Penske Automotive Group Inc (PAG) 2002 Q2 法說會逐字稿

Welcome to United Auto Group's second-quarter 2002 earnings call. A press release which details United Auto's second-quarter results was released this morning and is posted on the company's website which can be viewed at www.United Auto.com.

This call is being recorded. If you have any objections, please disconnect at this time. I would also like to remind you that your lines have been placed on a listen-only mode, until we're ready to take questions.

I would now like to introduce Mr. Roger Penske, chairman of United Auto. Thank you, sir. You may begin.

Good afternoon. I'm pleased to present our report for our second quarter of 2002. Statements made in this conference call may include forward-looking statements regarding UAG's future reportable sales and earnings growth potential. Actual results may vary materially because of external factors such as interest rate fluctuations, changes in consumer spending, and other factors over which management has no control.

These forward-looking statements should be evaluated together with the additional information about UAG which is contained in UAG's filings with the Securities and Exchange Commission.

With me today in Detroit are Sam DiFeo, our president, Jim DiFeo - Jim Davidson, executive vice president of finance, Bob O'Shaughnessy, controller, and Tony [inaudible], VP investor relations. Thanks again for joining us this afternoon.

Before I discuss the specifics, you know, of our second-quarter results, I thought it would be great to highlight some of the key items for you this afternoon.

Obviously, we had a record quarter. Revenue increased 25% to 2 billion, making UAG the second public auto retailer year-to-date. Same store gross profit increased 5.1% on a same-store revenue increase of 2.5%. Our gross margin increased 50 basis points from 13.8 to 14.3. Our net income increased 78% to 23.9 million. Our earnings per share increased 40 cents to 56 cents, despite a 26% increase in weighted average shares.

Our income from continuing operations increased 72% to 22.8 million, and EPS from continuing ops increased 36% to 53%. We have completed the implementation of the impairment provisions of the new accounting standard covering goodwill. UAG has determined that no adjustment to the carrying value of goodwill is required.

Also, I am prepared to sign, along with Jim Davidson, our CFO, the required certification as to the accuracy and completeness of UAG's 2001 annual report and quarterly financial statements before the August 14th deadline.

During the quarter, same-store new vehicle revenue increased 2.7% at our domestic dealerships and 3.8% at our foreign and luxury locations. I would also like to point out that 73% of our revenues was generated from foreign and luxury operations during the second quarter, which compares to 66% in 2001. And just a memo. Today, I thought I'd give you a note. 38% of our revenue is from premium luxury brands.

We continue to realize same-store sales increases. I believe the resulting increase in units in operation will continue to drive the growth of higher-margin service and parts operations.

We reported our 13th consecutive quarter of same-store revenue growth. You've seen the metrics on our same-store performance in our press release.

Again, 3.5 on new retail revenue, up minus 2.6 on used retail revenue, F and I revenue up 5.8, and service and parts revenue up 5.8.

In March, we talked about the acquirement of [Sitner] group in Lester, England. The group operates over 60 franchises and is the leading prestige motor car dealer in the United Kingdom. On a year-to-date basis, sitner's performance has been consistent with their expectations. And just as a note, sitner's revenues have increased UAG's overall foreign brand mix by 4 percentage points.

Since the acquisition, [Sitner] has acquired 4 Mercedes franchises and was awarded a Toyota market area in Birmingham, England, the UK's third largest city. They were also awarded three Volvo franchises for Southwest London and a Lexus franchise in [Milton Keens]. Our newly constructed and expanded regional body shops operating in Atlanta, Indianapolis, Houston and Little Rock will generate up to $10 million each in annual revenue and gross margins in excess of 50%.

We're on track with our north Scottsdale, Arizona project, which will operate 11 franchises on one location. We opened BMW, Mini, Porsche and Audi in June and expect to open the remaining franchises by October. The north Scottsdale auto mall will become a destination point for automotive consumers in the Phoenix/Scottsdale market. In fact, since we've been operating, traffic count has risen almost 40% at Porsche, BMW and Audi and we opened the only Mini franchise in this market which has almost a thousand unit backlog.

In our press release, we have reiterated our guidance that we currently expect annual EPS to be in the range of $1.80 to $1.86 per share, from continuing operations. Please note that this estimate has been prepared assuming that we'll have 41.5 million of annualized weighted average shares at year end.

This guidance obviously assumes no significant acquisition activity for the balance of the year.

Let's take a look at the Q2 financial information. New retail sales increased 21.4% to 1.2 billion compared to 947 last year. Same-store was up 3-and-a-half percent. Our new unit sales were up 16.4%. Same-store up 1.6.

On the used side, used retail revenues increased 38.8% to 404 million compared to 291 million in Q2 of '01 and as I said earlier, our same-store used was down 2.6%.

Our used unit sales were up 16.8% to 20,561, and on a same-store basis, they were down 3.8.

Thinking about used and some decline, I think we could look at new product offerings from manufacturers, coupled with a relatively affordability of new cars as a result of the aggressive manufacturer incentives, and of course the 0% financing. I think this has driven some of our used customers to new vehicles.

Used wholesale units for the quarter were 17,478, with an average loss per unit of $64, and that compares to a $39 loss in Q2 '01. On the F and I side, revenue increased 23.1% to 47 million, in comparison to 38 million in Q2 of last year. As I said earlier, same-store sales were up 5.8%.

An interesting metric here is our F and I average gross per transaction, up $37 per unit to 745 - $49 in comparison to 725 last year.

Just to break out new and used, average F and I gross per transaction new was 798 and used was 649. Our finance and lease penetration for the quarter was 71%. 58% of which was with our OEM captive finance partners. Our vertical strategy as announced before with our OEMs has certainly paid off in F and I income.

Our extended warranty penetration was 37%, 32 in new and 47 in used.

Moving on, let's look at parts and service. Revenue was up 29.9% to just under 200 million, compared to 153 last year, and the good news is that same-store sales were up 5.8%. Body shop revenue increased 13.8% to 13 million compared to 11 last year. On the gross profit side, it was up 29.6%, and the same-store gross profit was up 9 million or 4.7%.

We talked about earlier that our gross margin increased 50 basis points from 13.8 to 14.3, and as the data point for all of 2001, we were at 13.9.

I think the increase in our margin is due to a change in our revenue mix coupled with a 250 basis point increase in our service and parts margins. I'd like you to note that S and P revenues increased from 9.8 to 10.2 of our total revenues. We believe the increase in revenues and gross margin is due to initiatives we put in place at our stores. We've increased our service hours at all of our stores, improved and expanded service facilities, and most of all, improved training programs for our fixed operation employees.

As we expand market share of new unit sales, the resulting increase in units in operation position our dealerships, I think, to continue to grow, our service and parts high-margin business.

Let's talk about SG and A for the quarter. It was 11.3% of total revenues, compared with 11.5 in the first quarter of '02. Interest expense was 10 million for the quarter versus 9.6 last year in the same quarter. Our floor plan interest expense was 8.9 which also includes a 2-and-a-half million dollar cost for a swap expense that we're amortizing. Our floor plan credits for the period were $9 million compared to 8.4 last year, and as we've noted earlier, those are recorded as a reduction in the cost of sales so you're seeing here pure floor plan costs.

Our tax rate for the quarter was 40.5.

Let's take a couple of minutes and look at our balance sheet at the end of the quarter, June 30th, 2002.

Our total inventories were $890 million which includes 144 million from [Sitner] in the UK. Excluding [Sitner], our vehicle inventories are flat versus the six months ended last year June 30th, '01, despite a 25% increase in our sales.

Inventory turns and days supply, if we go back to the trailing 12 months, December '01, we a 55-day supply. In March of this year, we had a 52-day supply of new. And we had a 51-day supply or a 7.1 times turns at the end of this June 30th time period on a trailing 12 months.

Our used was 33 days supply at 10.9 turns, and parts were at 58 days, or 6.2. So, again, I think that, you know, our dealer operators are - in principle, they're certainly, you know, looking at the metrics from the standpoint of inventory turns, and this is important as we get into Q3 as the new model changeover starts to take place.

A moment on capital expenditures. Major dealership projects continue in San Diego, Turnerville, which is really the Philadelphia metro market, and of course Phoenix and Scottsdale. Capex for the quarter was 53 million. The first quarter was 36. On a year-to-date basis, 2002, $89 million of capex has been offset by 50 million from sale/leaseback transactions resulting in a net capex on a year-to-date basis of 39 million.

Our net cash flow from operations year-to-date is 54.7 million. Net capex for the year is expected to total 70 million, relating to the currently planned expansion projects.

Maintenance capex is estimated at 5 million per quarter. Investments we make in our retail locations provide a sustainable use for 25 plus years. I think my strategy and our overall company strategy is to build world-class locations which will help us attract the best human capital and employees and our goal then is to increase market share and most important is to retain our customers.

On the debt side, UAG's debt position at the end of June was $598 million and to break it down, we had borrowings under our credit agreement of 264 million. This left us with availability of 432 million of borrowing capacity for our future needs. We also had 300 million of 10-year senior subordinated notes at 9.625.

Our other debt was $34 million which includes $20 million of bang debt at [Sitner] and 13 million of seller notes.

Floor plan borrowings as of June 30th were 817 million, which includes 122 from [Sitner] in the UK.

Over a 1.4 billion of total debt, which includes our floor plan as of June 30th, approximately 500 million is fixed with a weighted average of 8.6% and an average term of seven years.

I'd like to also note that based on current forecasts, there's not likely to be an increase, obviously, in short-term interest rates during the next six months. However, based on our June 30th balance sheet, such an increase in short-term rates would have the following effect on an after-tax interest expense, including our floor plan.

25 basis points would be 1.4 million annual, a 50 basis points would be 2.8 million annual and a hundred basis points would be 5.5. I think these are just good numbers for you to have for future information.

I really believe that these increases will be mitigated over a period of time by increased manufacturer floor plan assistance, as you've seen - as we've seen in the past. Our debt-to-cap ratio is 47% compared to 53% in Q2 of 2001. I've mentioned before, you know, our goal is to maintain a debt to capital ratio of approximately 50% or below. EBITDA for the quarter was 55 million. That's a 32% increase over the second quarter of '01. And EBITDA for 2002 annualized is expected to be approximately 190 million.

Our acquisition strategy continues to be to acquire strong brands in the right markets. Acquisitions completed already this year are expected to generate in excess of 1 billion in annual revenues. These, of course, include [Sitner] in the UK and the recently announced BMW franchise in Austin, Texas. As I noted earlier, we are extremely pleased with the performance of [Sitner] since it was acquired.

Going forward, we will continue to evaluate acquisitions opportunities both in the U.S. and Europe, and just as another note, international revenues for the period were 16.8% of total in the second quarter, and that's in line with our plan not to exceed 20%.

Underperforming dealerships, we continue to evaluate whether we should fix, hold, or divest of stores that underperform. In accordance with the FASB 144, the result of two dealerships that were sold during the quarter have been presented as discontinued operations. In fact, these stores had an annualized revenue of approximately 75 million.

Let's move on to brand mix. As stated, our acquisition program continues to focus on buying the right brands in large markets with the strongest demographics.

As noted earlier, foreign and luxury name plates accounted for 73% of our revenues during the quarter and I'll break that down.

Toyota/Lexus 25%, 880 million; Chrysler/Mercedes or DCX, 17%, 626 million; General Motors, 13%, 444 million; Ford/Jag/Lincoln-Mercury, Mazda, Volvo, 12%, 415 million. Honda/Acura 11%, 400 million, BMW Mini 10%, 349 million. It might be noted that on an annualized basis, we would move to 400 million with BMW, and that really is impacted certainly with our [Sitner] acquisition.

Infinity at 7%, 235 million, and other 5% for 206 million. So, again, you know, I think we've got a very balanced portfolio and I - in looking at, you know, where the movers are from the standpoint of quality and residual, I think we're positioned, you know, for the future.

Just to make a couple notes in summary, I'd like to address our stock price. Lately, our sector and the overall market has seen a decline in P/E multiples and stock prices. Of course we're trading at a discount to other specialty retailers. Let me comment on why I believe this should be trading at a premium to these groups.

As I mentioned before, we operate with state franchise laws and OEM designated primary market areas. We operate across a diverse geographic area and have operations in six of the top 10 job growth markets. We've got a diverse revenue mix and we're strategically aligned with our OEMs. Remember, they engineer and manufacture the products we sell. They provide incentives to the market. They provide national and local advertising support. They warrant the products to consumer purchases from our showrooms and obviously offer attractive financing from their captive finance companies.

Our capital investments are onetime events in most of these markets that generate annuities in sales, parts, and sales and income, for 25 plus years.

We have limited risk of inventory shrinkage. An important fact is that more than 60% of our cost base is variable.

Our industry, I think, is in early stages of consolidation with the current public companies accounting for approximately 6% of the market. United Auto, we've built an infrastructure that we believe supports our future growth.

We have a regional president that brings scale and experience. We have specific brand managers that support the regions on a brand by brand basis. We have adopted the programs that are supported by the manufacturers to promote their brands. And obviously we've made customer service at all of our locations a key ingredient to our success. And to validate that, we've added over a hundred dedicated CSI specialists over the last two years.

Our balance sheet has the capital availability to meet the demands of our strategic plans, and remain - we remain committed to this business and our team is committed to future growth and profit ability. And as a final point, I'd like to note that Penske corp has over 250 million invested in UAG. At this time, I'd like to open it up for questions, operator. Thank you. 00:19:22

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press star 1 on your touch-tone phone. You'll be announced prior to asking your question. To withdraw your question, you may press star 2. Once again, if you would like to ask a question, please press star 1 on your touch-tone phone.

Rick Nelson, you may ask your question, and please state your company name.

It's Stevens. Hi, Roger.

Hi. Good afternoon.

Could you tell us, have you seen any tightening among lenders on the used vehicles side of the business, and how you see comps in used vehicles and margin moving forward?

Well, the one thing that we - we see, as far as used vehicles, most of the manufacturers today have certified programs. And if we have a certified program, there's more reconditioning, you know, added to the base cost of that car, so there's some limitations on the amount to be financed on a certified vehicle, and I think that's some of the reason you've seen some of the people move over to new cars.

At the moment, when you look at our - I think from the metrics that we had shown you earlier today, and some of the information that was provided, you know, our used gross per car has gone up on a quarter to quarter basis, so at the moment, I just think there's some competition between, you know, all the noise over the new vehicle business and we certainly, you know, have our programs continuing to support used. In fact, we will probably see more pointed advertising in our operations on used over the next quarter.

How do you get more gross profit per transaction but your gross margin is - has gone down? Is that the wholesale side of -

Well, let me - we went from 11.1 to 10%, I think, is the metric that someone would look at. The selling price, though, has gone up almost 2,000, and I think that's attributable to [Sitner].

I gotcha. How about stock buybacks? Do you contemplate those at all, given where it is right now?

Well, we have an outstanding stock buyback provision that our board has approved, so we'll take, you know, prudent steps based, you know, on market pricing.

Thank you.

Thank you. Don meter, you may ask your question and please state your company name.

Hello?

One moment. Mr. Meter, your line is open. One moment.

Hello?

One moment, sir.

Sir, I do apologize. I am expecting - experiencing some technical difficulties. One moment, sir.

Thank you. Operator? Operator?

One moment, sir.

Operator? I.

Sir, I do apologize. We are unable to take questions due to technical difficulties.

Is this - have you reported this to the rest of the people on the line?

Yes, sir, they are aware of this.

There's been no notification on the line yet I understand. We're monitoring the line our self.

Sir, everyone is still connected with us.

Why don't you make that announcement that we can't take questions at this time. There's knowing else you can do at your end.

No, sir. We are currently working it.

Can we disconnect meter?

I do apologize. We are unable to take questions at this time.

Operator, will there be a time frame when we might be able to get back on?

One moment, sir. I can - I am double-checking on that. I do apologize, Mr. Penske. We are unable to take questions at this time.

Can we - can you give us another call-in number now that we could report to the people on the line and then we could restart the question period?

One moment, sir. Sir?

Yes, go ahead.

One moment. Sir, I can have the parties dial in to a different number, if they would like to ask a question.

That would be great. Why don't you give us that number. Thank you I very much.

Thank you, sir. The number is 888-455-0164. Again, I will repeat that number. The number is 888-455-0164.

Operator, let's be sure we make that clear to everyone and what we'll do is plan to re-instigate the question period in five minutes, giving people a chance to call back in at 888-455-0164. Thank you for accommodating us.

Thank you, sir. I do apologize.

Not a problem. Thank you.

[The call was reconnected using the new number and the following took place:]

Thank you all for standing by for the United Auto Group conference. I do apologize for the technical difficulties. We have rejoined the conference and again, if you would like to ask a question, please press star 1 on your touch-tone phone. Again, to ask a question, please touch star 1. One moment for our first question.

Mr. Meter, you may please state your question and please state your company name.

I can hardly hear you. Can you hear me, Roger?

Now I can hear you great. I apologize for the technical -

That's okay. We need one of your pit crews on these calls in the future.

That's exactly what I said back here. We made a pit stop so we'll try to get going here. I'm sorry, but -

I wanted to do a couple of congratulations. First, on your 13th quarter of revenue growth, which is great, but also on the Indy win. Most of my customers are car guys. They own cars, they own high-performance cars or they race and they follow racing and they're all aware of United Auto and what [inaudible] and it's good PR and it's good to see.

My question is on this UK thing, I'm being asked on the distribution, I guess what I mean is can you sell into France, can you sell into Italy, can you carry other - other makes at your dealerships? I'm told that there's a lot of restrictions on how you distribute cars in Europe. Can you bring cars from Europe into the U.S.A.? Can you help us on that one?

Well, first, number one, typically because of emission differentials -

I know that, yeah.

- we can't bring cars into the U.S. and obviously right-hand drive cars wouldn't be sold here in the U.S. From the standpoint there's been a lot of discussion about block exemption which would change the distribution policies across, you know, Continental Europe.

Yeah.

And basically, today, that's really been put off for five years, so there will be opportunities maybe to go both directions at that time, depending if it's selective distribution or another way that you might want to distribute your cars and that will be signaled by each one of the individual manufacturers. But at the present, we have no impact from that, either from a plus or a minus, as far as [Sitner] or UAG is concerned.

Are you contemplating maybe a dealership in France, which is so close to the UK?

Well, as we've said, we want to stay within our metric of about 20% of our overall revenues on an international basis. You know, we would look for, you know, opportunistic purchases but at the moment, our real focus has been in Germany and in the UK.

On your gross profit per transaction on new vehicles, it is up. I heard an earlier question or the first question. Is that basically because cars are costing more now and there's a little bit more profit in it for you?

I think it's our premium mix -

Premium cars.

Which would give us more gross profit.

How do these salesmen get paid? As a percentage payout? How do they get paid?

As I said earlier, 62% of our expenses is variable and most all salespeople operate from a small base and then all would be on a percentage of gross, so it's a really variable commission structure within the whole organization, so to me -

I understand.

- that's positive from the standpoint as we see volumes move up and down.

Okay. Well, thanks for bringing us back in for the questions. That's great, and good luck. Bye.

Thanks.

Thank you. Adrienne Dale, you may ask your question and please state your company name.

Hi. I'm with CIBC. Could you please provide any EBITDA guidance for the end of the year and for the third quarter?

I didn't hear you. I'm sorry.

Could you provide some EBITDA guidance for the end of the year and the third quarter?

I think the EBITDA for the year is 190 million.

So that's the same? That hasn't changed at all?

No, it has not.

And could you break that out by the third and fourth quarters?

Really haven't given any guidance on the third quarter EBITDA now.

Okay. And do you have any expectations for debt towards the end of the year?

Well, we would - we would assume that our debt would stay pretty much flat. Most of our acquisitions that we've made and will end with a positive cash flow, and depending on the sale/leaseback transactions we might do prior to year end would give us, you know, probably a reduced working capital and acquisition debt. And inventories, typically as we move into the fourth quarter and into the Q1 of next year, we would probably see lower inventories because of the new models coming out and sometimes short supply of the newer models. So I would say debt on a particular basis, if you looked at it today, we'd estimate that we could be flat and our goal would be down based on better inventory controls and looking at any acquisitions that might be in front of us that we would complete.

Okay. And do you have any specific acquisitions in the pipeline right now?

Right now, you know, we have - always have a number of acquisitions that we're talking to. There's nothing specific that we'll announce at this time, but I'm sure that in the next - within the next 30 days, that we'll have one or two acquisitions that we would announce that we get to complete.

Okay. Great. Thank you.

Thank you. Again, as a reminder, if you would to ask a question, please press star 1. Again, press star 1 if you would like to ask a question.

Jerry Marks, you may ask your question, and please state your company name.

Good afternoon. Roger, I just wanted to clarify something. You said five years for the block exemption. I mean, I guess the stuff I've been reading in the press was indicating October of 2005 it takes effect.

It is 2005. I'm sorry. You're absolutely right. And I apologize for - it's 2005, not five years, but again, as you look at that, there's going to be a lot of time for the manufacturers to have opportunities to weigh in, you know, on the current information, and certainly, you know, we see that not to affect us in the UK at this time.

Okay. But I mean if you see companies like supermarkets and stuff trying to get into it. I mean, how do you think it possibly could play out or is it just too early to tell?

Well, look, number one, it's too early to tell but I can assure you that any of the doctrines that would come to pass under the block exemption, they're going to have to meet certain facility requirements, technical requirements, and in many cases, you know, those would not pass because of the turnover and we need people in this business, you know, that have the technical capability and the training and typically in supermarkets you have 50% of your workforce is part-time and they have a high turnover. So I say it would bode well for the large dealer groups because we then could have market areas as we do with Mercedes in England where we would actually have a particular market that we would be responsible for.

Okay. And then I just was wondering, I apologize, I missed the first part of the call. But it seems to me like your guys same-store sales seems to be fueled both by brands and you indicated that, you know, six out of the eight regions, or whatever, are in, you know, job growth markets. Could you give us some flavor on those markets a little bit?

Well, I think that as you go across the country, you know, our same-store - as I said, this is the 13th consecutive quarter, and we gave you certainly the markets from the standpoint of growth. You'd look at revenues by market, it would be difficult to take each one today and give it to you over the phone, but I guess you got to aggregate those, and, you know, when you look at Phoenix, you took at the Texas market, just to mention a few, you know, these are high growth. Some of the southeast, the Atlanta markets, you know, are very strong. And typically, in all of those markets, you know, we've had strong same-store growth. But it's driven, I think, by a process of increasing working hours, better training of our salespeople, and then certainly the vertical integration with the OEMs using their captive financing.

Okay. Thanks a lot.

Thank you. Carl Dorf, you may ask your question and please state your company name. Carl Dorf.

Carl Dorf. Dorf Asset Management.

Hi, Carl.

Hi, Roger. A question - sorry about the phone ringing in the background, the other line.

That's okay.

With the weakness in the dollar overall, basically the Euro basically being stronger and the yen being weaker, have you seen any impact on your operations as a result of that? And what kind of an impact might you have going forward in your opinion?

We've had no impact at all, and we don't foresee anything, at least, you know, in the foreseeable future.

Okay. Thank you.

Surely.

Thank you. Again, as a reminder, to ask a question, please press star 1.

At this time, sir, I'm showing no further questions.

Okay, Jan. Thank you very much. Sorry we had the technical difficulties, and anyone that has any questions, you know, concerning, you know, the information that we put out today, we'll aggregate those questions and put them on our website, you know, for everyone to be able to review. Thanks again.

Thank you. This concludes today's 00:45:27 conference. You may disconnect.