AutoNation Inc (AN) 2006 Q1 法說會逐字稿

Ladies and gentleman, thank for standing by and welcome AutoNation’s First Quarter 2006 Conference Call. [OPERATOR INSTRUCTIONS] As a reminder, today’s call is being recorded. I would like to turn the call over to AutoNation, please go ahead.

Good morning ladies and gentleman and welcome to AutoNation’s First Quarter 2006 Conference Call. My name is John Zimmerman, AutoNation’s VP 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 823916, after 2:30 p.m. Eastern time today through May 4, 2006. Leading our call today will be Mike Jackson, Chairman and CEO of AutoNation. Joining him will be Michael Maroone, President and COO, and Craig Monaghan, our CFO. At the end of their remarks, we will open the call to 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 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.

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 2006. Today we have reported first quarter earnings from continuing operations at $0.37 compared to $0.33 per share, an increase of 12%. The prior year first quarter included $0.03 per share from senior notes repurchases. We achieved record first quarter operating income of 204 million and revenue growth across all business segments and especially with growth in premium luxury and our higher margin parts and service business.

Our results were driven by an increase in revenue of 5% in used vehicles, 5% parts and service, 5% finance insurance, and 2% in new vehicles.

I will have Craig provide you with details on the financials.

Good morning. As Mike mentioned we have reported EPS from continued operations $0.37 per share versus $0.33 a year ago. Q1 2006 results include $0.01 per share of stock option compensation expense related to the company’s adoption of the new accounting standard. We expect to record similar amounts in future quarters.

Last year’s first quarter included a charge of $0.03 related to senior note repurchases. Other financial items of note in the first quarter include the following.

Rising floor plan interest rates, net OEM assistance cost us 7 million versus Q1 a year ago, in spite of lower average inventory levels. We expect net floor plan costs to continue to increase in 2006 as we experienced increased interest rates versus the comparable period.

For Q1 we had an effective tax rate of 39.7% versus the Q1 2005 effective tax rate of 37.8%. The rate last year benefits from some one-time adjustments that a resolution of various tax matters.

Also in Q1 2006 we had losses from discontinued operations of 10.6 million, net of tax of $0.04 per share. These losses relate to the divestiture of several stores in the quarter, the bulk of which stems from losses on the sales of assets.

As for our capital structure, during April we successfully completed our tender offers for 50 million shares of our stocks and substantially all of our outstanding 9% senior notes. We financed these transactions with approximately 1.3 billion in new debt and available cash. We expect the net results of all the transactions to be accretive the future earnings in the range of $0.13 to $0.15 per share, on an annual basis. As of today, our non-vehicle debt is 1.5 billion and we have unused revolving credit capacity totaling approximately 400 million. Our non-vehicle debt to capital ratio stands at 29%.

We are targeting 2006 capital expenditures of approximately $130 million excluding any acquisition related spending or lease buyouts. As you know, we view acquisitions and share repurchase opportunistically and anticipate full year 2006 combined spending on both in the range of 300 to 400 million excluding the recent equity tender offer. I will turn you over to our President and COO, 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.

We are very pleased with our performance in the quarter. Increases across the board in revenue were converted to increases across the board in gross profit dollars. Our focus was on expanding gross profit per vehicle retail while keeping our inventories in balance and aggressively managing our expenses.

In the quarter, we completed the acquisition of Mercedes Benz of Pompano Beach and welcomed the store to our Florida region. The addition of this store brings our store brand mix to a balanced store profit contribution between luxury, volume import, and domestic. In fact, today AutoNation is the largest U.S. retailer for Mercedes Benz, BMW and Lexus, as well as Honda, Toyota, and Nissan. Our balanced brand profit portfolio along with a disciplined operating approach continue to contribute to the highest operating and net margins in the peer group.

Now I will touch briefly on our first quarter performance for each area of the business, starting with new vehicles.

AutoNation generated first quarter same-store new vehicle revenue of $2.7 billion, an increase of 38 million on 89,000 new vehicles retailed. Year-over-year our new vehicle gross profit per vehicle retailed increased $67 to $2223. And, same-store gross profit as a percent of revenue held steady at 7.4%.

At March 31, our new vehicle day supply was 55 days, down 6 days compared to the period a year ago, and in line with December 31.

For used vehicles, on a same-store basis compared to the period a year ago, retail revenue was up 5% to $923 million on the sale of 58,000 used units. In the quarter, retail used vehicle gross profit of $112 million reflected an improvement of 2%. In gross profit per vehicle retail of $1930 improved by $59 compared to the period a year ago. Our results were driven by systematic use of our used vehicle management system and favorable market conditions. Our used vehicle day supply was 41 days at March 31, putting it mid-range of 39 days a year ago and 43 days at December 31st.

Overall in the quarter, South Florida, Las Vegas and Phoenix were strong for the brands we represent while Cleveland, Memphis, and Baltimore were off.

Turning to parts, service and collision, compared to the quarter a year ago, same-store revenue of $664 million and gross profit of $291 million reflected increases of 5 and 6% respectively and gross profit as a percent of revenue increased 50 basis points to 43.8%. Our customer pay Parts and Service business increased 7% compared to the period a year ago. Continued strong performance in parts, service and collision is driven by a system wide implementation of best practices that include our full disclosure customer friendly service drive process, our aggressive service marketing program, and our ongoing pricing initiatives, all supported by extensive training and certification programs for our associates.

Our finance and insurance business continued to be strong in the quarter as evidenced by gross profit per vehicle retailed of $1034, an increase of $63 per vehicle compared to the period a year ago setting another company record for F&I PVR. We attribute ongoing strong F&I performance to intervention in our third and fourth quartile stores, ongoing training and certification of all F&I associates, and a notable improvement in used vehicle F&I PVR in product penetration, compared to the period a year ago.

Before I turn the call back to Mike, I’d like to share that we introduced the South Florida market to Smart Choice this month. Smart Choice is a new approach to the sales process that gives customers everything they want to know to make intelligent purchase decision. It’s a computer generated sales menu that includes the purchase price, trade-in value, several finance and lease options with multiple terms and payments, along with full disclosure of all taxes and fees. Smart Choice also delivers a shortened transaction time, which figures prominently in our customer research as an important factor in driving a superior buying experience. Smart Choice can be summed up as putting our customers in control and respecting their time and intelligence.

Following in the footsteps of finance and insurance pledge, Smart Choice further solidifies our commitment to lead the industry in transparency and choice at every step in the buying and ownership experience. And finally, I’d like to thank each of our 27,000 associates for their contributions to another strong quarter, and with that, I’ll turn the call back to Mike Jackson.

Thanks Mike. We believe that in 2006 industry sales of new vehicles will be nearly 17 million or high 16 million for the eighth year in a row. With that, we throw it open to questions.

[OPERATOR INSTRUCTIONS] First on the line is Jonathan Steinmetz with Morgan Stanley. Please go ahead.

So a few questions - on the increase in the gross profit per vehicle retail - do you think that was more of a function of a brand mix that skewed towards some of the luxury makes or were you actually seeing [off] comparisons in more of the domestic makes as well?

We actually saw some margin - our gross profit expansion in both non-luxury and luxury and really saw it across the board. It was something that we have really focused on in the quarter and we were able to deliver it across the brand portfolio.

The real key is inventories. If we buy right and manage the inventories then you can control your front end gross. When you get heavy in inventory, you’re going to have compression.

Okay, and looking at Parts and Service growth. Can you talk about what some of the - more detail on what some of the drivers where there on the comp increase and also [Linthia] mentioned on their call that import warranty was up about 30%. I was just wonder if you too were seeing something similarly strong?

We really - our increases were driven on the customer pay side where we generated about a 7% improvement and I listed the reasons earlier as to why we did that. And, in answer to your question on warranty, our domestic warranty was down in the neighborhood of 10% to 12%. Our import warranty was up I believe 12% or 13%. I think in part, that’s driven by units in operation, but we didn’t the same kind of differences that [Linthia] did, but certainly, our domestics were down and our volume imports were up.

So overall, the warranty business is flat and the two trend lines there are a rising car population, units in operation are going up each year, combine that with improvements in quality, so on net you have basically a flat situation in warranty. Customer pay, we have a tremendous market share opportunity and Mike already talked about how we’re taking advantage of that opportunity.

Okay, and last question. On discontinued operations - this seems to be rising not just for you guys, but with a lot of the peer group as well. And are there more dealerships in this bucket - is it a similar number, their losing more money. Maybe if you could just talk about what’s in there or this is something we would expect going forward?

As we discussed, we had a goal to shift our brand mix and we have successfully done that with - if I go back to when I joined the company, 60% of our revenue was a [great] day, we flipped that to 60% of our revenue is imports and 40% domestic with a big component within that premium luxury. Now, our domestic stores, our view is as follows. If you’re in the rural single point market, I think you’re fine. Of course that’s not us. Or if you have great locations with high throughput stores with big units in operation around it you’re fine. If you’re in between you’re going to be marginally squeezed, due to the over capacity of retail with the domestics and those are the stores that we have investing and we probably still have some to go. As far as a specific loss for the quarter, Craig do you want to talk about that?

Yeah, the bulk of that loss was actually a loss on assets like I mentioned earlier. And we actually saw the biggest loss in one store where the property that we disposed of was worth less than what we had originally invested.

Okay, so the ongoing operations so to speak of those businesses aren’t - you’re not seeing a decline there in a big way?

Our lost stores are deminimus.

Okay. All right, thank you.

The next question is from Rick Nelson with Stephens. Please go ahead.

I have a question about SG&A. We saw it widening year-over-year as a percent of rev and a percent of gross profit. What contributed to that?

Well the single biggest component of that is that we’re expensing options now for the first time.

And, if you exclude options, would SG&A in fact have narrowed?

If you exclude options the maybe 20% of the percentage point change, 20 basis points was an increase in SG&A during quarter.

As a percent of gross?

Yes.

Okay, F&I per unit - you’ve seen nice increases there - you’re north of a $1,000 unit now. Now, how much opportunity do you see there?

I think there’s some more opportunities, but the opportunity is primarily in narrowing the bandwidth between our stores. The improvements we’ve made have really been in the third and fourth quartile stores and I think there’s more there. Hard to quantify whether a $30.00, $40.00, $50.00 a car - don’t really want to commit to that, but I would tell you it’s not with the best stores it’s with the bottom quartile stores.

All right. On the acquisition front you’ve been acquiring a number of import dealers especially Mercedes-Benz. Any comments on pricing out there would be helpful.

Well, you know that we were basically very conservative in the second half of 2004 through 2005 and basically what we saw was that everyone in– when they presented they’re performance took full credit for the low rate instead of giving it to Mr. Greenspan. Well now that we’ve had 15 rate increases they believe that maybe the world looks a little bit different and that pricing is looking more attractive this year then certainly it did in the second half of 2004 and 2005. So we’re in discussion on a quite a number of deals. Whether we will be able to get them to the finish line remains to be seen.

And this would be more import, Mike?

If it fits the model I described. Mainly if it’s a great location with a high throughput domestic store at the right price, I wouldn’t hesitate to buy it. So, for instance where we have concentration, let’s take South Florida, there’s 19 Chevrolet dealers in South Florida, we have six of them. We sell 50% of the Chevrolets in South Florida and in the first quarter we sold 54% of the Chevrolets. So that great location, density, high through put model really worked for us. And so if it was a domestic store that was enhancing those attributes, we would acquire it. So yes we like import and premium luxury, the right domestic store at the right price, we would not hesitate to buy.

Okay. Thank you.

The next question is from John Murphy with Merrill Lynch. Please go ahead.

Good morning guys. Just a quick question on F&I there, what is the penetration rate on your current new vehicle sales, give or take?

Our penetration of F&I’s percent of total retail?

Yes.

It varies in the 65 to 70% range.

Okay and if that increases, that’s where you have the opportunity to increase that F&I PVR, I mean it’s not like you’re slapping a lot more money on the individual unit, it’s just going deeper into that penetration?

Actually the opportunity really is on the product side, certainly not on the rate side. There’s tremendous pressure and of course we have our caps on rate, so the opportunity is really on bringing the bottom quartile stores up to product penetration levels that approaches what our better stores do.

Okay. Then a question on the cap structure and we saw a change here in the first quarter going into the second quarter. Can you guys comment on the possibility of any future changes in the cap structure strategically that might allow you to change the makeup of the business?

Obviously we put a lot of thought into the capital structure going into calendar year 2006. We observed that we might have paid off all our non-vehicle debt in 2006 and still would not have achieved investment grade with Moody’s so therefore we thought some level of debt would be appropriate with the road map back to investment grade if the political climate changed. So the amount of debt we put on the Company we gave a lot of thought to and it had an eye towards investment grade and it had an eye towards keeping tremendous flexibility. So I sort of feel we’ve taken step here that is a strategic step and has well positioned us and now we’ll see how the situation develops in the marketplace.

Are you making a big commitment to get back to investment grade? Because it seems like your capital structure right now is pretty efficient and it might be inefficient to just shoot to get back there. Is that a true protocol or --?

I would say we certainly have paid the price in inefficiency to get investment grade without getting the payoff and the payoff would have been the possibility to do something completely different in floor plan at a much lower cost then even what we paid today. That was disappointing so we’re not going to go back toward investment grade unless we’re clearly going to make it. Because we made it before in all the metrics but we just didn’t see there on the political side, so we’ll – that’s probably a couple of years over the horizon before that would be cleared. But on the other hand, we didn’t want to completely disconnect and not have a way back. So I think we’re in the sweet spot now and we’ll just see how the situation develops.

Got you. When we think about Smart Choice, I mean this is sort of a two-part question on ITs here. I was just wondering how much time that really saves in the dealership and is that an opportunity to pull head count out on the sales force? And then second on IT, what kind of integration do you have right now with your DMS and your used vehicle systems, because it seems like that is something that a lot of dealerships are going through right now, is integrating their used – systems with the core DMS?

John, let me take the first one on, on timing and impact on head count. We certainly believe that Smart Choice will shorten the transaction time. It is much more efficient. We piloted it for quite some period of time and have gone through some very robust training prior to launch and it’s clearly short in the transaction time. Customers absolutely love it. They’re response has been phenomenal. In terms of head count though, it is not about head count, it’s about customer satisfaction, it’s about transparency and it’s about letting customers really make choices. So I don’t anticipate that it will reduce our sales head count but I do think it can help our sales productivity and make happier sales people and that’s important to us. I’ll let Craig take the question on the DMS and the used vehicle management system.

About 75%, I think the exact number is 74% of our stores today are on a common DMS. We’ve got 122 stores that are in our shared service center environment, so we’re doing the accounting to some extent. But broadly speaking, you’re question about the used vehicle integration, I would say it goes beyond used vehicles. We are working to integrate all of our systems and drive all of are reporting back directly out of the DMS. We have used vehicles systems in place today in all of our stores. We don’t have the level of integration that we’d like across all of our different platforms, but we are well on our way to getting there and have a lot of those things coming on line as we speak.

That’s great. And then just one last question, in you’re GM stores, how do you feel and how much are you participating in the consolidation of the Buick/Pontiac/GMC dealership franchises, under one rooftop? I mean are you effectively doing that yet? How do you feel like that’s going and where do you see that going in the future?

Well first I would say we primarily try to focus on the big brands which any given OEM would and with General Motors that’s certainly means Chevrolet. And we are over 80% Chevrolet and if some day I end up over 90% Chevrolet that would be fine too. To the extent that cooperating with the consolidation of Buick, GMC and Pontiac, we’re doing it but it’s really on the margin. I don’t think it strategically changes anything for us or General Motors quite frankly. Mike.

I agree with what Mike said. And we have done a couple deals where we consolidated. There’s not a lot more to do in our markets and we do participate and have an excellent relationship with General Motors. But I’m with Mike, Chevrolet is our bread and butter and that’s the primary chunk of that business.

Yes, the way we think about it is there is a tremendous over capacity at retail with the domestic brands. It will not be resolved in the near term and certainly these consolidations are on the margin. Therefore, you have to say your strategy is either rural or great locations with big high throughput stores with density were you have economies of scale. And that’s what have we have built out over the last five, six years and that’s the reason we’re able to perform the way we are today. And, we’re not waiting around for any manufacturer to straighten out the retail network.

Great, thank you very much guys.

The next question is from Joe [Amaturo] [Galleon] Securities. Please go ahead.

We were impressed with your same store comps besides the challenging retail environment in the first quarter and I’m just wondering in you could provide us on some color on any incentives you may have put in place to drive new vehicles same-store sells?

We’re always trying to drive our new vehicle sales. I would say that we spend strategically. We are testing some advertising concepts. We’ve obviously moved more emphasis to internet sales and some direct marketing. I would say those are the primary pieces - it’s really a shift in ad’s spend. We are not spending more, but we’re shifting strategically and we’re measuring everything we do trying to become more efficient, more productive.

Great, thanks. And, I just have one housekeeping question. I wonder if you could provide us with some color on your inventory levels, particularly as it relates to the domestic brands.

Our overall inventory is - as you probably now is at 55 days, which is down 6 days from a year ago. Underneath that, obviously there’s great disparity among brands. We are up I’d say in the middle 70s in Ford, middle 80s in DCX, and a little bit higher on the GM side.

And, that’s up from prior levels, or?

No, those are the absolute level.

Right, but I guess relative to last year?

I would say, in aggregate they are probably a little less than last year, but as they rank we’re probably highest in GM, second in Daimler Chrysler, and third in Ford.

Okay, great, thanks very much.

And next one is from [Ron Lash] with Deutsche Bank. Please go ahead.

A couple questions. First of all, do you happen to know what registrations look like on a year-to-year basis retail in your regions?

You’re talking about for the quarter?

Yes.

I think they were basically the same as the industry figure. Fleet sales were up in the first quarter - 3%, 4% something like that. Retail was down 1% - something like and we’re basically even with that.

Okay, and can you comment a little bit about the strength you’re seeing in luxury here. Is this actually picking up from where it’s been running, what’s behind it and maybe on the F&I as the mix changes to luxury, how does F&I per unit look in a luxury store versus mass market?

I would think this specific quarter is very product related and Mike Maroone will talk about that. What we’re attracted to though in premium luxury is the overall strategic demographic. The baby boom generation is not slowing down at all and our peek earning years will be for the foreseeable future and shows no signs of retiring. Plus you have a transfer of wealth from their parents. So our view is that premium luxury is going to grow significantly faster than mass market and we identified that opportunity five, six years ago and have taken premium luxury as a percent of our revenue from 11% to 22% an absolute doubling of that business. And, also in that business we like the service absorption in that you have a very complex product with an owner base with the desire to maintain it and if we take our gross profit from service and parts and put it against our fixed cost in premium luxury, we’re at 120% fixed coverage. So the dynamics in the business are absolute outstanding. So as that grows as a percent of our business of course it helps our total numbers. Mike why don’t you talk about some of the specific product developments.

Sure. In the quarter, the real star of the show was the introduction of the S Class Mercedes. The S550 literally doubled its sales quarter-over-quarter and also brought tremendous traffic into our Mercedes store. Mercedes is really on a product offensive with the new M Class, R Class and now introducing the G Class and our Mercedes performance was very, very strong, again driven by the S Class. BMW also has been strong. It has been consistently strong in the last several years. We still get tremendous traffic on the 3 Series, which is their newest product and it continues to ramp up and it’s a great franchise and Lexus has been hot for five years and they’ve got a new product offensive coming out with their full size sedan and we believe that’s going to really keep that whole segment active. It’s going to be a tremendous competition between the three full size cars among the three major brands. In regards to F&I, our F&I performance out of our luxury stores is very strong. I think in part because we’re financing a more expensive automobile, but it also is attracting a wide range of consumers and so it has influenced our F&I dollars.

Okay. Obviously a lot higher. Is the penetration rate a little bit lower in those luxury stores offsetting it or is it just positive across the board?

I think the leasing rate is higher in the luxury stores. But I think it’s a - you know you’re financing a strong amount and we’re getting a stronger mix – skewed to premium luxury.

And my last question is just on these - you know the OE’s that are changing their pricing to bring down MSRP’s and reducing the incentives you guys have commented in the past you think it’s the right thing to do. How does that affect your gross or does it at all affect the gross per unit?

It has no effect whatsoever. What it basically does is simplify the transaction. And the reason why we urge them to do this is we really sense that there is an exhaustion from the consumer of trying to figure out when and how to buy a car to get the best deal they can. So every time you spin this wheel, the cycle becomes more vicious and we have to find a way out of it. We last year, literally had hundreds, if not thousands of incentive programs going on at anytime and the confusion it creates and the complexity it creates in the marketplace is amazing. And, our sense is that the American consumer is time starved and when they come to retail, they’re looking for as much added value and as little time as - consuming as little time of theirs as possible and incentives and rebates really add complexity and confusion. So we’re urging for a simplification with absolute price cuts. We’re not saying take the incentive away from the consumer because then we’re just saying go ahead put it in the price of the vehicle up front, get it over with, there will always be some tactical but move away from strategic incentives. It’s a tough transition to make, but I think it is a transition that has to be made.

Thank you.

We have time for one last question.

That will be from the line of Matt Nemer with Thomas Weisel Partners, please go ahead.

I--just, a quick follow up on Smart Choice, can you get us a sense of what the roll out time table is, and then also is that something that you built in-house, or are there elements that come from an outside provider?

We certainly don’t build it in-house. We are relying on our DMS vendor ADP. So this is an ADP project. South Florida is a huge launch for us. I do not--I am not ready to give you a full rollout, but we have--we are using it in other areas of the country. We are probably a little bit ahead in South Florida and our marketing it very, very aggressively. So I would say, our--lets see how we do in South Florida and we will see how quickly we roll it out. But we have the ability to roll it quickly. We have a very robust training infrastructure that really adds value in our operating model.

Okay. And then lastly, have you been participating in any of the special OEM deals, like the Chrysler inventory bank deal, or and also are there any other deals out there like that right now that you are aware of?

Chrysler is probably the bigger player and we have participated to some degree. We look at on a case-by-case basis, looking through each model and really doing the math and making sure it is the right business situation for us. We do not blindly buy in. GM did a little bit of it last month, but we have not seen any of the other manufactures use the same tactics at this point.

Again, it is not our favorite program and we really hope they find a way to move away from it.

Okay, that is all I had, thank you.

Thank you for joining us today.

Ladies and gentleman that does conclude your conference for today. Thank you for your participation and you may now disconnect.