O'Reilly Automotive Inc (ORLY) 2003 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the CSK Auto incorporated second quarter 2003 conference call. At this time all participants have been placed in a listen-only mode, and the floor will be open for your questions and comments following the presentation.

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 revenues, and future performance. The forward-looking statements are subjects to risks, uncertainties, and assumptions, included, 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.

Unless otherwise noted, the company indicates that the following financial information is presented on a non-GAAP basis for purposes of assessing the comparability of its financial performance with other periods. The corresponding GAAP measures and a reconciliation with the non-GAAP numbers are available on the company's earnings press release which is posted on the company's website at www.cskauto.com. Under company, then press release.

It is now my pleasure to turn the floor over to our host, Mr. Maynard Jenkins. Sir, the floor is yours.

Good afternoon and thank you for joining us on our second quarter fiscal 2003 conference call. Joining me this afternoon is Martin Fraser, our president and chief operating officer, and Don Watson, our chief financial officer. We'll each make some comments, then we'll try and answer any questions you may have.

We are pleased to report our operational and financial results for the second quarter of fiscal 2003. The company reported the same-store sales increase of 6% for the quarter on top of a 7% same-store sales growth for the same quarter of last year. FIFO inventory grew only 3.5% year-over-year.

In addition to exceeding our sales plan we also exceeded growth profit dollars, gross margin rate, and we continue to leverage our selling and general and administrative expenses over our increasing sales. As a result, on a comparable basis, we increased our second quarter net income to $13.5 million, compared to$ 8.8 million for the second quarter of fiscal 2002. This is an increase of over 50%. As a result, net income was 30 cents per diluted common share compared to 21 cents per diluted common share for the same period last year.

In addition to the increase in net income, the company has continued to focus on reducing debt, which will reduce our future interest expense and allow the company to attain its lowest available cost of capital. During the last 18 months we've reduced our net debt by just over $180 million. And for the first six months of fiscal 2003 the company generated free cash flow, which is operating cash flow less capital expenditures, of $40.7 million, exceeding the company's plan.

Effective June 20th, 2003, we completed a new $325 million credit facility resulting in up to a 75-basis point reduction in interest rate compared to our previous credit facility. A new credit facility has maturities of 2008 and 2009 for the revolver and term loan respectively, with minimal amortization payments until maturity. Since the end of the second quarter, we have continued our strong sales trends with comparable sales growth levels in the mid to upper single digits. At the end of the quarter the company operated 1,108 stores. During the first six months we opened six stores, relocated two stores, and closed seven stores. At the end of the quarter we operated 554 commercial operations. The company expects to open and relocate between 20 and 30 stores for the full fiscal year of 2003.

The company also expects to open or relocate between 20 and 30 stores for the full physical year of 2003. The company also expects full-year pay-down of our long-term debt by a total of between $70 and $75 million dollars during the fiscal 2003, to an equivalent debt pay down of $1.50 to $1.65 per fully diluted common share. With that being said free cash flow for the first half of 2003 was $40.7 million, compared to $2.4 million in the same period last year. The major drivers were higher net income, improved working capital, and the termination of our interest rate swap.

For the remainder of 2003 the company will continue to focus on top-line growth, margin expansion, cost control, and to pay down debt.

Now I would like to turn this over to Martin Fraser, our president and chief operating officer, for his operational comments.

Thank you, Maynard.

We were very pleased with our operational performance in the second quarter. Associate turnover is at an all-time low, leading to more experienced and knowledgeable store associates. Associate productivity is also up, giving us improved labor efficiencies in our stores.

Our merchandising department has continued to improve our category content and keep us in an industry leadership position. We continue to add new and innovative items to our store product offering. These items give our customers new reasons to come into our stores and take advantage of exceptional values. We've also improved the brands and assortments within our basic categories. Using our store level POS information we are able to manage category performance to improve sales and margins.

Our marketing efforts have been a valuable catalyst to exposing new and current customers to our stores. Weekly print advertising featuring exceptional value on new products have been very well received by our new customers. Our new Spanish marketing campaign started last year and continues to be effective in communicating with our expanding customers. While all these promotions have helped to improve comparable store sales they do have a moderating effect on our gross margin. We have, nevertheless, been able to increase our margin rate year-over-year by reducing our product acquisition cost in a stable pricing environment.

Our promotional activity will remain strong in the third and fourth quarters, allowing the company to continue to drive strong comparable sales, but will moderate year-over-year margin rate growth.

In the second quarter the company rolled out our free automotive systems test diagnostic program to all states except California. This program, called FAST, allows customers to rent diagnostic equipment that reads their vehicle's on-board computer and retrieves diagnostic information. The information is then uploaded into our stores computers, and the customer then receives a printout of the results. By assisting our DIY customers with this information we can get them the right part the first time, improving customer service and lowering returns. Commercial sales finished the quarter at 4% comparable sales up from the 1% comparable store sales achieved in the first quarter of fiscal 2003.

One area that continues to exceed our expectations is our national accounts business that is reported stronger year-over-year growth. With the return of many of our services personnel, our military business has also improved and is very strong. We remain very dedicated to the professional installer business and are optimistic about the second half of fiscal 2003.

Now I'd like to turn the call over to Don Watson, the company's chief financial officer.

Thank you, Martin. Good afternoon.

Net sales for the second quarter ended August 3, 2003 were $418.5 million compared to $398.3 million for the same period last year. This represents a second quarter same-store sales growth of 6% comprised of a 7% increase in retail sales and a 4% increase in the commercial sales.

Gross profit for the second quarter ended August 3rd was $193.7 million, compared to $182.1 million for the prior year. On a percentage-point basis, the gross profit rate for the second quarter was 46.3% compared to 45.7% for the same period of the prior year. This is an increase in gross profit of 60 basis points compared to the prior year. The increase reflects the continued strong focus by the company to take advantage of available vendor allow answers and to reduce our net acquisition cost of inventory.

Operating and administrative expenses for the second quarter were $158.5 million compared to $152.6 million for the comparable period of fiscal 2002. On a percentage points basis the operating and administrative costs were 37.9% of net sales in the second quarter of fiscal 2003 compared to 38.3% of sales for the same period of the prior year. This is a 40-basis points improvement when compared to the prior year and reflects our continued cost containment and focus on leveraging our costs against the sales increases.

Operating profits increased to $35.2 million for the second quarter, a 25% increase, over the 28.2 million reported for the same period last year. Interest expense declined to $13.3 million from $16.2 million for the same period of 2002 primarily as a result of our reduced debt.

Net income on a comparable basis for the second quarter of 2003 increased 53% to $13.5 million, as compared to $8.8 million in the second quarter of fiscal 2002. Earnings per fully diluted share for the second quarter increased to 30 cents on base of 45.5 million shares, as compared to 21 cents on a base of 40.1 million shares for the comparable period of 2002. This is a 1 cent higher than the revised guidance we provided at the beginning of the second quarter, and 9 cents higher than the second quarter of 2002, despite 4.4 million additional shares outstanding in 2003.

Net sales for the 26 weeks ended August 3rd, 2003 were $796 million compared to $773.9 million for the same period last year. This represents a same-store sales growth of 4% comprised of 5% increase in retail same-store sales and 2% in the commercial sales area. Gross profit for the 26 weeks ended August 3rd, 2003 was $368.7 million compared to $347.2 million for the prior year. On a percentage point basis, the gross profit rate for the 26 weeks was 46.3% of net sales compared to 44.9% of net sales for the prior year. This is an increase in gross profit of 140 basis points compared to the prior year. The increase rate reflects our continued strong focus to take advantage of available vendor allowances and continue to reduce the net acquisition cost of inventory. Adjusting for the 2002 period for the adoption of the EITF 2-16, 2002 would have had an increase of $7.8 million in last year's gross profit.

Operating and administrative expenses for the 26 weeks ended were $307.2 million compared to$ 294.2 million for the comparable period of fiscal 2002. On a percentage points basis the operating and administrative costs were 38.6% of sales in the first 26 weeks of 2003 compared to 38.6% of sales for the same period of the prior year. Operating profits increased to $61.4 million for the 26 weeks, a 20% increase over the $51.3 million reported for the same period last year.

Interest expense declined by $6.8 million, to $27.2 million from $37 million for the same time of the prior year. Net income for the first half of 2003 increased 63% on a comparable basis to $21 million, up from the $12.9 million for the same period of 2002. Over the past 18 months the company has continued to reduce its total net debt by just over $180 million. In addition, the company generated $40.7 million of free cash flow for the six months of fiscal 2003.

As discussed earlier, on the first quarter conference call, the company entered into the new credit facility with J.P. Morgan Securities, J.P. Morgan Chase Bank and Credit Suisse First Boston. The new 325 million credit facility reduced our current bank facility interest rates by up to 75 basis points and provides us with increased flexibility to pay down debt. Also the new maturity facility has new maturity of 2008 for the revolver and 2009 for the term loan with minimal amortization payments until the maturity.

On an outlook basis for the full year of fiscal 2003 the company expects to grow sales between 4 to 5% on a comparable basis. 4 to 4.5% on a comparable basis. This results in net income of between $1.05 to $1.07 per fully diluted share. Of the estimated annual net income we anticipate the third quarter net income to be between 30 and 32 cents. Based on the higher than planned cash flow generation we are now expecting free cash flow of between 70 and 75 million for the full fiscal year to pay doubt debt.

The company is also in negotiations to implement ago new vendor payment funding program that should further increase our operating cash flow.

With that being said I'd now like to open up for questions.

Enrique.

Thank you, sir. The floor is now open for questions. If you do have a question or comment, you may press 1, followed by 4. If you are on a speaker phone we ask that you pick up your handset to minimize any background noise. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. If you do have a question or a comment you may press 1, followed by 4 on your touch-tone phone at this time. Thank you.

Our first question is from Bret Jordan of Advest.

Hello, good afternoon.

Hi, Bret.

A couple of quick questions here, and why not just a little bit more color on the '02 second quarter comps, could you give us the break-out on retail versus commercial and what you were up against this year in that 7%?

On the last year, it was 7% retail, 7% commercial.

Okay. Capex for the quarter, and I guess your '03 and '04 projections?

The capex for the quarter was $4.2 million, and year to date is $4.8. We're still expecting to spend about $15.4 million in a lot of our store openings in the second half of the year. Then if you look at 2004, we're still anticipating 15 million of capex, but we're also trying to speed up the opening of new stores, which could take that up a little bit higher.

Target for '04 net store growth?

We're looking for new or relocated locations in terms of 40 to 50 stores. So if we close six, you could have a low of 34 and a high of 44.

Okay. And then I guess Martin mentioned the new merchandise strategies. Could you give us an example of what particular strong items the new merchandise and -- a little color there?

Well, we've added the garage items which everybody is well aware of, and we've had pretty good customer response from the jack category and power tool category that's all deemed at making our four-wall blocks more productive, and also the strategy is to try and appeal to the wrench-head, the guy out there that will work on his automobile and not necessarily the same mentality of a home improvement store.

Then I guess you were talking about a mid to high single digit comp in the current third quarter. Any areas for the DIY versus commercial in that comp and any areas of regional strength or weakness?

Both have gotten stronger. Without giving you the exact numbers out there, just state that quarter to date we're exceeding what we achieved in the second quarter.

Okay. Great. Thanks.

Thank you. Our next question is coming from Jerry Marks of Raymond James.

Good afternoon.

Hi.

Just a couple of quick questions. Regarding the free cash flow, could you break out a little bit some of the working capital issues you said you benefited from?

Jerry, if you look at it, you had cash flow from operations, net income of $18.4 million. You know, you've got about $6 million dollars on the retirement of the swap, and basically the rest of it came from favorability in working capital.

But I guess that's what -- on the working capital side, was it more that you were able to push out some of the payables terms?

Part of it came from lowering our receivables. That helped us quite a bit. We were able to extend our payables out a little bit better than we expected. We are currently working on ways to extend that further as some of our competitors have done. We had to get our new bank facility in place before we could pursue the new vendor program, funding program, but that's where the majority of it has come from.

Is this a factoring program, like some of your competitors are doing? Is that what you're referring to?

Yes.

And was there a LIFO credit?

There was a small LIFO credit, but that's actually the cost of obtaining lower cost from your vendors so therefore it only turns as the product turns, and some of it is a reversal of the EITF 2-16 as the product flow through your balance sheet also.

Okay. Last question. Bret was talking about the quarterly trends. You indicated that in the third quarter things are running better than they were in the second quarter. Did you see kind of sequential from month to month improvement in same-store sales as the quarter progressed?

Well, we're just a little over a month into the quarter, and we just made the statement that we're running in excess of what we ran for the entire quarter for the second quarter. That's the best we can give you. Should I was referring to the second quarter. I mean, was it kind of spotty, where the first month in the quarter was very strong and the third month wasn't?

No, pretty equal.

Jerry, there wasn't a lot of change from quarter to quarter. Just continued to get a little stronger.

From month to month.

Yes.

Okay.

Our next question is coming from Reed Anderson of Piper Jaffray.

Good afternoon. Good quarter.

Quick question on the expense side. Good control on the operating expense line, and Martin had commented about, sounds like you got some labor productivity there. What other factors helped you benefit on that line and maybe what were some negatives?

I think, you know, just the total operation of focus on cost control, we became more productive in commercial deliveries.

Another thing that happened, you know, over the last three or four years where we were kind of strapped for cash, we did some capital leases, you know, that flow through the expenses at higher rates, so we're able to negotiate lower rates on them as we improved our balance sheet. But in general you could go through basically every line, and you've got improvement, except for you do have some offset because of the Workers' Comp and the increased cost of medical. So I think our store operators have just done a very good job managing store expenses.

Okay. And even at a little bit lower comp you'd expect to see that kind of trend continue in the back half?

Yes.

Okay. You talked about -- I know comps, talked about that, a couple of questions already, but in terms of promotional activity, something that Martin had commented on, were you fairly consistent relative to last year, or were you a lot more promotional? Just give us a sense of some of the year to year delta from that perspective, please.

Well, we changed our marketing mix around a bit, but when you take a look at the offering, the product offering is a bit different than it was a year ago, and that's what we think the customer has really been accepting.

The one thing I would add, as Martin talked about moderating margins, what happens is, you know, you make a lot higher margin on a $59 product than you do a $249 product. So it does have a moderating effect on margin, but it also has a lot higher dollar average, which helps your expense ratio. So we've been very successful on bringing that to the bottom line.

The key point here is we're attracting new customers, and our customer counts are increasing in the DIY segment, and we think that's very positive for the entire industry.

Excellent. Thanks very much.

Thanks.

Thank you. Our next question is coming from Zafar Nazime of J.P. Morgan.

Yes. Hi. Could you give us some color on what your plans are for your [inaudible] where you plan to retire those [inaudible] or perhaps even earlier than that?

If you look at, when you see the balance sheet, you will see that, you know, we had no borrowings on the revolver at the end of the quarter. We had $42 million dollars of -- sorry, $36 million of cash. We have to be open-minded on the repurchase of those, but, you know, at 12%, it doesn't make sense to buy them back now. There's a call date in December of '04 at 6, and at that point in time I think we would be very interested in doing that unless somebody wants to step up and sell them to us a little cheaper.

Great. That's it. Thank you.

Thank you. Our next question is coming from Christina Bone of Credit Suisse First Boston.

Good afternoon. Congratulations on the quarter. Most of my questions have been answered, but I have a couple of follow-up questions. One just on working capital.

Do you foresee for the full year in your free cash flow guidance that that will be a source of cash for 2003?

Yes. Absolutely.

Okay.

It would even be a bigger source of cash if we can get that funding facility up and running in the next 60 to 90 days.

Okay. And you did say there's nothing outstanding on the revolver. Is the difference on the availability, which I believe was about 109, and the size of the facility just letters of credit outstanding?

Yes. And those letters of credit out there for the purpose of Workers' Comp.

Okay. And finally, on the gross margin, can you talk a little bit about in the second half, you know, what you see on a relative basis in terms of overall expansion as you continue to try to lower your product procurement costs?

You know, last year we had very strong third and fourth quarter margin. We would expect that trend to continue, maybe slightly higher, but as Martin talked about, as you continue to run, you know, the promotions that we're running to drive -- continue to drive customer count, that comes with a moderation. So we think we can continue to increase, but, you know, we look at it increase of 10 to 20 basis points versus 50 to 60. But, on the other hand, as those sales come with higher dollar average, you're much -- you know, you'll get the exchange down on the lowering of the leveraging of the SG&A. So we would expect on operating income percent to continue that 50 to 60 basis points year-over-year improvement.

Okay. Great. Just to clarify, does the existing bank facility allow you to repurchase senior notes?

The answer to that is yes.

Great. Thank you very much.

Thank you. Our next question is coming from Alan Rifkin of Lehman Brothers.

Thank you. Just a couple of questions, if I may. Don, break down, if you could, the difference between traffic and ticket on the comp.

Well, you basically had about 90% of it coming out of increased dollar average, and the rest coming out of customer traffic.

Okay. Also, maybe you could provide some commentary on, how did some of the garage items and some of the ancillary product categories do in the quarter? Also, give us an update on your in-stock position.

Our in-stock position is the best it's been in over two years. The garage category, as usual, you make some mistakes, and you do a lot of things right, and that's exactly what happened. We continue to flesh things out and replace them with new items and create excitement in the stores, and the customers are accepting it.

Thanks. One more follow-up, if I may. I know that you said that currently you're running in the mid to high singles. Is your 30 to 32 cents guidance for Q3 predicated on that comp, or are you looking for sales to slow down just a little bit as the quarter progresses?

Guidance that we have is 4 to 5% comp in the third quarter and the 30 to 32 is the range between 4 and 5. So.

Okay. Thanks, Don.

Thanks.

Thank you. Our next question is coming from Brian Gretheria of Belazne Asset Management.

Thanks. My questions have been answered.

Thank you. Our next question is coming from Amher Shed of Cobalt Asset Management.

Hi. Very good quarter. Can you clarify for me what are expected store openings in the second half of '03, please?

We would expect, based on what happened in the first half of the year, to be between 17 --.

19.

19 to -- 19 stores in the second half.

Okay. So net new store increase in the second half would be?

Knelt new stores in the second half, after the closures, will be six.

Okay.

Go ahead.

Okay. Certainly sounds like you're stepping up store openings. The numbers that you were quoting earlier for '04 are higher than the prior plan, is that correct?

That's right, Amher. If you go back a few quarters, which you were on the conference call, the company focus hasn't changed. We had a focus on improving our top line, making the four-wall boxes existing more profitable, more productive, and a reduction of debt. We have followed that line for over a year now, and it's working, and now for 2004 we will look at stepping up our store opening.

Okay. How do we think about gross margin expansion in the context of everything you just described?

I think, Amher, as I explained to Christine, if you look at last year, we had very strong third and fourth quarter gross margin rate. I would expect to have very strong gross margin rates this year, but I also believe, you know, 10 to 20 basis points improvement year-over-year, and with the sales increases that we're experiencing, I would expect to see better leverage on the SG&A. So on the operating margin, you know, you should see that 40 to 60 basis points improvement in operating margin, and, you know, we're going to have a heavy focus on continuing to reduce debt, which will lower that interest expense.

Okay. Can you comment on AutoZone's comments today? They suggested that 100% target for payables inventory is still possible. What is possible for CSK?

The answer is no, we're not going to comment on that.

Okay.

You'll have to get the details from them.

So for us, you know, we've taken our number from 30 to 35 to 36. You know, we would like to put the facility in place and get that number up to 50 to 55%, but that's not a five or six-month deal. That's a year deal to do that, because you've got to get vendors to participate in the facility.

Having Don say that, you know, we may not increase our payables with a given vendor, if it's more opportunistic to buy the product at a lower price. So everybody we're dealing with, what we deal with in this -- in its entirety is trying to make the supply line more efficient. And that's what we're talking to our vendors about, and we meet with them weekly and have an ongoing discussions on their logistics people with our logistics people and how we can make the entire supply line more productive, more efficient for vendors, and more efficient for ourselves. So it's just not a payable issue in our mind.

Okay. Thank you very much.

Once again ladies and gentlemen if you do have a question or comment you may press 1 followed by 4 on your touch-tone phones at this time. Our next question is coming from Wayne Coopermann of Global Capital Management.

Hi, how are you guys doing?

Pretty good Wayne, how are you?

Good quarter. Question. The comps have been running above your guidance, the earnings have been running kind of the high end of your guidance. As your comps continue to be better than guidance are you increasing spending to offset some of that, or is it going to flow more through to the bottom line?

Well, you know, Wayne, we did give guidance out there. One of the things that does happen in the new regulations out there on the EITF 2-16, you know, as you get vendor rebates, you have to let them flow through inventory turns, as they turn quicker, maybe there's upsides, but right now, knowing what we know, we're comfortable with the $1.05 to $1.07.

I guess for the next quarter you gave guidance based on 4 to 5% comps, and you're running above 5. If you finished the quarter above 5 would your earnings be higher or would you look to increase spending somewhere else in the business?

I think you know the answer to that. I don't think you're going to get me on a conference call to raise that number based on what our sales are right now, but if you remember, we originally expected the second quarter to be 27 cents. We raised it to 29, and beat that number by a penny based on sales.

Right.

Everybody can extrapolate their numbers there, but we're not a company that says, we're making more money, so let's spend it. We're going to make more money and put it on the bottom line.

I hear you. For next year, could you give us, what do you think your average interest rate would be for '04 so we could kind of figure out what your interest expense will be?

Well, you know, right now we're at line or plus 2 3/4 on the term. We're also at a point where if you pay down the term, you lose it.

Right.

We have to manage a lot of things, and that's managing, as Maynard said, the payables for better saving discounts, those kinds of things. But there's also the opportunity where you've got 12% money in the marketplace, and the sooner we can get that the better, but we haven't been very successful to date getting it.

Right.

Based on what I told you right now our average rate is in the neighborhood of about 8%, if we could get to, you know, for every 10 million you take out of high yield, you scratch that a little bit.

Well, the high yield is callable next year, at the end of the year.

December.

And our plan would be although that point in time to be in a position to call it.

It's all mathematics whether the premium is worth the savings you get.

That's right. But between now and then the Delta right now is over 600 basis points.

You've got to pay a premium anyway, so it's kind of -- it's all math.

Absolutely. And we have high yields people on this phone also, so it's not helping negotiate any.

If your net debt at end of quarter was 472, it should end somewhat lower than that at the end of the year?

We would expect another 30 to 35 year.

Let's say you end the year at 450 and 8% average, multiply the two, that would give me a pretty good ballpark on your interest for next year?

Yes.

Great. Thanks a lot.

There appears to be no further questions or comments at this time. I'd like to turn the floor back over to Mr. Jenkins for any closing remarks.

At this point we'll terminate our conference call. Thank you all for participating, and we'll talk to you next quarter.

Thank you, ladies and gentlemen. For your participation. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day.