Penske Automotive Group Inc (PAG) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Penske Automotive Group third quarter 2009 earnings conference call. The call today is being recorded and will be available for replay approximately one hour after completion through November 6, 2009. Please refer to Penske's Automotive's press release dated October 30, 2009, for specific information about how to access the replay. I would like to introduce Mr. Tony Pordon, Senior Vice President of Penske Automotive Group. Please go ahead.

Thank you, John, and welcome everyone. A press release detailed Penske Automotive's third quarter results was released this morning and is posted on the Company's website at www.penskeautomotive.com. Participating on the call today are Roger Penske, our Chairman, Bob O'Shaughnessy, our Chief Financial Office, and JD Carlson our Controller.

Before we begin, I would like to remind you that we may make forward-looking statements relating to Penske Automotive on this call. We caution you that these statements are only predictions and are subject to the risks and uncertainties relating to economic conditions, interest rates, consumer credit, confidence, spinning, the ongoing restructuring of the US based automobile and auto parts sector and other factors over which management has no control. Our actual results may vary materially from these predictions. Any such statements should be evaluated together with the information about Penske Automotive and our public filings including our annual report on Form 10-K.

During this call, we will be discussing certain non-GAAP items such as adjusted income from continuing operations and adjusted earnings per share from continuing operations. Our adjusted third quarter 2009 earnings exclude $3.4 million or $0.04 per share of after tax expenses relating to the Company's terminated acquisition of the Saturn brand, our election to close three franchises in the US, and costs associated with our interest rate hedges. Adjusted 2008 third quarter earnings exclude $2.7 million or $0.03 per share of after tax expenses relating to severance, transaction termination fees, and property damage deductibles. We believe this non-GAAP disclosure improves the comparability of our financial results from period to period and is useful in understanding our financial performance. At this time, I would like to turn the call over to our Chairman, Roger Penske.

Thank you, Tony. Good afternoon, everyone. Thanks for joining us this afternoon. Our retail operations continued to improve during the third quarter, generating sequential growth compared to the second quarter. As a result, I am pleased to report a 21% increase in adjusted EPS from continuing operations compared to last year and a 55% increase compared to the second quarter of this year. In total, adjusted income from continuing operations in the quarter was $30.9 million or $0.34 per share which compares to $26.6 million or $0.28 per share last year.

In the US, Cash for Clunkers provided a much needed boost to overall vehicle sales; however, industry sales were still down approximately 10% during the quarter. In the UK I am pleased to report new vehicle registration increased 8%. Despite the challenge of the difficult operating environment, our performance continues to demonstrate the resilience of the automotive retail business model.

As noted in our press release, there were three nonrecurring it pes in our third quarter results. As you know, we terminated our agreement to acquire the Saturn brand on September 30. In total, we incurred $3.3 million of transaction expenses relating to Saturn, $3 million of which was incurred in third quarter. We also elected to close three franchises in the US during the third quarter. In total we incurred $1.2 million of noncash expenses in connections with these closures including the write off of $1 million of franchise value.

Finally, as you know, we had $300 million of interest rate swaps that were used to hedge a portion of our variable rate floor plan notes payable. Given the unprecedented decrease in our inventories over last year, our outstanding floor plan dropped below the level of our hedges. As a result, we were required to record $1.1 million of expense. These items aggregate to $3.4 million $0.04 per share on an after tax basis.

Turning to our operating results. Total retail unit sales were 67,122 units, down 5.7% compared to last year. Total retail revenues declined 13% compared to last year including a 12% decline in same-store retail revenue. Excluding the effect of foreign exchange rates, total revenues declined 8.4% while same-store retail revenues were down 8%. Our revenue mix in the quarter was US 64%, international 36% and our brand mix domestic big three 5%, volume foreign 32% and premium luxury 63%. Our mix of adjusted operating income was United States 50% and international 50%.

During the quarter, our recorded SG&A was down $32 million compared to last year and adjusted SG&A as a percentage of gross profit was 81.3% a 90 basis point improvement compared to last year. Perhaps most importantly, we continue to experience sequential improvement in the business. Compared to the second quarter of this year, we experienced a 13.5% increase in total retail unit sales with revenues up 11.6%. Same-store total retail revenues increased 12.6% including a 1.2% increase in service and parts. Our retail margins remained strong during the third quarter. New vehicle margins at 8.4%, used vehicle at 8.8%, and our service and parts margins continued at a 55.2%. However, our margin on the distribution business was negatively impacted by $3.1 million or $0.03 per share of after tax reserves for incentives designed to clear the 2009 model inventory that we established in October. Our cost curtailment efforts continue to benefit our operating results. As a result, our adjusted SG&A as a percentage of gross profit 190 basis points lower than in Q2. On a year-to-date basis our adjusted SG&A is down $178 million versus the same period last year. A portion of these savings relates to the decline in our gross profit over the same period. For example, our gross profit is down approximately $256 million year-over-year. If you estimate 30% of the gross profit would have been paid in variable compensation, that represents approximate reduction of $77 million, and that would happen naturally. So if you deduct the $77 million from the overall SG&A, a reduction of $182 million we have a realized savings of approximately $105 million year-to-date. I feel we should still see some modest cost reductions in the fourth quarter, and our goal is to sustain many of these costs throughout 2010.

Looking at Smart, during the quarter we wholesaled 3,400 Smart Fortwo compared to 6,600 during the third quarter of last year. For the year we expect to wholesale between 15,000 and 16,000. As I mentioned, we accrued $3.1 million or $0.03 per share on an after tax basis in our September accounting relating to our anticipated incentive spend. This was treated as a reduction in revenues which impacted our gross margin. We have also implemented new marketing campaigns designed to promote the brand increase test drives to sell through the 2009 inventory.

Let me move on to the balance sheet. Total vehicle inventory was $1.1 billion, down $89 million since June and down $413 million since the end of last year. The end of the quarter our worldwide days supplies in inventory was 42 days new compared today 65 at the end of June. Used was at 36 compared today 34 at the end of June.

Moving on to CapEx, our gross CapEx is $71 million through September 30. Net CapEx was $69 million. We continue to expect CapEx in 2009 to be approximately around $80 million. We have not done any sale lease back transactions at this point and we are evaluating mortgage and other sale lease back transactions in the UK and also here in the US.

Turning to our liquidity and debt, we extended the term of our US credit agreement by one year to September 2012. We also amended our UK credit agreement to increase the revolving capacity from GBP80 million to GBP100 million. At the same, time we extended the revolving credit by two years to August 2013. We also paid down $40 million of our US term loan in September. The balance is now $159 million. As of September 30 we had $971 million of nonvehicle debt, an additional $336 million of availability under our credit agreements worldwide. Looking at acquisitions we acquired four franchises representing annualized revenue of approximately $100 million. In total, we paid $3 million of goodwill in connection with these acquisitions. We don't envision significant acquisition activity between now and the end of the year.

Turning to our securities repurchase program we did not repurchase any of our securities during the second quarter. We currently have $44 million of authorized availability remaining under our program to repurchase stock, debt or convertible debt. Let me make a few comments on Saturn before we close. As you know we signed an MOU with GM on June 5 to buy the Saturn brand. After significant negotiation and due diligence, we negotiated a deal and were prepared to execute. However, we felt we needed a vehicle supply agreement in place for vehicles after the GM supply contract expired before we closed the transaction with General Motors. We considered a number of vehicle supply sources and quickly determined that Renault Samsung was in the best position to provide a complete range of vehicles meeting US standard for safety, emission, and fuel requirements. We began negotiating with Renault in July and believe we were making substantial progress toward a definitive agreement that would close at the same time as the GM transaction. At the last minute Renault concluded that the terms the proposed GM supply agreement did not meet the return requirement. Based on their unwillingness to proceed, we did not have any viable source for product after the GM supply agreement expired. I had to call GM and tell them we would not be able to proceed with the transaction. We as a company could not accept the risk of moving forward without a course of vehicles. However, at this time I would just like to commend the people on the PAG due diligence team and the good people we worked with at GM for all the work they did on the project but, again, a big disappointment but I think it's the right decision. Again, thanks for your attention and now I'd like to open it up for questions.

(Operator Instructions) First we will go to Rick Nelson with Stephens. Please go ahead.

Hi Rick.

Thank you. Good afternoon, Roger. Can you talk about the ability of customers to get financing for vehicles? Are you seeing any opening up there?

I think one of the things I think we have to look on a macro basis is that the credit markets have opened up substantially and securitization is now available to most of the key finance subsidiaries for the OEM. So I would say that from that standpoint it is open, certainly we read where GM is going to get another couple of billion dollars I think from the Government to support their balance sheet. So from the OEM's perspective and certainly from the one that is we deal with on the premium luxury side, we see really nobody backing up with us from the standpoint of availability of either lease or retail. One thing we are seeing is certainly stipulations on credit, advance rates probably have been curtailed a certain amount. So that would reduce grosses if we could not get the banks or captives to buy. So, I think leasing as, we have seen that open up.

Our Cadillac business was, had a big spurt here the last month and a half because they're now focused on leasing, and I think that's going to be important as we go forward. But if you look traditionally at Mercedes, Lexus, BMW and Audi, 60% to 65% of their business is leasing and they're still in business today. We feel good about that. When you think about residuals out there today, Toyota and Lexus have just announced they raised all on leases by 300 basis points. When you look at residuals in the market you have been able to see the ES300 is up about 11% over the last year, you will have a 10% increase in the IS 250 and the RX is up 13%. So residual values are up which really bode well obviously for leasing. The same thing at BMW, seeing some increases in 328 up about 2%. The 7 series is up about 6%. Then you go on to AUDI, a 2% to 3% increase in most of their key product lines. So with that in place I think we are going to see the captives being more, more aggressive as we go forward during the balance of this year and going into next.

Thank you for that. Can you also comment on what you are seeing in October both in new cars and used cars and where your inventory sits at this point in time and when do you think stores get fully stocked?

Well, I think that as I look at October, it is certainly feels better than September and I think you're going to see a forecast most of the people are saying we will see a total forecast of about $10 million. I think the retail forecast we were under $8 million for September. I think you will approach $9 million in the month of October. The month started out a little bit slower. The first of the month I think that was due to inventory, but we have seen good traction, you know for the past three weeks. And as I look at our business, you know before the call I just, talked around the circuit and it looked like used vehicles would be up about 10% versus a year ago, and 10% above even the September month, and the new vehicles will be flat and we are seeing it really in the UK we are seeing both new and used up. So I would say October will be a better month than we had expected.

Again on the service side we are seeing that in the UK the last three months the service hours are up over the previous year. We have been probably flat to down slightly here due fact we don't have the pre delivery inspections overall but when you look at our used inventory really on a basis of looking back at the beginning of September and you look at our inventory now, we are down about 5% in total units and from an over 60 day perspective we have about 300 units. We are in good shape on used inventory and you are starting to see the growth from the standpoint of new vehicle side, we only had 1200, slightly above 1200. Toyota is up at the end of August and that's up about a thousand. If you look at the high point during last year, we were as high as 7,000. So, significant upward ability to add inventory in the market.

We have seen the same thing with Honda where their inventory is now back up. Vehicles like BMW they're down because they had their summer shut downs. So inventories are in pretty good shape and I think we will start to see a lot of movement from the standpoint of more production. September was impacted by the lack of inventory and I see October being better.

Thank you for that. Finally, if I could ask you about regional areas of strength and weakness, obviously the UK was strong but what's happening in the United States from a regional standpoint?

Just a point on UK. We were up 17%. If you look at this year versus our registration month in September versus March and we were up 11% versus a year ago. So that market seems to be adjusting forward. But we look at our business, certainly Arizona, Michigan and Rhode Island because of the high unemployment still are tough. Florida has been the tougher spot for us. I see that from some of the other peers. But, again, overall I think everywhere we are feeling a little bit better. I would hate to say one is a lot worse than the other.

Thanks a lot. Good luck.

Our next question is from Matthew Nemer from Wells-Fargo Securities.

Good afternoon, Roger.

Hey Matt.

So you had a great performance in used vehicles, you are almost at peak grosses per unit in that business. I'm wondering is that mainly from the UK and what how should we model that going forward? Do you think that could continue to go up or do we hold grosses at $2,300 or so?

Well, I think that there's been a market phenomenon take place because as we have entered with used car prices up it drove a lot of people to buy used cars and I think as the used cars are drying up in certain markets and obviously residuals coming up, you start to see that the used car business will probably slow a little bit, but I see overall from the standpoint of our business we continue to hold the margin and, again, as you look at it just looking at the wholesale business as far as the marketplace, we are seeing vehicles under 30,000 still strong, we have closed bit auctions, we have sold anywhere from 95% to 100% through those auctions over the last three weeks. We are seeing some softness in vehicles above 30,000. But again, as we deleverage a lot of these wholesalers and used car guys deleverage their balance sheet which I think is traditional, seasonal declines, you will see some impact on margins because we will want to be sure we maintain our inventory control which I mentioned earlier to Rick is in good shape. So there might be some deterioration, but I don't see it you know being double digit.

Okay. And then turning to Smart, if we take out the reserve in the quarter, it looks like your gross profit margin is around 13%. Is that a good number going forward or do you think that distribution margins could be lower on a longer term time period here?

I don't know what the impact in this small car segment is. As you know, when we looked at Smart and the sector itself, (inaudible) was down 43%, Scion down 52%, Avao down 32%, we were down 34%. Again, that is putting pressure on it with a lower fuel prices, we are going to have to have some incentives obviously to move the market. That's what we have accrued during for the fourth quarter, and for the market going forward. So, I think that as I look at Smart on a going forward basis, we are looking at 15,000 to 16,000 this year and I would be happy if we can meet that number next year based on the current market.

Any new products you can talk about there for next year or is it the same line up?

Well, we have, we have pretty much the same line up going into 2010. Obviously there's some, some subtle enhancements and that's one thing we are working on with Daimler is the next product segment. So that's going to be exciting when we can announce that and we are in contact with them now. And we will have the electric vehicle coming into the market at the end in Q4 this year which will have a sample of those vehicles and that will be as a production vehicle for 2012 and in 2011 will have over a hundred mile range. We have been running approximately 125 of those inside the M25 in the UK with great success. So, we expect more parts and service gross during 2010 which will help our mix.

And then lastly, just your CapEx expectations for next year, do you think that number will be about the same, up down a little bit?

Oh no, it is going to be down. When he projects, that we had committed to for this year, there's some Mercedes-Benz auto house numbers that we have to look at for next year. But I see our CapEx, in fact, you know my target and the goal is with all of the guys around the world is that we will be below our amortization and our amortization is about 60 million. So we should be below that.

Great. Good quarter. Thanks, Roger.

Thank you.

The next question is from John Murphy with Bank of America/Merrill Lynch. Please go head.

Good afternoon, Roger.

How are you?

Good. How are you? Roger, as we see sales eventually recover here, not asking for a forecast next year be we think sales are going to be up a fair amount. How much leverage do you think there is on SG&A, maybe asked a different way, how much of your cost savings do you think you will be able to maintain?

I would say this, that from a cost saving perspective, we talked earlier in my script about being able to sustain the cost saves in our model and we are going have some increase, there will be some employee increases based on performance. Most of our comp is variable anyhow but we are expecting to reinstate our 401(k) for next year. But other than that, we have been able to operate this business both on the fixed side and the variable side, I think pretty well from a managed standpoint. I don't see a lot of adds there, the hours of operation will stay the same, they won't be increased. So I think that we should be real fortunate next year if we can see this lift that people are predicting, our fixed costs or structural costs should stay in line. I don't think we are done by the way, I mean we had a meeting here this past week and George Brochick in the west said they are continuing to still go in and look at where they can take costs out. There might be some more marketing spend as volume goes up, you want to sustain a certain amount per vehicle but that would be relative to the volume.

Thanks. And, Roger, the Saturn deal coming apart was tough. But, you've obviously identified the potential for future distribution, as part of the potential model here. Are there any other brands or manufacturers that you are exploring or you might think of going forward to do that same kind of agreement with?

Well, I wish I had one I could announce today. I don't to be honest with you. But we are an international automotive retailer and distributer. So, we've had a number of people contact us about potentially distributing their brands here in the United States. First thing we had to do is get through Saturn and now looking at the market as we look at the future we like distribution and would like to grow in that area. So I would say that our antennas are up for opportunities for distribution and we will look at those as we go forward.

Roger, the four dealers you acquired year-to-date, any comments on valuation or what you paid there, and really attractive acquisitions in the market where there are distressed dealers that you might be able to buy at a discount or even just regular acquisitions going forward?

I can tell you that the multiple that we paid was probably about 1. We paid $3 million blue sky in total for the dealerships we purchased. So we are going to be opportunistic especially in markets where we have got contiguous operations. We can move management around that will give people an opportunity to go up in the organization. I would say from an acquisition perspective, we are always looking for opportunities. But it is not a priority now that we are out, we are not going to make the big steps we made in the past because we want to see this get back, you know up, you know, 14, 15 so we can see the cash flow generated out of those types of years and we want to focus as we go forward here at least for the next 12 to 14 month on generating significant cash to help us pay down our convert that's due in 2011.

Okay. Great. Thank you very much.

Good. Thanks.

Our next question is from Matt Fassler with Goldman Sachs.

Hey Matt.

Hi. Actually this is Mark (inaudible) fill in for Matt.

Hi, Mark.

How are you?

Good.

Great. First I had a question on new car margins. Can you just talk about how we should think about new car margins going forward just from given the building in inventory and maybe the rising gas prices and potential impact on mix?

Let me say this. When you have low supply and demand, obviously you are going to see your margins go up. We had a nice lift of margins during the third quarter both on new and used and when I look at the overall margin we were up 20 basis points on new and we are up 150 on used, and I think where we really picked up the used was in the UK. We were only up 60 and they were up 250 basis points. I think that is going to come back some. I think there was some opportunistic buying in big packages overseas that gave us that opportunity, and I think as we see the last quarter where we really got the margin increase was due to Cash for Clunkers because if you look at volume foreign, we were up about 100 bais points. That will come back and high line was down 10. So overall the volume foreign drove that increase. You will see some deterioration I am sure as we go into the fourth quarter of next year, but we are managing for margin but, believe me, we have been doing it all year and that's a reason we have been profitable. I don't expect that give that up.

Got it. Thank you. Just one follow up on F&I? Is there any -- what are you seeing as a main driver of F&I going forward, I understand that credit markets are getting better, but what do we need to see for had this to restart growing?

Well, I think we have to see the credit quality of the consumer, the consumer today is so overleveraged, and in that particular case, the home has been devalued. So until we see some market pick up in valuation, I don't think we are going to see a lot of different pattern. I think advance rates certainly are what has, is impacting. In the old days if someone was $3,000 upside down on the value of their used car, they would just cap it to the next vehicle. That's not the case. But, again, I think that the OEM, the captive OEM see one thing. I think maybe we didn't bring this out in the call. We have to think about what's happened here in the last 24 months. I am talking about 2008 and 2009, there will be 8 million less new cars that will have been delivered into the market. So that's going to have an impact on used in the future because we will have less used available this one and two year model. So those vehicles will be coming in the market. We are going to see higher residuals which are going to make it easier in some cases for finance companies to be able to do business. And I think that at the end of the day we are going to be, we will be in a better position to see some more F&I income but I don't see, on the per deal basis I think we are probably getting all the money advance we can get right now. But the good news is securitization as these companies wrap their lease portfolios and their retail business and they can sell them into the marketplace, that's a real positive.

Great. Thank you very much.

Next to Scott Stember with Sidoti and Company. Please go ahead.

Good afternoon, Roger.

Good afternoon. How are you?

Can you flush out the parts and service customer and warranty and so forth?

We are running about 70% customer pay and 30% warranty. I think that overall our absorption, if you take our business we are running somewhere between 60% and 65%. That's pretty much on a year-to-date basis. What we are currently seeing is that warranty is down. Our PDI which is a predelivery inspection, I think for year-to-date has been down almost 40%. So those are high margins, that's because of the new vehicle business is down. We are not doing as much from the CPO perspective because on the certified preowned where you have to do a lot of reconditioning but we can't get the advanced rate so we probably have less reconditioning revenue going through also. But overall from the standpoint of our business, same-store service and parts if you take out foreign exchange, we were only down 3.5% which was I think pretty positive.

What was the customer pay same-store number? Do you have that.

I don't think, no I don't have that. I will get Tony to get that for you. I don't have customer same store.

Okay. And just in general on the new car side, did you give what the number was in the UK from a comp basis versus the US?

You mean year-over-year on new car?

Yes.

Well, the only thing I gave was that the business itself was up due to the registration month. But if you look at revenue on a comp basis, it was down 7.3%.

That's in the US?

No, that's internationally.

Oh, okay. Got you. All right. And lastly, could you maybe just comment on, did you disclose how many cars you sold through Cash for Clunkers and any possible bottom line impact it had for you guys?

Yes, Cash for Clunkers we did just under 6,000, and I think that we are 65% premium luxury. So the real volume that we had was in that volume foreign which would be Honda, Toyota and Nissan. What we saw there that group of vehicles they sold we had 100 basis point margin increase. So it had, it certainly had some benefit for us during the quarter. I didn't look at it in detail because of the majority of our business is in the premium luxury.

Got you. That's all I have. Thank you.

Our final question will come from the line of Ravi Shankar with Morgan Stanley. Please go ahead.

Good afternoon, Roger. Can you hear me okay?

Ravi, how are you?

Well. Can you talk about the Toyota Lexus recall and at that hah that means for you guys?

Let me say Lexus had a recall earlier in the year which was I think the steering something to do with the steering rack which was four or five hours per vehicle which provided significant gross profit on a warranty standpoint. This current recall with the floor mat, we really don know how to, what that impact is going to be. What we are doing, obviously it is not a difficult one. But it has to get the consumer into the dealership and what we are doing is trying to be sure we are ready to take on, be able to do it effectively, but it really hasn't started yet so I can't tell you what the impact is going to be. But Toyota is really in front of it as they were with the Lexus stuff. So we expect it to go through. It is unfortunate they have it at this time because their product quality has been excellent over time.

Got it. And can you talk about your expectation for incentives heading into the holiday season which typically is very strong for luxury brands?

What you are seeing with Lexus is they have increased the ALG for their residual so they're going to be more aggressive on leasing. I think you are going to see the premium luxury it is all around leasing I'm not sure there is going to be a lot of dealer cash or consumer cash. On the other hand, when I see the big three and in the discussion I have seen, you will see them trying to be more realistic. I haven't seen the numbers unfortunately before this call on a month to date basis, but it is my thinking that most cases they will be lower. I know that BMW is pushing CPO with some special programs, Mini has had some special lease programs but a number of these things I think are tactical and I am not sure it's going to be systemic hopefully as we go into next year.

Got it. Last question, just a follow up on a question that was asked earlier on the distribution for other brands, have you ever thought about going to distribution for the hot new electric cars that are coming out from some of these smaller start-up companies that don't have the distribution that you have?

Obviously this whole electric vehicle area is very interesting from the standpoint of what we might be able to do. I am just not at the liberty today to discuss that: w e have a number of vehicle manufacturers around the world that want to enter this market, it is the biggest market, and as I say, we really had a number of calls as we got the visibility on Saturn. What we are doing now is checking those off and seeing if there's something else we might be able to do. We think that it makes in our model different when we have the international retail, US retail and distribution it gives us a balance and helps us manage through some of these market fluctuations. But we will certainly keep you in tune on what we are doing.

Thank you very much. Congratulations on the quarter.

Thanks a million, Ravi.

And Mr. Penske I will turn it back to you for closing comment.

That's all we have today. Thanks for joining us. We will see you at the end of the year. Thank you. Bye bye.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.