that you've seen in your markets to higher floorplan rates?

First on the assistance question, for the majority of the manufacturers that's a fixed amount per unit that is not moving with the rate changes. There's only one manufacturer left with variable rates and that's Ford.

In terms of the private cap dealers, I would say that our inventory reduction efforts were probably a little bit ahead of them. But certainly the private caps are feeling the increasing rates and are moving to reduce their inventories similar to what we've done.

Okay. And then the next question is, on Ford, it's about 20% of your mix and I'm just wondering what impact, when they wind down Blue Oval, will have on your margins? Or have they announced any kind of replacement for that program?

I would say that it's too early to say exactly how the market will respond. But pre-Blue Oval and during Blue Oval, our grosses didn't change a lot. So I don't think we'll see a deterioration in the grosses. Ford's got some stair step incentives and some other incentives built in, so although we're watching the market carefully, we don't expect any major erosion in our Ford margins.

Okay. And then lastly, on the used vehicle side, could you kind of give us a sense of where the margin increase came from? Is it more attributable to acquisition or inventory mix and turns, or is it more on the consumer demand side?

I don't think the consumer demand really drove the margin expansion. I think it was really based on a couple of things. One is just better inventory management and a real focus on getting the right product in the right stores at the right prices. And I also think you had a lift in all of the wholesale prices, as indicated by the auction indices. So I think it's a combination of those two things.

The volume itself wasn't up that much. But certainly the margins were good. I think our execution was better, along with a better market.

Thank you. We have time for one more question.

David Siino, Gabelli & Company.

A question for Mike Maroone. You broke out your new unit sales versus industry retail. Can you break that out for the Detroit 3, how your stores performed versus their retail sales?

I don't have that breakout in front of me. I don't think we've gone that deep in the past. I think we've just looked at the overall retail segment.

Okay. And then maybe just a quick question for Craig. What was your advertising spend year-over-year?

Advertising is roughly flat year-over-year. We don't breakout what the spend is by category.

Thank you, everyone, for joining us today. We really appreciate your interest and your questions. Thank you very much.

Ladies and gentlemen, this concludes the AutoNation first quarter earnings conference call.