O'Reilly Automotive Inc (ORLY) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your second quarter fiscal 2002 conference call.

Certain statements contained within this call are forward-looking statements. They discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenue performance. The forward-looking statements are subject to risks, uncertainties and assumptions, including, but not limited to, competitive pressures, demand for our 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, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation.

It's now my pleasure to hand the floor over to your host, Mr. Maynard Jenkins.

Sir, you may begin.

Good afternoon and welcome.

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

Management at CSK Auto is very pleased with the continued operating and financial improvements we've achieved thus far this year. The improved liquidity from the company's refinancing at yearend 2001 has had a significant impact on our operating results. The continued improvement in the second quarter is evidenced by the seven percent increase in comparable store sales, sequential increase in growth profit margins of 170 basis points, and the continuing leveraging of our Selling, General and Administrative costs, resulting in a net income increase before one-time charges of almost 70 percent over the same period in the year 2001.

Since the second quarter fiscal 2001, our outstanding debt has been reduced by approximately $90 million from $635 million to the current level of $545 million. This is a result of a retirement of approximately 71.7 million of 11 percent senior subordinated notes, and the generation of approximately 20 million of free cash flow. As a result, our debt to EBITDA ratio has been reduced from 4.75 times to four times.

At the beginning of fiscal 2002, the company increased marketing expenditures and new promotional activities to encourage customers who may have previously been disappointed due to our out of stock conditions in fiscal 2001, to revisit our stores. We also introduced new product offerings to attract new customers. During the second quarter, we continued to execute several new and innovative merchandising programs to attract a new type of customer. As a result, our sales remained strong. With the strong support of our vendors we continue to offer a broad selection of trusted brand name products.

Our newest merchandise program, which includes garage maintenance and garage organization products, such as automotive power tools and accessories has been received very well. The industry trends remain strong, with a continued increase in the average age of vehicles, the increasing number of newly licensed drivers, and the increasing number of SUVs and light trucks in the marketplace, which cost more to maintain, we expect to continue to see strong industry growth for the next several years. The company will continue to focus on our customer service program called , providing our customers with better in-store shopping experience. Associate turnover in our stores is down from last year, giving us more associates with more experience to serve the customer. These two factors have helped to improve service and productivity in our stores.

We're very encouraged by the continued increases in our comparable customer count. In recent years customer counts have been flat or declining, but now are positive. These increases show the strength in the DIY market. In addition, we believe our sophisticated parts availability network, our improved inventory position, and the generally favorable dynamics of the automotive aftermarket indicates the strong potential for our business going forward. With regard to commercial sales, CSK's commercial sales program continues to grow, with total sales of approximately 72 million for the quarter. This represents 18 percent of our total sales, and despite a challenging general economic environment, our commercial business increased nine percent in the second quarter of fiscal 2002, when compared to the same quarter in the comparable period of 2001. The continued growth is a result of our ability to gain market share.

In summary, the company's focus for the remainder of the year will be to continue to improve our profitability through further increasing top line growth, expanding our margin, and expense control. At this point I'll turn it over to Don Watson, who'll review the financial performance for the second quarter, fiscal 2002.

Thank you Maynard, and good afternoon. Net sales for the 13 weeks ended August 4th, 2002, totaled 398 million, which represents a seven percent same store sales increase. Gross profit for the 13 weeks ended August 4th, 2002, was 182 million, or 45.7 percent of net sales, compared to 170 million, or 44.6 percent of net sales for the same period of 2001. On a sequential basis, from the first quarter to the second quarter of fiscal 2002, gross profit margins increased 170 basis points. This is a direct reflection of our increased liquidity allowing the company to reach optimum in stock levels which has resulted in increase sales and allowed the company to take further advantage of the available cash discounts and vendor allowances much more quickly than anticipated.

We expect this trend to continue throughout the remainder of the year. Operating profit for the 13 weeks ended August 4, 2002, increased 30 percent to 29.3 million or just over seven percent of net sales compared to 22.6 million or 5.9 percent of net sales for the same period of fiscal 2001.

Operating administrative expenses were 152.8 million or 38.3 percent of sales, as compared to 147.6 million or 38.7 percent of sales for the second quarter of fiscal 2001. The continued leverage of operating administrative expenses reflect the implementation of the company's profitability enhancement program and our continued emphasis on becoming the low cost operator.

Interest expense for the second quarter of fiscal 2002 totaled 16.5 million, which is a 1.5 million increase over the same period of fiscal 2001. The major variance in the increase expense is a non-cash increase in amortization of the recent financing costs. That income for the second quarter of fiscal 2002 increased to approximately four million from a loss of approximately 24 million in the second quarter of fiscal 2001.

Net income for the second quarter of fiscal 2002 before one-time items was approximately 8.8 million or 21 cents per diluted common share. Assuming an increased weighted average share base of 41.1 million. This is an increase of almost 70 percent over the same period of fiscal 2001.

These fiscal 2002 results exceed the guidance the company provided in connection with its recent equity offering by .8 million. The outstanding share account, however, is higher than was expected as a result of the strong demand for the company stock resulting in the full exercise of the over allotment granted to the underwriters.

In addition, recent strength in the company stock price has increased the diluted the effect of the company's outstanding stock options. The impact of these share account increases caused fully diluted earnings per share to decrease by about approximately three cents. Using the weighted average share count of 36.1 that was assumed at the time of our recent equity offering, earnings per share were 24 cents. Three cents higher than the guidance.

Net sales for the 26 weeks ended August 4, 2002, totaled 774 million which represents the seven percent same store sales increase. The gross profit for the 26 weeks ended August 4, 2002 was 347 million or 44.8 percent of net sales, compared to 339 million or 45.9 percent of net sales for the same period of fiscal 2001.

As mentioned earlier, the decrease in the gross profit for the year over year first half was anticipated in light of the steps we took during the first half of this year to encourage former and existing customers to return to our stores and to also attract new customers who have - may never have previously visited a CSK store.

These steps included an increase in emphasis on promotional activity and promotional pricing to stimulate customer awareness, the commencement of a new merchandising program that features garage maintenance, organizational products and items that the company had never previously stocked, and a replenishment of inventory to return the stores to more normal level of product availability.

While these steps were successful in increasing customer count, average sale amount and total sales level, they expectedly produced lower gross profit margins, especially in the first quarter of fiscal 2002. However, on a sequential basis, from the first quarter to the second quarter of fiscal 2002, gross profit margins did increase 170 basis point as the company took further advantage of the availability of greater cash discounts, vendor allowances being available as a result of the company's improved financial condition.

Operating profit for the 26 weeks ended August 4, 2002 was $52.3 million, or 6.8 percent of sales, compared to $45.9 million, or 6.2 percent of sales for the same period of fiscal 2001. Operating and administrative expenses were $295 million, or 38.1 percent of sales, as compared to $293 million, or 39.7 percent of sales for the same period of fiscal 2001.

Interest expense for the first half of fiscal 2002 totaled $32.8 million, compared to $31.4 million during the same period of fiscal 2001. And, as discussed earlier, the major increase was the non-cash increase for the amortization of the recent financing costs.

Net income for the 26 weeks ended August 4, 2002 was approximately $7.5 million, or 21 cents per common diluted share. Excluding the one-time items detailed in our press release, net income would have been approximately $12.9 million, or 32 cents per common diluted share, assuming a weighted average share base of $39.6 million. This is a 35 percent increase over the same period of last year.

The outlook, the positive sales trends have continued into the third quarter, and the company expects comparable store sale increases to remain in the mid single-digit range for the remainder of the year. As a result, barring unforeseen changes in the general economy, the company expects full year fiscal 2002's net income to range between $29 million and $31 million, excluding one-time items referred to earlier. This represents an increase from the previous guidance given between $27 and $29 million.

This is also based on a weighted average share account of approximately per share. The full-year earnings, exclusive of one-time items, are expected to range between 77 and 80 cents per share full year. This calculation is based on weighted average share count to be 45.2 million shares for quarter three and 45.2 million shares for quarter four. In addition, based on our recent stock price, since our December 2001 sale of convertible , the warrants associated with this are unlikely to be exercised.

And, finally, we should also note, although because we are not a calendar year company, we have not been required to issue any certifications as to our SEC reports, but we fully intend to be issuing such certifications when they are due in September. Now I'd like to open it up for questions.

?

Thank you. The floor is now open for questions. If you do have a question or a comment, you may press one, followed by four on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again that's one, followed by four, on your touchtone phone. Our first question comes from of Schroeder Investment. Your line is live.

Hello?

Our next question comes from of Advest. Your line is live.

Good afternoon.

Hi .

Hi. A couple quick questions, and one of them, Don on the share count, a little surprising on the high side. What was the impact of options dilution on the share count in the quarter?

It's just over 300,000 shares.

OK. All right. And then on the business side, commercial versus DIY, the nine percent gain in commercial. Was that primarily comp, or was that incremental stores doing commercial distribution?

Primarily comp.

OK. And then on full year interest expense, I guess do you have a number for where you think you're going to come out?

Yes, hold on one second here . After giving impact of the, you know, these redemption of the 11 percent notes that we just did at the last day of the quarter, we'd expect full year interest expense to be $60,300,000.

OK. And then I guess, it seems like the vendor terms that have been improving in the second quarter, would you expect the same general trend into the second half as your improved liquidity is, at least on a year over year basis?

Yes we would , because as we stated back in December and early January, we said with our increased liquidity of our balance sheet, that it was going to take time to ramp up, and we should see things start to flow more and more each quarter.

OK. And then one last question, I'll pass it along. As far as regional performance goes, Northern, Midwestern, or just general, are there any particular regions of strength or weakness we should be aware of?

No.

OK. Thank you.

Thank you. Our next question comes from of Goldman Sachs. Your line is live.

Thanks a lot, good afternoon.

Hi .

Hi. Two questions. First of all, if you could enlighten us a bit on the sales progression through the quarter, particularly in light of what we saw in the broader retail sector, clearly you're comfortable with the third quarter outlook, but just curious whether you saw signs of what much of the rest of the world witnessed in July and part of August?

Well , for us, and you know we're on the road show in June, the equity offering, at that time, May, we had experienced a softening of sales. We ran four percent comps for the period May, which was period four for us. Five increase to the seven and a half, eight range, and then if you look at July we were running just over eight, to get us into just over seven for the quarter. If you look at the three weeks since then, we've stayed, you know, in that mid to upper single-digit levels.

And would that progression also be just something we consistent with the comparisons that you have that would help explain it?

You need to repeat that, I ...

I guess, did your compares get easier through the quarter, would that help explain this ...

No, actually July last year was our, actually our best month of the, for last year. I think what's happened is there's been a general increase in the demand in our industry, our industry seems to be very strong. There seems to be more, you know, licensed drivers, customers, that are shopping at the stores because comparable customer counts are up in the DIY business significantly.

So, we would expect the trend to continue for the remainder of the year.

I think everybody's well aware of what's happened in the airline business and there's been routes cuts and passengers - customer counts are down and their predicting that they're going to be down for Labor Day and, you know, it's a cliché but more miles driven with older cars and more people driving, there's going to be more broken parts.

It's going to be advantageous for the entire industry.

Well, it's nice to see somebody bucking the sales trend. Second question, your gross margin obviously was quite strong and stronger than what I had looked for in my model. The operating expense number was also a little higher than what I had been anticipating and I guess you didn't have - in the first quarter you achieve substantial leverage on the operating expense side.

It looked like there was minimal leverage in the second quarter despite a good comp. Can you talk a bit about what you saw in SG&A? Whether - how it compared to your plan and whether there were any factors that might have moved the needle on that line item?

Just to answer that, , if you look at the first quarter. You know, there was 300 basis points improvement year over year, but that also assumed that we were over 40 percent last year.

Yes.

The second quarter of last year we ran, you know, 37 -7 but this year as we stated in the equity offering, the company's intention was to spend $5 million more in gross advertising costs in the second quarter.

So if you look at just comparing those two numbers, you actually spent less dollars - almost 20 million more in sales.

Gotcha. OK. Thank you very much.

Thank you. Our next question comes from of Lehman Brothers. Your line is live.

Hi. Actually it's Scott Nessen on behalf. Two questions if I could.

You said that the customer count continues to track positively. Can you maybe delineate on average ticket? And second, as far as the vendor allowances are concerned, how much is outstanding out there for you to realize and do you expect most of that to fall within the third quarter?

, as we talked about earlier when we - the last call. We're still seeing about 50 percent of the - for the first quarter it was 50 percent comp customer count and 50 percent DA that was driving the dollar - the comp increase.

If you look at the second quarter, it's about 40 percent that's coming from customer count but with our new garage offering we're getting a little bit higher DA so that's significantly helping us. We also said, to answer your second question, you know, there was a progression throughout the year that we stated the last time going from 44 gross profit margins to 44.8 going to 46 going to 47 by year end as the run rate.

One thing that happened, is the sales have continued to improve. What has happened, is naturally you get higher cash discount. You also get better terms from your vendors and you started to hit some of the step up allowances because of the increased sales. We would expect, you know, those trends to continue. You know so we're looking for about 46 margin in the third quarter and about 47 - just over 47 run rate in the fourth quarter.

OK, great. Thank you.

Once again, as a reminder, if you do have a question or a comment, you may press one, followed by four, on your touch-tone phone. Our next question comes from of . Your line is live.

Good afternoon, guys.

A quick question about the SG&A line. I know you spent the $5 million. What should we expect for Q3 and Q4? Should that be coming down more to where the traditional levels have been so you can get some leverage on the sales line?

Well if you assume pure dollars, I think, that, you know, we are expecting to spend about $148 million in the third quarter and $139, almost $140 million in the fourth quarter. And that assumes, you know, about $15 million sales just in the third quarter because of seasonality. And it assumes almost $48 million lower sales.

So, yeah, we think there's going to be continued leverage in the pure dollars. But as the sales get lower, you know you just don't get as much leverage. But you'll be better year over year substantially.

In the percentages?

In the percentages. Does that answer the question?

Yes. And just another question. What has been your cash flow this year, and sort of what would you expect based on your projections for cash flow to be for the year - free cash flow?

We're still expecting in the - you know what we have of just over $70 million cash provided for operating activities. And we also think we're going to spend now less than $10 million on capital expenditures. So we still think that there'd be close to $60 million of free cash flow, of which probably - you know we said that the first half would be just about half, so we would expect, you know, about $30 million in each of the next two quarters.

Great, thank you.

Thank you.

Our next question comes from of . Your line is live.

Hi guys. A question about your gross margin. I'm curious when you think you will be at a normal level of cash discounts and vendor allowances.

, right now we're running at, we think, maximum cash discounts availability right now. So we think we're getting that, you know, almost $1 million a month that we talked about earlier on the equity offering.

We also think that, you know, a lot of our vendor allowances, because of our, you know, last year having some financial problems, had those step-ups build into them. You know, for example, if a vendor gives you six percent on $30 million, maybe you know you get three percent up to 10, and then it goes to four and then it goes to five. And they're always retro to day one, and the company has taken the position that we're not forecasting sales. So we don't take those step-ups.

So we think by this year's end...

Yeah, we don't take them until we hit the threshold. So when we get to the fourth quarter, sometime early fourth quarter, we will be at the optimum level.

All right. So then for 2003's gross margin, will you be - will there be any gross margin improvement in 2003 versus 2002?

If you take the full year this year, the blended rate, you know, as we said earlier we expect the blended rate this year to be about 46 and a, just over 46 percent, or sorry, be 45.9 or close to 46 percent. We also think that with the continued sales trends that we can exceed a 70 basis points each year for the next three years.

So next year ...

And we think 2000 ...

... 2003 will produce more margins than ...

Yes. So we think that they'll be up about 70 basis points next year, over the full year run rate.

OK. Great. Thank you very much.

Thank you. Our next question comes from of Wachovia Securities.

Hello. Can I get a, get a breakdown of the debt number?

Yes, hold on . OK the, at the end of the quarter, there was term loan was 170 million, the revolver was 50 million, we have 288.3 in notes, and 36.3 of capital leases, for a total 544.6 million.

OK. Thank you.

Thank you. Our next question comes from of Goldman Sachs.

Just a quick question to understand a couple of the particulars. As we, as we back off some of the one-time items, the 21 cent headline number and the $8.8 million number excluding one-time items for the second quarter of 2002. Does that exclude both the loss on the sale of stores and the secondary offering costs?

Yes.

And if you could just, if you covered this I apologize, the tax rate we should be using here would be what?

Well, one thing that happened is, you know, we usually run about 38.5 to 38.7.

Yes.

Ourselves along with our public accounting firm is very active in getting these enterprise credits, and so we booked a tax rate of 38.5 and we had credits that we earned during the quarter of approximately $400,000, which are, you know, pure cash and help the cash flow going forward.

So that would reduce the ...

Yes, it reduces it down to about 35.

So that's about a penny a share or so?

Yes.

OK. And going forward, what would we ...

I think we should be using 38 and a half going forward.

Got you. Thank you.

Thank you. Our next question comes from of Financial Management Advisor.

Hi guys. Congratulations on your great quarter, and doing a phenomenal job in terms of managing the balance sheet, especially since you took us out of our subnotes at a nice premium. Given the, given the cash flow you're going to be generating on a free cash basis, any thoughts on what you're going to do with the tag end of those 11, since you didn't leave a whole lot out there?

, the company, you know, has the opportunity within our debt covenants when we, when we reach 3.25 to one, debt to EBITDA, which we think we'll be there early 2003, at that point in time we would expect fully to take those things out.

OK, great. Thank you.

All right.

Thank you. We do have a follow-up question come from . Your line is live.

Question on the business mix. Within the DIY segment, and this sort of goes back to the economy and Maynard's comments on parts breaking. Hard parts versus the more discretionary sort of DIY light and accessory business, was there a shift towards hard parts in the, in the recent months?

No, it's been running about the same.

OK. And I guess that on store level inventories, you've rolled out some higher ticket items and moved out some slow moving items. Have things stayed relatively constant, I guess discussion on working capital trends, it looks like your not expecting an increase in the second half?

No. We're actually would expect the inventory, which is 546 million at basis at the end of this quarter. We think it will be very close to the same. And I think the important thing here is that from a year and a half ago - two years ago, when they were running 1.2 turns on an annual basis.

If you take Q2 and annualize it, we're approaching that 1.7 already. So we think this is an appropriate level to run the business and as we, you know, gave guidance we want to end this year at 1.7 turns. And we think we'll be there.

And, you know, we will do everything with our systems to keep inventory as low as possible and still service the customer.

Brett, you asked the similar question in the last conference call and there was, I think, a concern in your question about whether this new inventory mix was going to increase the inventory level substantially. And we stated at that time, that we were on a constant mode of looking at our inventory and replacing, maybe, slower turning merchandise with the new merchandise.

And we fully expect to integrate this new merchandise, keep things going and not really increase our inventory level.

OK.

Gentlemen, there are no further questions at this time.

OK. If there are no further questions, we'll terminate the conference call. Thank you all for participating.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.