AutoNation Inc (AN) 2015 Q1 法說會逐字稿

Welcome to AutoNation's first-quarter 2015 earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have an objection you may disconnect at this time. Now I will turn the call over to Andrew Wamser, Treasurer and Vice President of Investor Relations for AutoNation.

Good morning and welcome to AutoNation's first-quarter 2015 conference call and webcast. Leading our call today will be Mike Jackson, Chairman, CEO and President; Cheryl Scully, CFO; Bill Berman, COO; and Jon Ferrando, EVP responsible for M&A. Following their remarks we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have.

Before we begin let me read a brief statement regarding forward-looking comments. Certain statements and information on this call may 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 differ materially from such forward-looking statements.

Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

Certain non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors. AutoNation.com. And now I will turn the call over to AutoNation's Chairman, CEO and President, Mike Jackson.

Good morning and thank you for joining us. Today we reported record first-quarter earnings per share from continuing operations of $0.97, a 29% increase as compared to adjusted EPS from continuing operations of $0.75 for the same period in the prior year. This is our 18th consecutive quarter of double-digit year-over-year growth in EPS from continuing operations.

First-quarter 2015 revenue totaled $4.9 billion compared to $4.4 billion in the year ago period, an increase of 13% driven by stronger performance in all of our business sectors. In the first quarter AutoNation's retail new vehicle unit sales increased 10%, or 9% on a same-store basis.

AutoNation continued reforms during this recovery with an optimal brand and market mix and a disciplined cost structure. We continue to drive solid results across all our business sectors. I now turn the call over to Chief Financial Officer, Cheryl Scully.

Thank you, Mike, and good morning, ladies and gentlemen. For the first quarter we reported net income from continuing operations of $112 million or $0.97 per share versus adjusted net income of $91 million or $0.75 per share during the first quarter of 2014, a 29% improvement on a per share basis.

There were no adjustments to net income in the first quarter of 2015. Adjustments to net income in prior periods are included in the reconciliations provided in our press release.

In the first quarter revenue increased $581 million or 13% compared to the prior year and gross profit improved $93 million or 13%. SG&A as a percentage of gross profit was 69.7% for the quarter, which represents a 110 basis point decrease compared to the year ago period.

Net new vehicle floor plan was a benefit of $14.2 million, an increase of $2.9 million from the first quarter of 2014 primarily due to higher floor plan assistance which increased due to higher new vehicle sales. Floor plan debt decreased sequentially approximately $95 million during the first quarter to $3 billion at quarter end primarily due to increased -- decreased borrowings on our used vehicle floor plan facilities.

Non-vehicle interest expense decreased slightly to $21.4 million compared to $21.6 million in the first quarter of 2014 primarily due to improved pricing from our credit facility refinancing that was completed in December of 2014.

At the end of March we had $1 billion of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of $2.1 billion. This was a decrease of $73 million compared to December 31, 2014. The provision for income taxes the quarter was $69.8 million or 38.5%.

From January 1 through April 20, 2015, we repurchased 150,000 shares for $9 million at an average price of $60.46 per share. AutoNation has approximately $272 million of remaining Board authorization for share repurchase. As of April 20, there were approximately 114 million shares outstanding. This does not include the dilutive impact of stock options.

Our leverage ratio decreased to 2.2 times at the end of Q1 as compared to 2.3 times at the end of Q4. The leverage ratio was 2.0 times on a net debt basis and this includes used floor plan availability and our covenant limit is 3.75 times.

Capital expenditures were $63 million for the quarter. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. Our quarter end cash balance was $74 million which, combined with our additional borrowing capacity, resulted in total liquidity of $900 million at the end of March.

The finance team remains committed to supporting our operational partners with a unified focus on driving long-term shareholder value. Now let me turn you over to our Chief Operating Officer, Bill Berman.

Thank you, Cheryl, and good morning. AutoNation posted stellar first-quarter results with double-digit growth in revenue and gross profit across all business sectors. This marked our 18th consecutive quarter of double-digit EPS growth. Going forward my comments will be on a same-store basis and compared to the period a year ago unless noted otherwise.

Total gross profit for variable operations was $459 million, up 12%. Total [variable] gross was $3,406 on a per vehicle retail basis, an increase of $67 or 2%. New and used same-store sale unit volume was up 10%.

New vehicle revenue for the quarter was $2.7 billion, an increase of $277 million or 11%. We retailed 76,900 units, an increase of 9%. New vehicle gross profit was $2,005 on a per vehicle retail basis, off slightly due to continued pressure in the Import segment as well as growth in the volume of entry-level Premium Luxury models.

For the quarter used vehicle retail revenue was $1.1 billion, an increase of $121 million or 13%. Used vehicles retailed were 57,400, up 11%. Used vehicle gross profit was $1,738 on a per vehicle retail basis, a decrease of $42 or 2%.

As you might remember in Q1 2014 we focused on maximizing margin due to our tight inventory supply. We are well-positioned with our used inventory for the second quarter. We increased our total store used units by 26% compared to last year and our current total store used vehicle inventory levels at 34 days.

Customer financial service's gross profit set an all-time record at $1,515 on a per vehicle retail basis, an increase of $114 or 8%. Approximately two-thirds of our gross profit per vehicle retailed was related to customer financial service products and approximately one-third was related to finance.

Total gross profit for customer financial services of $203 million was up $32 million or 19% compared to the period a year ago. We continue to see opportunity in customer financial services as we drive store level execution and offer products that build customer value and loyalty.

In the quarter customer care revenue was $723 million, an increase of $56 million or 8%. We set an all-time record high in customer care gross profit of $310 million, an increase of $26 million or 9%. Customer paid gross was $124 million, or 4%. This was our 19th consecutive quarterly increase in customer paid gross. Warrantee gross was $60 million up 19%; collision gross was $29 million up 11%.

Excluding the impact of elevated recalls we continue to expect mid-single-digit growth in customer care. I would like to thank all 24,500 associates for a job well done this quarter. As an organization we remain focused on driving sales, driving service and building the AutoNation brand. I will now turn the call over to Jon Ferrando.

Thank you, Bill. We are excited to announce that in April we completed two acquisitions that we signed in the first quarter, including Mercedes-Benz store located in San Jose, California. This represents our 22nd Mercedes-Benz franchise and our 21st franchise in Northern California.

We also acquired a Chrysler, Dodge, Jeep, Ram store in Valencia, California, our 32nd franchise in Southern California. The Chrysler store will be an excellent addition to our business in the Valencia Automall where we offer nine brands.

AutoNation has also signed an agreement to acquire a Jaguar, Land Rover and Volvo store in our Spokane, Washington market. This will give us 25 franchises in the state of Washington.

As previously announced, during the quarter we completed the acquisition of a Mercedes-Benz store in Reno, Nevada, and a Volkswagen store in Atlanta.

The combined annual revenue for our five acquisitions since the beginning of 2015, including the Spokane acquisition which we expect to complete in early May, is approximately $320 million. As of today our store portfolio numbers 290 franchises and 235 stores in 15 states representing 34 manufacturer brands.

Looking forward, we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our auto retail markets, as well as markets that can be supported by our existing management infrastructure.

As for M&A market conditions, there is a solid pipeline of potential opportunities in the marketplace. While we have not seen a material increase in competition for deals, we have seen an uptick in sellers testing the market with unrealistic expectations.

We will continue to be selective and prudent with our capital with a focus on investing to produce strong returns and long-term shareholder value. I will now turn it back to Mike Jackson.

Thanks, Jon. We believe the auto industry is healthy, we still expect industry new vehicle sales to be above 17 million units. And with that we will take your questions.

(Operator Instructions). Patrick Archambault.

One question I wanted to ask is just you had this Chrysler news that came out where they were talking about raising the, I guess, invoice prices on their dealers and I guess without raising MSRP. And I wanted to get your view on whether, A, that was being accurately portrayed and, B, whether that even matters?

Because I feel like you guys kind of set your own prices and potentially if the vehicles are as hot as they are maybe there is an ability to really offset the increased list price. So just some thoughts on that.

This is Mike Jackson. I believe the reporting is accurate. But I am more in your B that you've got to look at the totality of the relationship. The fact of the matter is our Chrysler business is booming, we have high throughput through our stores. It has been a phenomenal recovery led by [Sergio] and his entire team. And the stores are very profitable with profitability growing.

So how they run their marketing scheme and the various things, it is a partnership with them. And in principle, as long as it is a win-win relationship, and we certainly believe with Chrysler it is, the details are not so much of a concern.

Okay, that's helpful. And maybe if I can squeeze in an obligatory CFPB question. I suppose we are on the cusp of getting the new rules published where they officially take over regulation and non-bank financials. There has been obviously a lot of talk within CFPB documentation about markups.

And some have speculated that they may try to convince industry participants to go after sort of a flat fee. A number of numbers have been thrown out, but I mean this is just discussion. I wanted to just see where you guys were coming out on that and what you thought -- how you thought this might end up.

Again, this is Mike Jackson. Our portfolio has been tested 18,000 times -- that is not an exaggeration, 18,000 times. And a very miniscule nominal number of situations were called to be looked at and when you look at them in detail there is not much there. So I could certainly speak for our portfolio that there is no sign of disparate impact let alone discrimination.

As far as the CFPB's position for flat, that's been their position from day one. And so far the banking industry has said that is not where they want to go because the system in principle is working very effectively for all the constituents. It is working for the consumer, it is working for all the protected classes, it is working for the banks and it is working for the retailers. So it is a very efficient effective system.

So what is finally going to happen? I don't know. But I don't sense anything impending is going to turn the world upside down.

Okay, terrific. Well, thanks a lot for the perspective.

Rick Nelson, Stephens.

Ask you about the regions, areas where you saw strength and maybe some weakness and commentary on Texas would be helpful.

Rick, could you repeat the question?

Regional areas of strength and weakness and Texas in particular, if you can make some comments there, what you are seeing.

This is Bill Berman. What we are seeing is strong and steady growth in California and Florida and we've seen virtually no impact in Texas with the decrease in oil prices. Overall all of our markets are performing very strong.

Great, thanks. Also, as I look at the segment performance, the revenue and the segment income, it looks like the Domestic stores are driving the income growth where Premium Luxury is driving the revenue growth but lagging a little bit on the income side. If you could (technical difficulty).

So, this is Bill Berman and, yes, we are definitely getting revenue growth out of Premium Luxury, that is just because of the average price per point. The gross is definitely being generated out of the Domestic segment and that is primarily driven by increased light-duty truck sales, trucks and SUVs.

And margin pressures just follow up on that. If we can look at those segments domestic, midline import and (technical difficulty).

So what we are seeing out there -- this is Bill again, what we are seeing on our PVRs is our -- we (inaudible) pleased with our performance in our overall total variable opt PVR, which is up 3.2%. What we are seeing is once again steady growth in our Domestic or downward pressures on our Import and our Premium Luxuries are holding.

But the average sell price on our Premium Luxuries because of entry-level models that have been recently introduced is bringing down our margins and reducing our gross slightly. But all in all, like I said, we continue to be pleased with our performance and our total variable opt PVR has increased 3.2%.

Okay, thanks a lot and good luck.

John Murphy, Bank of America Merrill Lynch.

Good morning, this is Liz Suzuki on for John. On a same-store basis your F&I per vehicle got above 1,500 for the first time. Was there anything in particular helping to boost that number that we shouldn't think of as sustainable or does it seem like 1,500 is doable on an ongoing basis?

Bill?

AutoNation has always been a leader in CFS with our technology and our training and we will continue to be that way. We see steady growth opportunities in our CFS performance especially in our lower performing quartile stores. And as we increase our focus on our product sales we will continue to grow our CFS PVRs.

Great, thanks. And on customer care, how much of your revenue there is related to recalls in a typical year? And how much of a benefit was elevated recall activity in the first quarter?

Well, on a gross basis recalls only represented 5.2% of our total customer care gross profit. So I would have to get the exact numbers as it relates to (multiple speakers).

I think as far as our increase it is around 25% of the gross profit increase. So of our gross profit customer care increase in the first quarter 25% of it was recall related. So at the peak of this surge of recall, that is all it -- that is what it meant to us -- to put it in perspective. But Bill's number is the best, 5% of our total customer care business is recall related.

Okay, thanks, that is very helpful.

David Lim, Wells Fargo.

I just wanted to follow up on that F&I per unit question. Wondering if you guys did something with the comp structure that you pay off to your F&I personnel in order to push more of the insurance side on that F&I portion?

We haven't had a substantive change in our compensation plans in the last year.

Got you. And then when it comes to this whole Chrysler situation with MSRP and invoice, granted the invoice becomes a lot more public via some of the Internet shopping sites, but have they changed anything from a hold back structure?

No, there have been no changes -- this is Bill, there have been no changes on the hold back structure or any of the performance bonus metrics.

Great, thank you very much.

Paresh Jain, Morgan Stanley.

First one on the [Express shows], it is early days but now you have about 120 days of operations under your belt. Can you give us any color on transaction times and market share performance of the stores there? And if you highlight a few things that may have surprised even [you]?

Yes, (inaudible) Express, our journey to improve our AutoNation digital performance really began with the launching of the brand AutoNation just over two years ago. And I recall at the time I said that was the inflection point. And so our investment in the brand in digital is progressing extremely well.

And if I look at our business here in the first quarter fully 19% of it was generated by the AutoNation sites. And we had about 13% of our total business come from third-party sites. So we have significantly outgrown and had a crossover as far as our dependence upon third-party sites.

As far as this transactional capability under the flag AutoNation Express, it is now active in 84 of our stores. It has been very well accepted by our customers and by the stores. We will roll it out across the rest of the enterprise through the course of the year.

And I expect in the next several years this strength of the AutoNation digital sites versus third-party will widen with our sites breaking over 20 and third-party sites going down into high-single-digits over the next couple years.

That's helpful. And just a second one on the used business. You obviously had a great volume quarter there and pricing continues to be very favorable. But what we continue to see, and this is across the (inaudible) actually, is that demand and pricing isn't really helping keep GPUs up. If you could help us understand why that is the case.

So our used vehicle volume, as you said, was up significantly. We are looking at our total overall used car gross profit was up 7.9%. The nice thing about the used car business is with the availability of inventory increasing and the way the market ebbs and flows as the market drops, we are able to buy our cars for lower money. And because of market dynamics being able to drive and sustain PVR. So we really don't see any negative impact going forward.

Thank you.

James Albertine, Stifel.

A quick question if I may. I noticed through some of your press releases this morning, the quarter -- some of the state-of-the-art facility upgrades. Just wanted to understand kind of better what is going on there and if you could put some math around it at a high level as it relates to investment and return on that investment. And should we plan to see more of those facility upgrades roll out across the portfolio over time and what (inaudible)? Thanks.

Yes, this is Mike Jackson. As I have often stated, our first responsibility to our existing organic business that it is state-of-the-art. In the first quarter we had a number of major [expanses] and renovations that were of a level that substantiated a re-grand opening. So we did events in those markets, I hosted events in those markets with our associates and customers and we did a lot of local market press so therefore the press release.

Yes, I think you are going to see that continue through the course of the year. That our confidence and optimism about our existing footprint remains. We are committed to our OEM partners to have first-class facilities. And when they arrive to a certain level of investment we will be doing events in those markets. And then you will see a press release.

And, Jamie, we are sticking with and have called out $235 million of CapEx forecast for this year.

Thanks again. Let me add my congratulations and best of luck in the second quarter.

Brett Hoselton, KeyBanc.

Good morning, this is Irina Hodakovsky on for Brett Hoselton. I had a question for you regarding acquisitions and the comments you made about market activity. Is it reasonable to assume that going forward, given the increased number of sellers in the market, perhaps your capital deployment will be weighed a little more towards acquisitions than stock repurchases?

Yes, this is Mike Jackson. Going forward on capital allocation we've never given that much clarity other than to say we're always looking at the balance between the opportunity on the acquisition side and the opportunity that is available on the share repurchase side.

I think it is fair to say that we have a lot of discussions underway. But you would never really know whether that leads to transactions or not. So it is very dangerous to say, oh, we are going to do X in this quarter and that quarter because then you feel this pressure to conclude deals to meet the commitments that you made.

But I think it is fair to say that there is a lot of activity and a lot of discussion underway from willing sellers and we will see if that leads to transactions.

Thank you for that. Congratulations on a good quarter.

Brian Sponheimer, Gabelli.

Good morning, nice quarter. Just a couple questions here. Thinking about some of -- just the recall comment that you made before. What is your sense of where you are in some of the largest campaigns that are out there? And I guess the add-on to that is, Mr. Jackson, the sense is that we are in an elevated recall world for the foreseeable future.

So, this is Bill, the two biggest recalls we have out there right now is the GM ignition switch. We have performed approximately 23,000 recalls there, it's about 60% of what we feel is available to our current customer base and on the Takata airbag we have done 48,000 which is approximately 20%. The availability on the parts for the Takata airbag are starting to open up. So we had a small increase in that, but overall that is where we are at on the two biggest.

All right, I appreciate that. And just the thought that for the next three to five years, or maybe into perpetuity, we are just looking at a situation where recall activity is just going to be elevated.

Yes, I think it will be -- it probably will be higher, but whether it is this high I am not convinced at all. These are two extraordinary recalls that or so broad and so old that to say we are going to have these type of recalls open-ended I am not necessarily there.

Understood.

But I think the feeling within the industry is if in doubt recall, recall sooner the better. And certainly the whole process somehow someway needs to be improved. It is really broken the way it is today, almost dysfunctional. We get it all done at the end of the day, but it is certainly not ideal and it is certainly the customers deserve something better than what is going on today. But to say we are going to be open ended at this level, I would not necessarily agree with that.

Okay. And then just my last one, use vehicle pricing, I may have missed it, average selling prices continue to rise. How much of that is mix going from car and cross over to full-size SUV versus just like for like what you are seeing from a pricing standpoint on used?

We'd have to get back to you to get the breakdown on what is truck versus SUV versus car on the used cars. Inherently as the volumes increase on the new car side the corresponding years on the late-model two to four year old cars, inherently the prices go up. So most of it is being driven by the mix of inventory that is available in the marketplace.

Understood. Thank you very much for answer.

David Lim, Wells Fargo.

A question for either Mike, Cheryl or Bill. When we think about the F&I PVR, and I think you mentioned earlier a third of it is from the finance side. In a scenario where the CFPB does mandate a fixed fee of let's say $250 or $300, whatever it is, and you guys lose $100 to $200 per vehicle, what are the levers that you could pull in order to make up the $100 to $200 loss there in theory? And then I do have a second follow-up question.

This is Mike Jackson. So first I would be surprised if the industry moved to a flat fee. And if they did move to a flat fee I would be surprised if that is what the flat fee is, the number that you mentioned. It doesn't mean I can't be surprised, I am just saying that is not where I think this is going. But let's see.

I think Bill stated the case well. We have -- we see exceptional potential in the product side of the portfolio. And speaking of flatness our finance side of the equation has been relatively flat for years. All of the growth has been on the product side.

And we intend to take a big step launching a pilot in the third quarter where, again with the brand AutoNation, we will now offer our service and maintain contracts under the AutoNation brand name. And we feel this will be another growth opportunity that has the potential to be very beneficial in 2016 after we get through the pilot phase.

Interesting. And then I know that some of these OEMs further down the road are talking about over the air software updates, whether it be infotainment or what have you, for their vehicles. How would that affect your business or the dealer business in general? And is that something where you guys are maybe -- or are dealers in general pushing back on the OEMs or proposing that these software updates actually occur -- should occur at the dealership? Thank you.

First, we are quite the opposite, we are advocating whatever is most convenient for the customer. And have long argued that cars be designed and equipped in a way that these software updates can be done on a regular basis without any inconvenience to the customers.

And I think that's pretty much the direction the industry is going in. I think some manufacturers on certain models are already there. And I expect that would -- to be continued in the future. It is not a big part of our business today.

This is Bill. The thing I would add to that is on the flip side of this I think technology is also going to be able to drive the customer to be able to diagnose a car and drive the customer back into the dealer to perform whether it is a maintenance requirement or a possible warranty or recall. And it could notify the dealer and the customer as well as come back into us. So we see it as a positive.

Yes, that is the other thing we are pushing for with the manufacturers is that the car communicate with us what its maintenance needs are so that when the customer comes in we already know it needs this, this and this and the parts have been ordered and are there and we are ready to make the repairs.

So I think this connected car where it is the car talking to the manufacturer and talking to the customer care experts, namely us, the retailer, I think has tremendous potential for the business and for the convenience of the customer. And we are all for it.

Excellent perspective. Thank you very much.

Thank you. (Operator Instructions).

I think we are all set for the day. Thank you very much for joining us. Very much appreciate it. Thank you for the questions.

(Technical difficulty) thank you all for joining.