O'Reilly Automotive Inc (ORLY) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the CSK Auto, Inc. fourth quarter and year end fiscal 2001 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

Certain statements contained within this call are forward-looking statements. They discuss, among other things, expected growth, store developments and expansion strategy, business strategies, future revenues and future performance.

The forward-looking statements are subject to risks, uncertainties and assumptions, including, but not limited to, competitive pressures, demands for products, the economy in general, inflation, consumer debt levels and the weather.

Actual results may differ from anticipated results described in these forward-looking statements.

At this time, I would now like to turn the conference to your host, Mr. Maynard Jenkins. Please go ahead, sir.

Good afternoon, and welcome.

With me this afternoon on the call is Martin Fraser, our President and Chief Operating officer, and Don Watson, our Chief Financial Officer.

I'll open up with a few comments as far as the company overview, and then I'll turn it over to Don Watson, who'll review the actual results of the fourth quarter and the full year fiscal 2001 ended February the 3rd, 2002.

Total sales for the fourth quarter of fiscal 2001 were 334 million. And total sales for the full year of fiscal 2001 were 1,439,000,000.

Same store sales for the fourth quarter fiscal 2001 increased four percent, when compared to the fourth quarter of fiscal 2000, and increased one percent for the full year fiscal 2001, when compared to the full year fiscal 2000.

Net income for the quarter, excluding the non-recurring items that are associated with the refinancing and other items disclosed in the financial statement, was two million, 100 -- $2.1 million for the quarter and $17.6 million for the full year.

EBITDA, as adjusted for these items, was $31 million for the quarter and 131 million for the full year.

We are very encouraged about steps we have taken to improve our future operating performance. During the year, we implemented the following.

First, the profitability enhancement program, which has refocused the entire company on reducing operating expenses, maximizing cash flow generation, increasing return on assets and reducing our debt. This program specifically involved closing under-performing stores, reducing corporate staffing, eliminating certain merchandise and renegotiating certain equipment and equipment leases and service arrangements.

In addition, during 2001, we raised 80 million of additional equity and refinanced our long-term debt, with no amortization payments until 2004. As a result of this refinancing, we were able to improve our relationship with the vendors and improve the inventory selection in our stores.

Since the completion of the refinancing at the end of December, our same store sales increases have been running in the mid to high single-digit level. In addition, both our same store retail customer accounts and retail dollar averages have been improved. Customer accounts, which had been declining in recent years, are now positive.

This trend is -- positive customer accounts and high dollar average per customer indicates the strength of the business going forward. We believe these improvements reflect our improved inventory position, and also the general favorable dynamics of the current automotive after-market business.

Regarding our commercial business, CSK's commercial sales program has continued to grow with total sales of 55.6 million for the quarter, which represents 17 percent of our total sales, and 259.1 million for the full year 2001, which represents 18 percent of our total sales.

Commercial business increased 10.4 percent on a comparable basis in the fourth quarter of fiscal 2001, when compared to the same quarter in the comparable period of 2000, and 10 percent for the full year fiscal 2001, compared to the full year 2000.

We are very encouraged by the continued growth and our ability to gain market share and the acceptance of CSK's commercial format.

With regard to store openings, during the quarter we opened, relocated or expanded six stores and closed seven stores, of which four were closed due to relocation, bringing our total store count at quarter end to 1,130. Store growth plans for 2002 are for 25 new and relocated stores. The company will continue to evaluate store performance and make adjustments as necessary.

At this point, I'll turn it over to Don Watson, who'll review the financial performance for the fourth quarter and the full year fiscal 2001.

Thank you, Maynard, and good afternoon.

Net sales for the thirteen weeks ended February 3rd, 2002, total 334 million, which represents a four percent same store sales increase.

Excluding the non-recurring items associated with the refinancing, and the other items disclosed in the financial statements, gross profit for the thirteen weeks ended February 3rd, 2002, was 161.2 million, or 48.3 percent of net sales, compared to 169.2 million, or 48.1 percent of net sales the same period of fiscal 2000, which was a 14 week period.

The higher gross profit margin rate is in part a result of the company's ability to begin to take advantage of available vendor allowances since the refinancing was complete in late December 2001.

Excluding the non-recurring items of both periods, operating profit for the thirteen weeks ended February 3rd, 2002, was 18.7 million, or 5.6 percent of sales, compared to 22.9 million or 6.5 percent of sales for the same period fiscal 2000, which was a 14 week period.

During the quarter the company incurred an additional interest expense of 500,000 in connection with the convertible debentures, due to a longer than expected duration before the conversion. Also the company has incurred additional expense of 813,000, due to the amortization of the deferred finance -- deferred financing costs as a result of the refinancing.

As a result, net income for the quarter, excluding non-recurring items associated with the refining disclosed in the financial statement, was 2.1 million or seven cents per common diluted share, when assuming 32,434,000 weighted average outstanding shares.

The additional share count -- 2.4 million in the fourth quarter of 2001 -- is the result of the convertible debentures that were issued as a part of the global refinancing.

EBITDA for the quarter was 31 million, which is consistent with the previous company's guidance.

Net sales for the 52 weeks ended February 3rd, 2002, totaled 1,439,000,000. Same store sales increased one percent for total year of fiscal 2000.

Gross profit for the 52 weeks ended February 3rd, 2002 was 671.1 million or 46.6 percent of net sales, excluding the non-recurring items.

Operating profit for the full -- for the full fiscal year 2000 was 88.3 million or 6.1 percent of sales, or eight percent of the -- or eight percent of sales for fiscal 2000.

2001. Fiscal 2001.

The lower operating profit is the result of the company's inabilities to take advantage of the available vendor discounts and allowances, due to our liquidity issues that have now been solved with our refinancing.

Net income for the full fiscal 2000, excluding the non-recurring items of both years disclosed in the financial statement for fiscal 2000, excluding the non-recurring items in both years disclose in the financial statement, was a 17.6 million or 56 cents per fully diluted common share. We're assuming 32,387,000 of weighted average outstanding common shares.

The share count is four million -- four million shares higher the fiscal 2001 than it was in 2000, in connection with the convertible debentures that were issued in August and December associated with the refinancing.

EBITDA for the full year was 131 million -- February 3rd, 2002.

Now I'll turn the call over to Martin Fraser, our company's President and Chief Operating Officer.

Thanks, Don.

Since the company has raised $80 million of additional equity and refinanced its long-term debt, we have been very happy with the recent trends in the business, particularly in customer account and dollar average.

Starting in January, the company increased marketing expenditures in new promotional activities to introduce our customers to our improved inventory assortment. And as Maynard mentioned earlier, the same store sales response has been encouraging.

Industry trends remain strong, and we believe with the continued increase in the of the vehicle, the favorable demographics of younger drivers and the increased numbers of SUVs and light trucks, which cost more to maintain, we will continue to see good sales growth.

The company continues to focus on our customer service program called , providing our customers with a better in-store shopping experience. Our associate turnover in our stores is down from last year, giving us a more experienced associate base. And these two factors helped to improve our service and productivity in our stores.

The combination of lower turnover, improved customer service, success in putting in place new capital resources and the operating initiatives we have implemented as part of our profit enhancement program has strengthened the company operationally and financially going forward.

As a result, we expect that 2002 net sales to increase to the mid-single digits on a same store basis. For the full year, we expect earnings, before interest and taxes, to increase about 20 percent and net income to be in the range of 25 to 27 million.

The company is assuming a fully diluted share count of approximately 38,300,000 shares, based on the conversion of our debentures into common stock. We expect to generate EBITDA of approximately 145 million and free cash flow of approximately 57 million for the full year, which be applied to reduce outstanding debt.

Now we would like to open it up for your questions.

Ladies and gentlemen, if you do have any questions at this time, press one on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

One moment, please, for our first question.

Our first question comes from of Midwood Securities. Please go ahead.

Hi. You mentioned that you're improving your employee service to your customers. Can you elaborate on how you're doing that?

We have a -- we have a customer service program we've put in place called , where we've really concentrated really greeting every associate that comes in the door, responding to their need, expediting their transaction so they can get their car back on the road, asking them if they need any help -- any further help with diagnostics or installation of the - and finally, thanking them for their purchase.

And we've really made a full court press on that, and our service in our stores is just really improved.

We have a shopping program that goes along with that. And the stores are judged on how they do on each of those individual items.

I see. What do you expect your inventory turn to be this year compared to last year?

Go ahead, Don.

When you look at that on a FIFO basis, our inventory turns will be just slightly under 1.6 turns for full year. When you look at next year, we expect to increase that to just over 1.7 turns.

Thank you.

Our next question comes from of Credit Suisse. Please go ahead.

Yes. Good afternoon, everyone.

Good afternoon.

Hi. My first question was with respect to the promotional environment -- you know, what you're seeing out there.

Are you seeing any acceleration in your comps in the first quarter? Is one to get a sense if you were doing anything different from a marketing and a merchandising standpoint at this juncture?

Well, as we did refinancing, we told people that we were going to build up our promotional activity to reacquaint our customers with our stores starting in the first quarter. As you know, the refinancing was completed in late December.

So we really only got the benefit of liquidity increase in the later timeframe of the fourth quarter.

And from the day that the liquidity issue was increased, we started seeing our customer accounts increase, our business to increase, and we were very happy to get to a four percent comp for the fourth quarter, because we really lost the first month.

And then we've seen business increase over that point so far year-to-date and, as stated earlier, since the refinancing was done, we've run in high single digit comps week after week. So we're very encouraged by the customer returning to our stores.

Is there any difference how you're doing -- are you being more promotional? Are you, you know, being more pointed on pricing? What are you generally seeing in the price environment out there?

There's a combination of things. We've infused some things into the business that would be an incremental sale to our normal operating situation, and we've got hot inspections lined up in the stores. We've got signed in rotating with the promotional-type items, and customers are responding to it.

Great. So are you happy now with your in-stock position?

Absolutely. We had the highest in-stock position last week that we've had since May of 2000.

OK. Also the -- can you give us the -- I don't think in the press resale there was a -- the payables levels? Do you have a payables -- the accounts payable number? And maybe cash? The cash at the end of the quarter?

, at the end of the quarter, although, you now, we're just finalizing all balance sheets, we expect that we had cash of about $16.1 million at the end of the quarter. And at the end of the quarter, we had accounts payable of about $169 million, which equates to somewhere in the neighborhood of the high 70 days. It's like 78 to 79 days.

OK. Great. Thanks very much.

Thank you.

Our next question is from Brett Jordan of Advest, Inc. Please go ahead.

A couple of quick questions, and one of those just following the last on the in-stock. What was your -- I guess, where would you compare to? What were the low in-stocks? If you're running around a now, where were you prior to the refinancing?

It was in the mid-80s.

OK. All right. And on the SG&A line, Don, I show fourth quarter percentage of sales you seemed a little bit higher than I'd been looking. Where do you see, you know, a side or on a, you know, targeting as a percentage or a run rate on an absolute basis for the current year?

Well, if you look on the -- on the SG&A, you know, excluding the charges -- 40.5 percent. If you look at, going forward, we expect about 150 basis points improvement going forward, reflecting the cost savings associated with the profit enhancement program that was put in place.

OK. And then just going back to one of your earlier comments on a target of 25 new and relocated. Is that a net new? Are there any stores under evaluation for possible closure this year, or are you pretty much cleaned up there?

Every year we take a look at stores that are either under performing, and, or maybe a smaller unit that the lease is running out. Typically, we would close, on a normal base, six to eight stores a year. A combination of 25 stores of new and relocated might be in the neighborhood of 15 incremental new stores, organically built, or one-store acquisitions in a given area, and probably 10 relocations.

OK. We can count sort of a net new 25 as opposed to 25 minus x number ...

No. The 25 would be new and relocated, and if we close six stores in the normal course of business, you could have a net new 19.

OK. All right.

And to follow up on the store expenses.

A couple dynamics that have happened that make store expenses a little bit higher in the fourth quarter is due to two things. One of them -- insurance costs have been skyrocketing. And if we able to go back and lock into some costs, but we did have some significant increases in property and auto insurance, I think, directly related to September 11th.

In addition, in the state of California, we stepped up our workers comp claims, due to the fact that legislation over there allows them to reopen workers comp claims, and we wanted to make sure we were fully preserved.

Just so you understand, reopen worker comp claims that had formerly been closed.

OK. That's not a good deal. All right. Thanks.

Our next question is from of . Please go ahead.

Hi. Thank you. I had a little question on -- if you could give us some more details on the derivation free cash.

Is it just, physically, net income plus depreciation minus cap ex, and what that number would be? Or is there a lot of free cash flow? Is there a working capital gain or loss in there as well?

Yeah. There -- well, it's a combination of three things. It's a combination of net income, a combination of a generation of cash through, you know, the decrease of inventory and the increase in accounts payable, which is just going to increase your operating cash flow.

And the last piece is the company only expects to spend $15 million of cap ex, so we're going to get to -- you know, operating cash flow will be in the neighborhood of 72 million, less the 15 to get to the free cash flow.

So is the working capital -- fair to say it's like a 10 to 15 million number?

I would say it's probably 15 to 18.

Fifteen, 18. And is there also -- I know your company hasn't . Is there a tax benefit in those numbers? Or is there any other type of -- I know also there's non-cash interest you're paying. Is that -- are those numbers in there as well?

Yeah, well, we expect to, in this year in our cash flow, we're going to assume to save between eight and $10 million of cash taxes from the standpoint of the that we had carried it over. And the decision we made last year to change from LIFO to FIFO for tax purposes will save us about 10 million on a cash basis.

Is that in the 57?

It is in the 57.

It is?

Yeah.

And also -- and I guess some expenses from the -- I guess some amortization of financing costs from restructuring and the capital you raised. Is that also in there?

Yes.

Good.

The amortization -- all costs associated with the refinancing have already been paid and would not be in next year's cash flow at all, but you do amortization of approximately $6 million to those fees.

But your net income of is that being hit by non-cash or the financing. Isn't that correct?

Absolutely. And those are added back to about six million.

So that's also in all those numbers in your 72 of operating?

Yes.

Cash flow?

Yes.

OK. Thank you.

You're welcome.

Our next question is from Alan Rifkin of Lehman Brothers. Please go ahead.

Thanks, this actually on Alan's behalf.

A few questions, if I may. First, if you could maybe provide a little bit more color on sales with respect to organic stores versus acquired.

And secondly, with, you know, trends pointing to higher prices in the after-market, could you maybe comment as to whether you think you'll be able to see price increases in the neighborhood of three to four percent as many competitors have? And do you perceive that as sustainable over the short term?

The pricing environment has been pretty consistent and stable in most of our markets, so we have not had any big increases in retail prices as some of our competitors have.

, to answer your other question on comparable store sales, if you look at it in -- the retail sales for the fourth quarter were up three percent. The commercial sales were up 10 percent. But there were -- there was not, you know, a big impact on either of those numbers from the acquisitions, because they were two years ago.

Thanks.

And as far as regions, California has been very strong in the fourth quarter and year-to-date, and if we've had any weakness at all it may have been tied to the Pacific Northwest. of the store operators think that they had some weather issues up there, but we don't like to blame things on the weather.

Got you.

Our next question's from of Solomon Brothers. Please go ahead.

Hi. I'm curious if you're now at a normal level of vendor allowances and cash discounts with your suppliers?

, to answer that question, we have assumed, and where we're at is we're more current right now with our vendors than we've been since 1999.

But we also have just recently got there, and we would expect to get about 50 percent of our normal cash discounts in the first quarter, and we think we'll be able to take full advantage of that in the second quarter.

As far as the other vendor allowances, we are returning to a more normalized level. There is still some room for improvement, and you know, I think that'll come as sales continue to churn away here.

All right. So then is it reasonable to expect your gross margin should be up in each quarter this year? Year for year?

If you look at the full year, we would expect that the gross margin would remain fairly flat year over year, in total, for a couple of reasons.

One -- commercial still continues to grow faster than the retail grows. And we have not -- and the rest of it is just based on, you know, not having the early year where we're going to get full advantage of the cash discounts.

But if you look at individual quarters going forward from the second quarter to the third quarter to the fourth quarter, we expect continued improvement in gross profit in each one of those quarters.

OK. And, Maynard, can you just say what your shop stores are roughly for your latest measurement period, and where they were a year ago?

Well, the -- obviously it varies by region and varies by , but a year ago, our worst numbers would have been in the high 70s, and this year, on an average, they're in the high 80s and above.

And with many regions in the mid-90s, but, you know, it's a rotating issue, and, obviously, it's an individual store and individual people. But the point is that we continue to hammer on this great program and taking care of the customer, and we think we're serving the customer better because of it.

OK. And, Don, can you say where you are with which revolver at year-end? How much you've ?

We disclosed that at the -- we're at 57 at the end of the fourth quarter, and based on the calculations of borrowing basis disclosed in the press release, we had just over of availability.

OK. Sorry I missed that. Can you say what your D&A will be this current year?

Hold on a second.

Yes. Sorry that number was 65 on that number on the available revolver.

If depreciation for the quarter was at eight million, 580, and for the year 32,800. Sorry -- yeah, 32, 800. If you looked at -- amortization was two million, 150 for the quarter, and eight million, 347 for the full year.

Right. D&A for 2002.

For 2002, depreciation and amortization, we've assumed 37 million -- or 34 million, 700 in depreciation, and amortization will be 1.6 million -- or 1, 675,000. And the reduction in amortization is due to us not amortizing goodwill in the future.

All right. And cash interest expense this year -- 2002?

Cash interest expense was 57 million, 128.

And this current year that we're in right now -- cash interest expenses will be how much?

In the current year that we're in right now, cash interest will be -- 50 -- will be very -- it'll be about 57 next year also.

All right. And you said that retail comps were up -- you said retail was up percent. Is that a comp basis for the fourth quarter?

That's for comp for the fourth quarter.

Just retail alone?

Yes.

Retail alone in the 10 percent -- commercial was four.

Got you. Thank you.

Our next question is from of Midwood Securities. Please go ahead.

Hi. I just wanted to follow up something on the three percent retail that you said in being up 10 percent comp in commercial. If commercial represents 17 percent of your sales, and that goes ahead 10 percent, that would automatically add about 1.7 percent comps.

It average -- it really runs just about 1.3 percent of the comps, and both of those numbers are rounded, and if you wanted the exact numbers -- about two seven when you get to the retail . So you take those two blended, you end up with a situation that's about percent comp total.

OK. Line pricing again, AutoZone has said they are going up somewhat in pricing. Does that not apply to the stores like in California that you compete against?

It applies everywhere.

The -- there's a couple different issues with AutoZone, and you know, just , they've been very public about it, and there's been a couple issues. They have gone to more of a name-brand format, which we've been on for years.

And name brands typically carry a higher retail price, and they also made some price increases that they've announced to the world in the past. A combination, we think, is very positive for the entire industry.

So you suggest -- or not following them up to the same extent in your own pricing?

No, we're not suggesting that at all.

We're suggesting that we haven't made substantial price increases in the marketplace. We still shop our competitors day in and day out and make adjustments where necessary. But it's not like AutoZone nor us take blanket price increases across the board in regard to where the competition is

I think when AutoZone entered the California marketplace, we made a decision to leave some of our California pricing where it was.

We thought that they would eventually follow us up in price, just because of the dynamics of operating in California. And they have raised some of their prices up to our prices in California.

Oh, OK. Thank you.

Once again, if there are any additional questions at this time, please press the one key.

Our next question is from of OppenheimerFunds. Please go ahead.

Yeah, hello guys.

Hi, .

Don, you talk about 150 basis points in SG&A improvement?

Yes.

And then gross margins being kind of flat. That's for this year, right? Have you looked out farther? Should we expect more margin improvement over the next two or three years?

Yeah, I think you're going to see significant margin increase in the second half of the year if sales continue to run where they're running. You know, this forecast we gave you assumes about an 80 basis points improvement in EBITDA, year-over-year from 2001 to 2002.

And we think there's another opportunity that's 50 to 70 basis points more when you get to 2003. But one of the things that we have to do is we reestablished credibility with the vendors, which we think we've done, and we think we'll start getting better allowances and rebates.

OK. Great. Thank you.

Thank you, .

There are no further questions at this time. Please continue, Mr. Jenkins.

If there are no further questions, I want to thank everybody for participating, and that'll end the conference call.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time. Good day.

Thank you.