O'Reilly Automotive Inc (ORLY) 2003 Q1 法說會逐字稿

Welcome ladies and gentlemen to the CSK Auto Incorporated first quarter,2003 conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation.

Certain statements contained with this call are forward-looking statements and discuss among other things expected growth, [inaudible] development 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, 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. It is now my pleasure to turn the floor over to your host Maynard Jenkins, Chairman and Chief Executive Officer. Sir, the floor is yours.

Good afternoon and welcome. Thank you for being with us this afternoon. Joining me on the call is Martin Fraser, company President and Chief Operating Officer and Don Watson, our Chief Financial Officer.

We are pleased with our financial results for the first quarter of fiscal 2003. Although our sales were a little weaker than expected as a result of the less customer counts during the hostilities in Iraq, the company increased its gross profit dollars, gross margin rate, and we continue to control our selling, operating and administrative expenses. As a result, we more than doubled our first quarter net income to just over $7.5m compared to $3.4m we earned in the first quarter of fiscal 2002. This results in a net income of $0.17 per fully diluted share after a reduction of $0.01 due to a change in accounting for vendor allowances.

At the beginning of year we gave guidance that the company would produce same store sales increases of between 3.5% and 4% for the full year. Prior to the start of the Iraqi conflict, the company was producing same store sales increase in excess of 3%. The first quarter same store sales ended at 2%. Since the end of the conflict our same store sales have rebounded and so far in the second quarter we are running at mid-second digit levels.

Since the beginning of fiscal 2002 our total debt has been reduced by almost $155m. During the first quarter the company generated free cash flow in excess of $15m which is $5m better than previous guidance. As previously stated the company will continue to reduce debt and obtain the lowest cost of capital available. That being our objective, we have entered into a commitment to consummate a new $325m credit facility that would be at least a 50 basis point reduction in the new credit facility interest rate, reducing the cost of our debt capital. The new credit facility will extend the maturities from 2004 to 2008 and 2009.

We continue to be pleased with our positive impact of our marketing efforts and new product offering. These initiatives have increased the amount of the average sale per customer. CSK continues to be the industry leader in exciting new and innovative merchandising programs that have attracted new customers to our stores. These initiatives have resulted in increased associated enthusiasm for our business. Based on our current sales level it is clear that our customers like what they see and have additional reasons to visit our stores.

The sales of garage maintenance and garage organization products, such as automotive power tools, storage and general purpose tools, have continued to perform extremely well. In addition to these items, the company continues to increase its mix of performance products and new automotive related specialty items. These initiatives, along with the strong support of our vendors, will allow us to continue to offer a broad selection of innovative and trusted brand name products.

Trends for both CSK Auto and the automotive [inaudible] industry in general are strong. We expect continued industry growth for the next several years. The increased demand is reflected in our current same-store sales increases, which are now running in the mid-single digit level quarter to date, on top of the 7% same-store sales increase for the second quarter of last year. CSK is encouraged by the increases in our sales levels per customer. These increases demonstrate strength and ongoing enthusiasm in the DIY (ph) market.

At CSK we're focused on great customer service. With our associate turnover trending downward, our associates are more experienced and more knowledgeable. Our research tells us that our customers value the knowledge and responsiveness of our associates. The bottom line is, more experienced associates have increased our store's productivity. At the end of the first quarter, CSK Auto operated 1108 stores, during the quarter we opened 3 stores, relocated 1 store and closed 4 stores. We remain the leader in the western United States and northern plain region. This leadership is evidenced by having a number 1 market position in terms of store counts in 25 out of the 28 markets in which we operate.

In summary, the company has begun the new year with continued focus on strong performance for fiscal 2003. The first quarter results reflect this focus with this now being the fifth straight quarter the company has met or exceeded the company's street guidance by improving our profitability to further increases in the top line growth, margin expansion, expense control and debt reduction. At this point, I'll turn it over to Don Watson, and he'll review the financial performance for the first quarter of fiscal 2003.

Thank you, Maynard, good afternoon. Net sales for the first quarter ended May 4th, 2003, were approximately $378m, compared to approximately $376m for the same period last year. This represents a first quarter same-store sales growth of 2%, comprised of retail same-store sales increasing 2%, and 1% same-store sales increases in the commercial sales area.

Gross profit for the first quarter ended May 4th, 2003, was $175m compared to approximately $165m for the prior year. On a percentage points basis, the gross profit rate for the first quarter was 46.4%, compared to 44% for the prior year. Excluding the impact of the reclassification of vendor allowances previously classified as an offset to selling, general and administrative expenses, the gross profit margins on a comparable basis were 46.4% for the first quarter of fiscal '03, and 45.5% for the same period of fiscal '02. This is an increase in gross profit of 90 basis points compared to the prior year. The increase in rate reflects the continued strong focus by the company to take advantage of available vendor discounts and reduced inventory acquisition cost.

Operating and administrative expenses for the first quarter were $148.8m compared to $141.9m for the comparable period of fiscal 2002. On a comparable basis, after giving effect to the new accounting guidance, EITF 2-16, which was adopted by the company at the beginning of fiscal 2003, operating and administrative cost were 39.4% of sales in the first quarter of fiscal 2003, compared to 39.3% of sales for the same period of the prior year. The year over year increase is related to increasing cost in workers' compensation, mainly in California and other increases in employee benefit costs. Interest expense declined in the quarter by $3.8m or 21.5% to $13.9m, as a result of our continued focus on reducing debt.

Operating profits increased to $26.2m for the first quarter, a 13% increase over the $23.2m reported during the same period last year. Net income for the first quarter of 2003 more than doubled, to $7.5m from $3.4m Earnings per fully diluted share for the first quarter of fiscal 2003 increased to $0.17 even after giving effect to a reduction of $0.01 due to the adoption of the new EITF 2-16. This is $0.02higher than the guidance the company gave at the beginning of the year and $0.07 higher than the first quarter of 2002.

Since the beginning of 2002, we have reduced our total indebtedness from $671m to $516m, a reduction of almost $155m, resulting in a debt to EBITDA leverage ratio of less than 3.4 times. EBITDA for the first quarter was almost $35m. Free cash flow, which is defined as operating cash flow less capital expenditures for the first quarter, was just over $15m, approximately $5m higher than our previous guidance. For the full year, free cash flow is expected to be in excess of $65m.

As discussed at year end, we have commenced a process of assessing alternatives to restructure our existing credit facilities. We recently entered into a commitment with J.P. Morgan Securities and J.P. Morgan Chase Bank and Credit Suisse First Boston for a proposed syndicated financing transaction consisting of $325m of new secured bank facilities. Upon the closing of this proposed facility we would expect to reduce our current bank facility interest rates by at least 50 basis points and have increased flexibility to pay down debt. Also the new facility will have a maturity of 2008 for the revolving credit facility and 2009 for the term loan.

In recognition of our improved operating performance and debt reduction since the end of fiscal 2001, and the expected benefits from the proposed refinancing on May 22nd of 2003, both Moody's and Standard & Poor's changed their rating outlook on the company to positive from stable.

The last 90 days have been very eventful for CSK Auto. Same store sales are now running in the mid-single digit level, the company has continued to pay down debt and generate free cash flow. Once again we have exceeded our earnings guidance. We have entered into a commitment to refinance our credit facility and Moody's and S&P have changed their outlook to positive.

CSK Auto's outlook for the future is as follows. For the full year of 2003, the company expects to continue to grow sales with a full year growth of between 3.5% to 4% on a comparable basis. We are raising our prior guidance from net income of between $45m and $47m, or approximately $1.00 per fully diluted share to between $47m to $49m, which is between $1.03 to $1.06 per fully diluted share and that would exclude any costs that may be incurred in connection with this planned refinancing. Of the estimated annual net income we anticipate the second quarter net income will be between $0.28 and $0.30 excluding any costs mentioned above. In addition the company expects to open, relocate between 20 to 30 stores during the full year. The company would also expect full-year pay down of our long term debt by a total of between $60m and $65m during the year. At this time I'd like to turn it back over to Maynard.

Before we open the mic for questions, one other bit of news. More recently in the last few months we focused our efforts on enhancing and formalizing our corporate governance practices. Among other things our Board adopted corporate governance guidelines and updated committee charters and charge and existing committee consisting solely of independent directors with the responsibility for corporate governance matters. Institutional shareholder services, which ranks companies based on their corporate governance performance, has this past week ranked CSK the leading company relative to other companies in the Russell 3000 and S&P retailing industry group. We're very proud of that rating. Now, with that, Neil, we'd like to open it up for questions.

Ladies and gentlemen the floor is now open for questions and comments. If you do have a question or comment please press the numbers 1 followed by 4 on your touch tone key pads at this time. If your question has already been asked and you would like to remove yourself from the queue please press the pound key. Please note that we do ask that you pick up your hand set while posing your question to provide optimum sound quality. Once again, ladies and gentlemen, to pose a question or comment, please press numbers 1 followed by 4 on your key pads at this time. Our first question of the evening comes from Matthew Fassler with Goldman Sachs.

Thanks a lot and how are you? A couple of questions if I may. First of all, in terms of EITF you had $0.01 impact this quarter. What kind of impact would you expect over the remainder of the year if any, and how would that be reflected in the earnings guidance that you offered us today?

Matt, we really think it's going to have no material or actually any earnings effect for the remainder of the year. And there really isn't any change in guidance in relation to EITF. One thing that I'll point out is, the company historically has always capitalized co-op and vendor rebates. So I think, you know, it didn't affect us as much as it did some other people. One thing I will tell you, when you're comparing SG&A from last year to this year, there's about $6m that the company along with many other retailers made the decision to take all offsets to advertising as an offset to cost of goods, and then that way you don't ever get into an argument with anybody as to whether it's incremental, specific or identifiable. I think it is the more conservative method to use.

So basically the $0.01 we saw represents most of the vendor contracts that would have changed and if there is any impact in any quarter for the rest of the year it should be less than that?

That's right.

That's helpful. Thank you. Second question if I may. You discussed the refinancing and were kind enough to give us a sense in terms of the impact on your cost of capital. Does your earnings guidance for the rest of the year, that $47m to $49m in net income, include the benefit of the lower interest expense that would presumably come from your refinancing?

Well, right now, Matt, what we would say is, there's probably $0.01 associated in the second half of the year related to the financing. But seeing as we haven't finalized the deal, it could be better than that, and there could be a little bit additional increases there. But right now, you know, there's some things going on in the market with these types of debt that I'd really rather discuss after I close the deal, versus for negotiation purposes, versus on this call. So I think it's right now, in the moving from a $1.00 to $1.03, to $1.06, assumed $0.01.

Understanding you didn't want to show your hand while you're still sitting at the table, would the order of magnitude would be a couple of cents it wouldn't be a dime or something like that?

No, it would be something north of $0.01 for this year and you know, we would expect to close in the next two weeks. And when we do that we would come out with further guidance as to what it means for this year and next year. Say it's maybe a couple cents, not five to ten.

Got you. One final question. Some of your competitors have discussed methods of extending their days payable, specifically there's been discussion of [inaudible], there’s been discussion of vendor factoring, all of which would suggest that there's potential to take payables up higher. Can you just give us a sense as to whether you're pursuing or plan to pursue similar strategies and whether you see a potential for yourself to extend your payable days?

Yes, yes and yes.

I'd like to say that we have all of our vendors in here in a couple of weeks. We know where we are at. We know where our competitors are at. We do sell a lot more front-room product, which comes with shorter dating than our competitors do. So there's a little bit of adjustment for there. But you know, we had to build our credibility back with the vendors. And if you looked at just the ratio of AP from year end, AP to inventory from year end to the first quarter, we have made some good progress there. But we also believe that there's plenty of room to continue to increase that. And you know, we're going to focus on that as much as we can, especially with our vendors coming in to meet with us in the next couple of weeks.

Do you have the AP number for the first quarter? I didn't see it in the release.

The AP at the end of the first quarter was $182m.

Got you. Thank you so much.

Okay.

Our next question comes from Bret Jordan with Advest.

Good morning, good afternoon. Sorry I didn't have the press release in front of me if you could give me the inventory number to fill out that picture and then on the comp side, if we could get a little color as to check average versus customer count on the comps, whether the success of the garage products is really spiking the check average? And then retail versus commercial, commercial up 1%. Are you seeing anything changing on the competitive landscape out there on commercial, or as you look through the balance of the year where do you see retail versus commercial in your expectation?

First of all on customer counts there is no question we had an effect with the Iraqi conflict on our customer counts in the first quarter. To give you an example, on the day of the count, down on the ultimatum, that evening from 5 o’clock to 9 o’clock, our customer counts were off over 40%. During the Iraqi conflict we continued to struggle with the customer counts, no question about it. But happily seeing since the hostilities have eased over there our customers are coming back in. We are increasing our average ticket as a result of some of the new initiatives that we put into place and will continue to do so. And on the side of the commercial business, some of our commercial customers have had somewhat of a difficult time in this period because they believe there's a lot of discretion in what they're doing, as far as their customer base. That business also is starting to rebound, and we're still comfortable we're going to get there on the full year results.

Okay. When you say mid-single digits presently, are you on the ten side of five or on the one side of five?

We're at mid-single digits, and --

It's pretty cold in Alaska. So back to answer that other question, we're not going to get that specific. I just will tell you that our sales are going very, very well. And on your inventory question, the FIFO inventory is $567.1m, which represents obviously the ramp-up that we have every year which is consistent with, you know, the prior year. So you know, we think we're going to end the year with flat inventories year over year, with sales increases of in excess of 3.5% to 4%.

Okay, great, thank you.

Thank you, Mr. Jordan. Our next question of the evening comes from Reed Anderson with Piper Jaffray.

Good afternoon. My question, Don, is on the gross margin. Even when you do apples to apples for the accounting change you are up 90 basis points and that's a lot more than we were looking for and it’s only the first quarter. To what extent is that sustainable through the balance of the year, and have things gotten a lot better in the last few months?

I think we talked about this last year. If you looked at the first quarter of last year where we're at 45-3 we had a lot of vendors that had negotiated step-up allowances as we built up our credibility. So you saw the gross margins ramp up on the remainder of the year. What we've done is, with our vendor negotiations late last year, we set those initial step-ups a little higher. So you see, you know, 90 basis points in the first quarter, and you'll still get up probably 60 to 70 basis points ramp-up each quarter for the rest of the year to get a full year increase year over year of about 60 to 70 basis points. And to answer your question I hope it is sustainable because if it is it's going to be very good for the company.

Particularly on only a 2% comp. So --

Yes.

And then in terms of you know you've given good color on comps but the only thing I would add to that, just curious if there was regional variation relative to your comps of significance during the quarter?

No, we're doing pretty good across the board. I will say that our California marketplace has been stellar, especially in Southern California. But we have had a little bit of a weather effect that we normally wouldn't have in the Colorado and the Utah marketplace. But in the last few weeks the weather's clearing out and it hasn't been quite as wet and cool as it had been previous to that, and they're coming along fine also.

Great, thank you.

Thanks.

Our next question comes from Jack Ballos (ph) with Midwood Research.

I just have a coupe of financial questions. First of all, you said you had long term debt of $516m. What is your shareholder equity?

Hold on a second here. Total shareholder equity is $309.7m.

Okay. And also, your accounts payable ratio declined to about 32% from 36% last year. And your inventory was up by about $22.6m. What's the reason for the decline in accounts payable ratio? And if you included having to fund working capital, what would happen to your free cash flow then?

Well, let me deal with the year-over-year. If you'll remember the quarter, first quarter of last year we were just coming off the refinancing. And the vendors brought us, you know, extra dating to get us back in stock. And you know, during the year, you know, we continued to pay down that debt as we talked about by getting extra discounts. What I mean is, we were getting 1% from our vendors to pay them 30 days more current. And when you're borrowing at 4.75% it makes a heck of a lot of sense to do that. So during the and at year end our accounts payable to inventory was 30%. At the end of the first quarter that number's come back up to 35%, and you know, we think we're not going to be happy until we're up to about 50%.

Okay.

And we think on the, you know, working capital side of it, one thing that's happened a little different on our inventory versus some of the other people, you know, I would expect our inventory to go up a little higher than we expected because I don't think anybody else in the industry is running 7% comps like we did last year. So then you've got to maintain in stocks the little bit higher than expected increase of about $5m in inventory came from the fact that we planned on continuing those sales. And you know, as Maynard said, we are running back in the mid-single digits but we've got a little bit of jam up in the system due to the hostilities in Iraq that slowed down the sales for a period of time. And we'd expect that to fix itself along the way.

So are you expecting to improve your inventory turn for the rest of the year?

We would expect to end -- last year we ended at 1.6 turns. We would expect to be 1.7 turns. So we expect, you know, the working capital to continue to get better. And we would also expect that, you know, we throw off at least $65m of free cash flow.

That's before working capital. So you're saying working capital might be the same with actually an increase?

$65m assumes working capital neutral for the remainder of the year.

Okay, thank you.

All right.

Our next question comes from Christina Bonnie (ph) with Credit Suisse.

Good afternoon, everyone. Just a couple of questions as many have been answered. First on capex, are you still looking for a budget of about $15m for the year, can you clarify on the capital expenditure front and secondly have you given any thoughts yet to 2004?

We think based on 20 to 30 stores or relocated stores nor the year, we'd expect to be somewhere in the neighborhood of $14m to $15m. Our first quarter capex was just under a $1m and that was just because the stores haven't started opening yet and will start opening the second through the fourth quarter. And we have looked at next year, and next year we would expect, if we are in the 30 to 40 stores, it would be still in the neighborhood of $15m to $16m. And that still goes back to, you know, when we restructured the company, redid our balance sheet, the prior four years we'd spend $134m upgrading all our store systems, reformatting all of our stores, putting in new financial and merchandising systems. So we think we've got in place all of the systems, all the capital that we need, other than new stores or the regular maintenance capex type things that you need to do to keep the stores going day to day.

Okay. Great. And you don't have the breakout between new and relocated stores, do you?

Right now we've assumed 20 new and 10 relocated. If we do 25 it would be 15 and 10. But you know, that moves, and you know, there's a lot of sites that are available and as we get good home run sites, then we may step that up a little bit.

Okay. And secondly with respect to the proposed new credit facility, is that going to be a cash flow facility or an asset based facility?

It is a cash flow facility, but it has a little bit-this is a little confusing -- a little bit of an asset base to it. Meaning that there is a minimum asset leverage coverage in there. And you know, that takes your FIFO inventory plus your non-vendor receivables, so basically, your commercial receivables, and then there is a factor there. Which is about, I think it's going to be about 1.8 times. So there's plenty of availability for us on our facility. And it gives us a lot of flexibility.

Okay, great. And one last housekeeping items, do you have LCs at the end of the quarter, the letters of credit?

Yes, end of the quarter we are about $17m of LCs of which $2.5m is for import product. But the majority of our LCs are guarantees of our workers comp claims out there, because of the negative implications in the surety bond market. So we've, to save money we've posted LCs.

Just one broad question in terms of pricing. Have you seen any general differences in dynamic of the pricing environment vis-à-vis your competitors?

No, pricing environment has been very stable.

Great, thank you very much.

Our next question comes from Alan Rifkin with Lehman Brothers.

Couple questions, gentlemen, if I may. Maynard you mentioned that given the success of your performance products and garage maintenance products that you'll be expanding the assortment there. Could you quantify how many SKUs (ph) you will be adding in each of those categories and the timing of that and on what base are we talking about? And then secondly with your commitment to restructure your credit facility which certainly everyone applauds, could you maybe give some longer term targeted levels with respect to, you know, debt to cap or debt to equity or even interest coverage ratios? Thanks.

Alan I'll start with your first question. This question came up originally when we were talking about new merchandising strategies. And we said that we did not think that we would be increasing inventories, because of a new merchandising strategy long term. And we were focused on increasing our turnover of the company, and that's exactly what we're doing. This merchandising strategy has a moving target. There are probably some 60 SKUs that are in the stores today, but that 60 is not going to be the same 60 that you'll see next year, because we're refreshing that mix continually. Some of the items have become a staple item, but there are other items that you get on and get off almost like a fashion product. So we're continuing to update them, and it's not like we're going to go out and add 150 SKUs or 200 SKUs tomorrow and have to add $10m in inventory to get the business.

Okay.

And on the debt, Alan, we would expect to end the year at 2.75 or lower debt to -- debt to EBITDA. We think that, you know, there could be some upside to that. You know, if we do $65m pay down it gets us right at 2.75. The company goal would be to continue to pay down $60m to $70m a year. I think the priority would be with the flexibility in this new credit facility, to continue to look at ways to take the higher cost debt out of the marketplace. I will tell you at the closing, we will -- we will recall the 11% notes. Right now, you know, there's no call date -- the first call date on the 12% is not until December of '04. But we're going to be opportunistic there, looking at opportunities there also.

Okay, thank you very much.

Okay.

Thank you, Mr. Rifkin. Our next question of the evening comes from Amy Norfoss (ph) with Pilot Advisors.

It is Amy Norfoss. You stated that you had an increase in worker’s comp in California. If we actually go through with the refinancing, what are the implications to workers comp going forward?

Amy, this is Don. The only thing we've seen differently is first of all the cost of workers comp certainly aren't going down anywhere. And the cost of D&O insurance, you know, with these problems that have been out there, Sarbanes-Oxley all those things are not taking it down. Where we are seeing the benefit, instead of higher percent, you know, 50% increase in D&O, you're getting a 30% increase in D&O and that's what we've budgeted in the forecast that we've given you. D&O is not a huge percent of your total cost. Where we see the benefit is the moving from stable to positive on the Moody's and S&P, which allows us to post less collateral for our workers comp.

Great. Thank you.

All right.

Our next question comes from Amir Shakhid (ph) with Cobol (ph) Asset Management.

Hi guys. You mentioned the business is going well, the comps returned to mid-single digits. Could you give us a flavor or discuss which segments if any are performing particularly well and what are pockets of upside?

Well, more recently the heat related categories have taken off but having said that, seasonally they were struggling a little bit prior to the last three or four weeks. I mentioned that the Colorado marketplace and the Utah marketplace was wetter and cooler than normal, and that affected some of the heat-related categories. But overall we're getting a pretty good balanced mix of sales and you know, overall, we have all regions on the positive side.

Okay. And secondly, can you give us a little bit more color on the potential for net new store openings? I was a little bit unclear before about what the potential upside is here now that the liquidity is much better.

Well, on a basis of 25, 15 new and 10 relocated, you could, on a typical year we would close because of smaller, older, worn-out leases anywhere from 4 to 8 stores. You could see incremental new stores after relocation of anywhere from 10 to 20, depending upon how many locations come up in a given six month or year period.

Okay. Thank you.

Once again ladies and gentlemen as a reminder, to pose a question or comment please press the numbers 1 followed by 4 on your touch tone key pads at this time. Once again ladies and gentlemen, to pose a question or comment please press the numbers 1 followed by 4 on your touch tone key pads at this time.

If there are no further questions, we'll terminate the call. Thank you all for participating. We'll talk to you next quarter.

Ladies and gentlemen, we thank you for your participation in today's audio teleconference. You may disconnect your lines at this time and have a pleasant evening.