AutoNation Inc (AN) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AutoNation earnings call. [OPERATOR INSTRUCTIONS]

I would like to turn the conference to over to AutoNation. Please go ahead.

Good morning, ladies and gentlemen, and welcome to AutoNation's fourth 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 814538, after 2:30 eastern time today through February 16, 2006. Leading our call today will be Mike Jackson, Chairman and Chief Executive Officer of AutoNation. Joining him will be Michael Maroone, President and Chief Operating Officer, and Craig Monaghan, our Chief Financial Officer. At the end of their remarks, we'll be open for questions. I'll also 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 Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the results or performance to be materially different. Additional discussions of the factor that may cause actual results to differ materially are con -- 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'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning, and thank you for joining us for discussion of the quarter results. Today we reported net income from continuing operations of $80 million or $0.30 per share, compared to $116 million or $0.43 per share in 2004, which included a $0.09 per share benefit from certain tax adjustments. When adjusted to exclude certain items, this equates to a fourth quarter earnings of $0.31 per share in 2005, compared to $0.34 per share last year, a decline of 9%.

Reflecting on the quarter, our performance was largely affected by Hurricane Wilma. We never like to use weather as an excuse or an explanation, but Wilma, at 150-miles across, was the largest storm to hit south Florida in the past 50 years. South Florida experienced the largest power outage ever recorded by Florida Power and Light, with wide-spread utility disruption for extended period of time. More than six million people in 14 counties were affected, and the state suffered approximately $9 billion in destruction. AutoNation was not spared, experiencing a $0.04 per share impact in the quarter. We also saw a challenging retail environment compared to a year ago, and the marketplace remains highly competitive. For the fourth quarter, industry sales declined 6%, but after removing fleet sales and looking at the industry from a retail perspective, the industry had double-digit declines of over 12%.

Now, Craig will provide detail in the numbers and Mike will follow with comments on our operational results.

Thank you, Mike. As Mike mentioned, we reported adjusted EPS from continuing operations of $0.31 per share versus $0.34 a year-ago. Other financial items of note in the fourth quarter include the following. Rising floorplan interest rates, net of OEM assistance, cost us $11 million versus Q4 a year-ago, in spite of lower average inventory levels. We expect next floorplan costs to continue to increase in 2006, as we experience increased interest rates.

For Q4, we had an effective tax rate of 39.4%, versus a Q4 2004 effective rate of 22.9%. The rate last year benefited from some one-time adjustments for resolutions of various tax matters. During Q4 we reinvested $40 million in our business through capital expenditures. We repurchased 2.4 million shares of stock for $50 million, and received $36 million in proceeds from stock option exercise. We also paid down $150 million in debt during the quarter. As a result, our non-vehicle debt was $525 million at December 31, 2005, which is a decrease of $288 million from December 31, 2004. And finally, we are targeting 2006 capital expenditures in line with the $130 million we spent in 2005.

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 are on a same-store sales basis. As we reflect on full year 2005, we're pleased with our performance, especially in the areas of used vehicles, and parts and service, where we delivered strong year-over-year same-store gross profit growth of 7 and 5%, respectively. These improvements more than offset a 1% decline in new vehicle gross profit, and drove full year total gross profit growth of 3% or $79 million, compared to 2004. This was in spite of a challenging fourth quarter, where we felt the effects of Hurricane Wilma and soft industry retail sales. We attribute our ability to deliver a sound, full-year performance to our emphasis on customer focus store processes, ongoing associate training, and disciplined expense control.

Now, I'll touch briefly on our fourth quarter performance for each area of the business, starting with new vehicles. AutoNation retailed 87,000 new vehicles in the quarter. Same-store new vehicle revenue of $2.7 billion and gross profit of $194 million were off 9% compared to the period a year ago. Gross profit per vehicle retailed improved $33 versus prior year to $2,240 per vehicle. At December thirty fir -- December 31, new vehicle days supply was 56 days, slightly higher than the period a year ago but, overall, we're in good shape. Turning to used vehicles, we sold 53,000 units in the quarter. Retail used vehicle revenue was down slightly, and same-store gross profit grew $2.5 million or 3% compared to the period a year ago. Used vehicle gross profit per vehicle retailed of $1,831 reflected an increase of $114 or 7% compared to the period a year ago.

While we made continued progress throughout the year in our parts, service and collision business, we felt the aftermath of Hurricane Wilma in the fourth quarter, where we lost an average of eight working days in our south Florida stores, due to power outages and damage. And this doesn't include preparation time prior to the storm. For the full year, our same-store parts, service and collision revenue grew to $2.6 billion and gross profit grew to $1.1 billion, both up 5% compared to 2004. In the quarter, our same-store parts, service and collision revenue improved slightly year-over-year, while same-store gross profit in the quarter reached $279 million, an increase of $8 million for 3%. We were very pleased to recognize 6% growth in our customer pay service and parts business, both for the quarter and the full year. This growth is due primarily to the diligent execution and training of best practices that include our service drive process, a customer friendly maintenance menu, and our service marketing program, and optimization of our in-store pricing models continues.

Turning to finance and insurance, same-store gross profit of $141 million reflected a decline of 6% percent, resulting from reduced new and used unit volume. In spite of this, our F&I team delivered a record gross profit per vehicle retailed of $1,008 in the fourth quarter, an increase of $26 or 3% compared to the period a year ago. We attribute this performance to a continued emphasis on third and fourth cortile stores, certification of all F&I associates, stronger performance in used vehicle F&I PVR, and higher returns on service contract portfolios. In closing, I'd like to take a moment to thank all of our associates for their contribution to a very successful 2005.

With that, I'll turn the call over to Mike Jackson.

Thanks, Mike. As we look at 2006, we believe the market will remain very competitive and challenging. We believe that, in 2006, industry sales of new vehicles will be nearly 17 million units for the eighth year in a row. That concludes our remarks. Operator, please open the call to questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question is from Rick Nelson with Stephens. Please go ahead.

Thank you and good morning.

Good morning, Rick.

Mike, last year you saw a post-hurricane rebound. Are you seeing any of that this year?

This is Mike Jackson. First, when we talk about our $0.04 this year, what is different than last year is the extent of physical damage that we have this year. The majority of that $0.04 is physical damage to facilities and to inventory, and, of course, that'll never come back. As far as how the south market -- south Florida is today versus the hurricane period, Mike you want to talk about that?

Rick, I'd say our market is back to a normalized level, but the insurance checks that have flown fairly quickly after some of the other hurricanes really haven't hit en masse. I guess it's probably the combination of the two big storms, so we have not seen a huge lift. But I would say the market is back to a normal level.

Thank you for that. Another question on the acquisition front. You've been more inquisitive of late and your brand mix is really shifting toward the imports. Have you had any issues or snags with the manufacturers in terms of approval for acquisitions?

I stated as a broad goal that, in our diversified approach, whether it is type of business or type of portfolio, that we wanted to spread the risk 1/3, 1/3, and 1/3. And that is 1/3 in the domestic -- traditional domestic brands, 1/3 in import mass market, and 1/3 premium luxury. If I look at it -- of course, in the table we have it from a revenue point of view, but, of course, in premium luxury the margins are much higher. And I would say if you count premium luxury which, of course, is import and the balance of our import portfolio, our store profit is approaching two thirds, so we are close to our goal. And we haven't encountered any significant approval problems -- approval issues in getting to that goal.

So you're getting the green light in most cases for acquisitions?

We do have some market restrictions, some regional restrictions, which we have -- we agreed to a long time ago and are entirely appropriate. From time to time, we will have a performance parameter that we have to address, which we do. But nothing of a magnitude that will keep us from getting to our goals since, in reality, we're already approaching 2/3.

Thank you very much.

Thank you. Our next question comes from John Murphy with Merrill Lynch. Please go ahead.

Good morning, guys.

Morning, John.

Just a follow-up on that brand mix. GM at 13% of sales, that does -- that's the lowest it's ever been for you. Wondering how much of that is active churning of your dealership portfolio and just how much of that is the natural decline in their sales?

For the fourth quarter and the figure you call out, it was an extremely difficult quarter for General Motors and Ford at retail. Their total industry figures look somewhat less dramatic, because they significantly increased fleet, but if you strip out fleet, they had significant double-digit declines in the quarter. Now having said that, if you look at it more on a year-over-year basis, which I think would more address your issue, that is more a fact of we are -- have, years ago, started to divest what we viewed to be the marginal domestic store, and by marginal, I mean it's not a big, high-throughput store. And when the volume falls, it's going to be in significantly impacted from a profit point of view. We have, over the years, divested those stores and then of course, if you look at our acquisition track record, we have been stepping towards the 2/3 goal for import.

So I would say the quarter was significantly impacted by the dramatic situation with retail for GM and Ford. I don't think it will be to that extent going forward. So, strategically, though, then I would focus more on the year-to-date figure and my statement that, from a store profit point of view, we are approaching our t2/3 goal.

Okay. Then just on the latest news on GM's lowering of dealer margins and their pricing strategy, just wondering if you could comment on that and how big a hit you think that -- you know, that really is here in the short-term, and how you might [claw] back some of that margin, if there is a significant decline there?

What we have urged GM, Ford, and Chrysler for the last several years is to take all these incentives and discounts and put it into the pricing and reduce pricing. And go to an every day fair-value price and reconnect with the marketplace and, thereby, stabilize their share and go back to selling the product and the brand. If we have to take some margin cuts on available margin basis to get to that goal in the marketplace, I think that is a fair tradeoff. And if you look at our margin performance, by managing our inventory and being careful what we buy, we have very stable front-end margins, at this point. And I would say it is too soon to say if these margin cuts on available margins will flow-through to our margins, I can't say today. But if the tradeoff was to stabilize and get a stronger forward-looking position in the marketplace for General Motors and Ford, it will have been a fair tradeoff.

And then on -- just touching on that inventory, the inventory levels, I mean, is there anything that any of the OEMs are doing to incentivize you to take vehicles into inventory because, I mean, they're building up in certain lines? Is there anything special going on there, recently?

It's Michael Maroone, John. Yes, there is some incentives, both from Chrysler and GM, to buy incremental inventory, and we look at it on a case-by-case, store-by-store, model-by-model basis. But it's really those -- limited to those two manufacturers today. If I could comment on the margin piece that Mike commented on. I do want to point out that, during the employee pricing, we actually expanded our margin slightly and did not see the deterioration. That doesn't mean that we won't have pressure in the new pricing, but our only historical perspective, really, is the employee pricing, and we held up pretty well there on a nationwide basis.

And just the lack of margin pressure, that just goes to your theory, or your thesis on owning the large throughput or the high-volume domestic stores, is that correct?

I think that's it and it's also, really, that the industry thinks on a cost-plus basis. So, when -- even when the margins are nicked from MSRP, we seem to find ways to stabilize the margins.

And then just one last question on floorplan interest expense. Given the strength in your balance sheet, I mean you have a much stronger balance sheet than most of your suppliers do right now, is there some way for you to mitigate the increase in floorplan expense going forward by financing elsewhere or financing away from some of these, you know, these captive credit companies that have rates going up?

John, it's Craig. We've seen our credit improving, with an investment grade rating with S&P and Fitch. We've been able to go back to the lenders and our lenders are primarily the captives, and negotiate reduced rates. So, we are actually already seeing some of that, and it's something that we continue to pursue.

But is there in I weigh to go to third-parties to get better rates, considering you are investment grade?

We -- there are -- there is floorplan available in the banking markets, and those are markets that we have available to us, as well. So we pursue every avenue that we have, but I think it would be misleading to tell you that we think we can see a significant reduction in our [inaudible] costs from levels where we are today.

Okay. Thank you very much, guys.

Thank you.

Thank you. We will now go to Michael Heifler with Deutsche Bank. Please go ahead.

Hi, good morning, guys.

Good morning.

few questions, I guess first starting off with a big picture one. It seems like the Detroit three are really looking to rationalize distribution and increase per store throughput, and it seems like they are trying to consolidate blue skies. Is there a way that you guys can benefit from these actions?

Well, I think, again, we've been way ahead of the parade here on this issue and felt that, just like there's been an over-capacity issue at the manufacturing and the supplying level -- supply level, there's too much installed capacity at retail relative to the shares they have today. And that's why we divested marginal domestic stores and have focused on the stores that say, if you had a clean sheet of paper, absolutely, positively, where would you put the -- the store, and have the economies of scale of high-throughput. And that's how we've structured our business, and that's why we are in the position we are today. Go ahead, Mike.

Michael, we've also worked with some of the manufacturers and Daimler Chrysler has done consolidation with the Chrysler Jeep and Dodge franchises, and we've participated actively. And, of course, GM has been trying to put their Pontiac, Buick, GMC franchises together, and we've cooperated over a period of several years, so we have been active in those area.

So, it sounds like you guys have been doing this already, and maybe we shouldn't be expecting, really, a big change from what it already --

That is correct. You'll see us continue to do what we have been doing, and we feel we're well on our way. And as I stated earlier, we're already approaching 2/3 of our store profits coming from import and premium luxury.

Okay. And on the SG&A in the quarter, can you talk to the increase in the SG&A ratio, and was there an impact there from the hurricane?

Oh, it's Craig. Absolutely. The -- where you fell in the quarter was a combination of hurricane impact, we had some pressure in our compensation expense, as our sales backed up, and I think if you put all that together, you pretty much summarized what happened.

So Craig, can -- just to quantify the hurricane impact, was it most of the $0.04 in the SG&A?

Yes.

Okay.

Well, no, no, no, no. The fixed costs with the hurricane was the majority of the $0.04, and that flows right to SG&A.

Okay. Also on the floorplan assistance seems like the relative level of assistance was down versus the other quarter. You guys may disagree with that, but if that is the case, what's behind that?

I think broadly speaking we have seen floorplans beco -- floorplan assistance become fixed over time. You combine that with the fact that we had a reduction in volume, you see lower floorplan assistance.

We recognize floorplan assistance upon the retail of the unit, and, therefore, when industry sales and our sales fell during the quarter, therefore we recognized less floorplan assistances. When the sales resumed, then floorplan assistance would come back up.

Okay. One question about 123(R), the options expense for 2006. Can you guys disclose the size of that headwind this year?

We're still working through the calculation, but we have -- we've said in the past that we thought it would be about $0.01 a quarter, and that would be our best estimate today.

Okay. And one very last one here just -- Mike Jackson, back to your comments on January. It seems like the fleet sales for the big three are still relatively high, and it seems like the retail is still relatively weak. Are you guys seeing that into the first quarter? On your business?

We never really comment on the current quarter, other than the industry figures.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] And we'll now go to Matt Nemer with Thomas Weisel Partners. Please go ahead.

Good morning, everyone.

Morning, Matt.

First question is on the Florida stores that were damaged, are they all up and running or are there still some facilities that you're working on?

They are all up and running. There is some signage issues and some glass issues, but nothing that is standing in the way of us doing business at this point. I think we called out that the stores were shut on average of eight days and on top of that, you have prestorm preparation, which is two or three days, and certainly some cleanup after the power's on. But our stores have been up and running for some time now.

Got it. And then on the service and parts margin you had a pretty good increase there. I'm wondering is that capacity utilization or is it price increases? What's driving that improvement.

The margin expansion real really was more a matter of mix, as we had less wholesale and more customer pay, so it was really more of a mix issue. Our margins have always been a little bit less than the peer group because of the size of the wholesale parts operations.

Got it. And then, could you comment on your advertising plan in the current quarter and maybe the first half, relative to sort of rising inventory levels in the industry?

We believe our inventories are in pretty good shape. We about 56 days and our advertising plans have remained relatively stable over the last year or so. So we don't anticipate an increase in ad spend in this quarter or really in this year, at this point.

Okay. And then last question is, can you give us an update on any new technology that you're looking for -- that you're looking at to improve store efficiency or the amount of time it takes to complete a transaction?

We're constant -- this is Craig. We're constantly working to put new technology in the store. I think some of the most exciting things that we're working on today is actually integrating systems that exist in the store today, so that we can speed the customers through the store. For example, if I could give you one, we want to be able to very quickly give the customer a menu on the purchase of the vehicle that would say, if you put this down payment down and you want to make your payments over four years, five years, here's the different payments you would see. Or if you'd like to lease it instead, depending on what you put down, here's what the lease payments would be. But there's a lot of systems that have to be integrated with that. We have to integrate with the systems in the store. as well as the banking community. to bring that all together very quickly. But I think it's a great example of what we're trying to do.

Have you thought about sole sourcing on the DMS systems?

Absolutely we have. We are working to put all of our stores on a single vendor and that would be ADP.

And where are we in that process?

We are probably about 60% of the way there. Maybe a little more.

Got it. Great. Thanks so much.

Thanks.

Thank you. We now have a question from Mark Trizarry with Goldman Sachs. Go ahead, please.

Oh, hey guys. Thanks. I have a question on the F&I piece of the business. Talked about the dispersion in terms of the cortiles. I guess you did a better job, you know, kind of managing the lower cortiles. Can you kind of discuss, you know, how much is left on the F&I line relative to where it is today, and how much of that do you think you can kind of get out of narrowing kind of the gap between the performance of your stores?

It is Michael Maroone. I think that we see an improvement potential of anywhere from 3 to 4%. We're making steady improvement, and we really see it both on the narrowing of the cortiles and pushing hard in our for -- third and fourth cortiles. But in addition, we're seeing a better performance out of our service contract portfolio and we continue to do really good work with the preferred lender network. So we're not growing the interest spread, probably narrowing slightly. But we're more than making up for it in the products and the lender relationships, and we are pretty proud of that.

Got you. And then on the cost structure, can you just give an update on the shared resource centers and, you know, on some of the consolidation activity? And how much of the anticipated SG&A benefits that you kind of called out in your release do you expect to get from that versus other initiatives you might have in place already?

The back office consolidation continued. I would say we continue at a very measured pace. We've got about 100 stores in our Dallas shared service center today, where we're doing about 25% of the accounting for those stores. We have a smaller group of stores where we do more of the accounting. But I would say that it is a work in progress, and there's still things that -- there's still more work we need to do to get that to run as well as we would like it to do. At this point, it is not a significant contributor to our SG&A savings.

So that would be incremental to what you have kind of already called out or?

There's not -- I would not attribute any savings to our work in the shared service center.

Gotch it. So then, what you've called out is a function of changes in com plains. Can you maybe bucket where those benefits are going to come from?

We continue to work hard on compensation, but really more on the productivity side than the cost cutting side. We continue to work on our advertising spend, using the critical mass that we've got in key markets, along with some of the work that Craig talked about on the floorplan side, where we've taken our investment grade ratings with two of the agencies and helped to drive some savings. That's the general area we are look at.

And I would say as we move forward, we have an anticipation that our shared service centers will help us save money, but we're not there today.

We're still in the investment phase at this point.

Okay. Great, thanks.

Your next question is from Jonathan Steinmetz with Morgan Stanley. Please go ahead.

Actually this is [inaudible] standing in for Jonathan. Good morning, guys.

Morning.

Have two questions. One, how was the mix for you of the new vehicles predominantly the car and truck mix?

Car and truck mix was about 50/50. Obviously, the car market is gotten a little bit stronger as the year has gone on, but we'er at about 50/50 sales mix.

Okay, and the other one was on the used vehicle, we are seeing strength across the dealer industry for the used vehicle prices and it has been going up. What's the cause for it? Is it more of a [inaudible] mix or is it -- what's actually driving it?

I think the used vehicle market, first of all, it is a very stable market. I think only twice in the last 17 years have sales fluctuated more than 3%. We are seeing that there is less off-lease product. I think back in '00, there was like 3.4 million cars coming off lease. This year there's like 2.4. So there's less off-lease. There's less repossession. But the prices continue to get stronger. Mannheim's Index was the highest this last month it'd been since April of '01, and year-over-year up about 5%. So we've got strong customer intentions, and the customer intentions up and the values up, as well.

Okay. Thanks a lot.

Thank you. Our next question from John Tomlinson with Majestic Research. Go ahead, please.

Yes, hi. Good morning, guys.

Morning, John.

Question for you, kind of theoretical, on Mike's question on the use -- or as Mike comments on the new vehicle market. We saw Lithia yesterday talk about going to a fixed pricing strategy in used. I know you've been down that road before, but with used continuing to be growing faster and margins better than new, have you kicked the tires on going to a no haggle used pricing strategy at all, recently?

It is Michael Maroone. We are not focused on a no-haggle strategy. What we're focused on is a market value strategy, where we try and price our cars very close to market value. We do leave some room for negotiation, but it's a far cry from where it'as been traditionally, and we really do try and price to market.

Okay, so there's no plans to kind of re-enter the used car superstore market or explore any of the avenues that Lithia talked about yesterday?

Our plans really are what we've stated and we were really pleased to grow our used car growth 7% last year, so I think we are on the right track.

Okay. Thanks a lot, guys and congratulations.

Thank you. We have time for one more question.

Thank you. That will come from Jerry Marks with Auto Retail Stock. Go ahead, please. Just one moment. All right, Mr. Marks, your line is open.

Thanks. Can you hear me okay?

Yes, we can. Good morning.

Morning. Just two follow-up questions, almost everything's been answered. First of all, Craig, can you give us some idea as to what percent of your dealers are on a common element pay plan now?

It's Mike. It varies by position We will have the sales pay plan rolled out across the enterprise by, I'd say, the end of April or May. We have had our GMs on the common pay plan. Our controllers on a common pay plan. Our F&I people on a common pay plan all along. Some of our positions are 100% there and others are work in progress.

About how much you were talking about in terms of the used vehicle market being so strong you know earlier in the conference call, you were talking about how we're moving more towards a value pricing concept with Ford and General Motors. Dealers are sharing in some of that margin pain, and yet we've got used vehicle wholesale prices kind of rising. Doesn't it almost become analogous to the yield curve -- [TECHNICAL DIFFICULTIES ON AUDIO]

I'm sorry, I missed the last part of your question. We had a little distortion on the phone line.

Yes, sorry about that. If used vehicle prices are continuing to rise and we've got new vehicle prices coming down, you know, at some point don't they start competing with each other?

I think what it forces you to do as a retailer is to really watch your mix. Traditionally, we try and have an average cost of our used cars that's about half of what a new car is, so we have to be very careful to not play too heavily in the nearly-new market, and we've worked hard to keep our pricing in those kind of parameters.

I think an important thing to be kept in mind here, also, is what -- we're talking about with the manufacturers here is a different way to arrive at the transaction price. Transaction price isn't really changing that much. So, do you have an artificialally high MSRP then all kinds incentives and rebates to get down to a transaction price, or do you just take all of the incentives and rebates and reduce the price to begin with? What the consumer actually pays doesn't change that much. And so, we may have an avail -- so we have a retained margin of 7.3% and in this action, we may -- may gone from an available margin of 12 to 10%. Well, we just change our discount, because you're asking less to begin with and, therefore, your retained margin doesn't actually change that much. And so, with transaction prices not moving that much, there's not necessarily a linkage into the used car market for these MSRP cuts, because nobody's paying those MSRP prices. It is an artificial price. That's important to keep in mind in this whole discussion.

So MSP is coming down but maybe not net price.

That is, correct.

And our revenue per new vehicle is actually up 2% in the quarter and 1.5% up for the full year, so we're north of $30,000 in average vehicle retailed on the new side.

So, I'm arguing as a retailer saying, look if you've got a price that nobody pays any more, that nobody pays any attention to, then the whole world has recognized that except for you, so you might as well go ahead and reduce the asking price and reconnect with the marketplace.

Okay. Thanks a lot.

Great, thank you for joining us today.

Thank you.

We thank you, and 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.