Q3 2019 Earnings Call
Hi, I would like to welcome everyone to the Autonation third quarter earnings Conference call.
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After the speaker's remarks, there'll be a question and answer session.
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Robert Cortiles, Vice President Investor Relations you May begin your conference.
Thank you.
Good morning, and welcome to Autonation third quarter, 2019 conference call and webcast, leading our call today will be Cheryl Miller, our Chief Executive Officer, and President and Chris Cade, Our interim Chief Financial Officer.
Following their remarks will we will open up the call for questions, Chris Kate and I will be available by phone following the call to address any additional questions that you may have.
Before we begin let me read our brief statement regarding forward looking comments.
Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives.
So to forward looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995.
Such forward looking statements involve known and unknown risks, including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward looking statements.
Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our FCC filings, including our most recent annual report on Form 10-K , and subsequent quarterly reports on Form 10-Q , and current reports on form 8-K, and now I'll turn the call over to Ordinations Chief Executive Officer.
Certain president Cheryl Miller, good morning, and thank you for joining us Autonation Waymo will continue a multiyear service agreement and the launch an autonomous cards delivery program in Phoenix, Arizona Waymo, an independent alphabet subsidiary is the leader in self driving technology with the mission to make it safe and easy for people and thing.
To move around.
We're excited to broaden our partnership with Waymo and support their fleet in operations. So what sets Autonation apart is our industry leading position in retail automotive investments in our brand and our people and the strategic partnerships that align with the mobility needs of our customers.
Today, we reported third quarter earnings per share from continuing operations of one dollar an 11 cents per share, which included previously announced severance and related expenses of 10 million after tax or 11 cents per share.
Same store third quarter 2019 revenue totaled $5.4 billion, an increase of 3% compared to the year ago period.
Same store gross profit of $877 million increased by 5% compared to the year ago period for the quarter same store total variable gross profit per vehicle retailed was up $114 or 3% compared to the same period a year ago.
Same store in new vehicle gross profit per vehicle retail increased $9 on a year over year basis. However, our prior year same store new vehicle gross profit per vehicle retailed was positively impacted by a nonrecurring OEM payments. Excluding this impact our same store in new vehicle gross profit per vehicle retail.
Would have increased approximately $54 compared to the prior year.
Moving forward, we remain committed to speaking the optimal balance between new vehicle pricing and volume.
We continue to manage our inventory levels to meet consumer demand year over year, we have reduced our new vehicle inventory by approximately 7000 units.
Same store customer financial services delivered another record breaking corridor with gross profit per vehicle retailed at $1939, which was up $150 for 8%.
The Autonation USA group broke even for the second consecutive quarter and we're pleased with the improving performance trend at these stores.
Same store customer care gross profit was $403 million, an increase of 6% compared to the same period, a year ago, driven by growth in customer pay which was up 7% and warranty which was up 6% year over year I'll now turn the call over to our interim Chief Financial Officer, Chris Kate.
Thank you Sheryl and good morning, ladies and gentlemen.
Third quarter, we reported net income from continuing operations at 100 million or $1.11 per share versus 112 million or dollar 24 per share during the third quarter of 2018, a 10% decrease on a per share basis.
EPS from continuing operations for the third quarter of 2019 included previously announced severance and related expenses of 10 million after tax or 11 cents per share.
In addition, net gains from store and probably divestitures in the third quarter 2019 were lower by 9 million after tax or 11 cents per share compared to the prior year.
During the third quarter same store revenues increased 179 million for 3% compare to the prior year.
On a total store basis revenue increased 112 million were 2% and gross profit increased 32 million were 4%.
As <unk> as percentage of gross profit was 73.7% for the quarter, which represents a 50 basis point increase compared to the year ago period.
As gene a included previously announced severance and related expenses of 11 million pretax.
Excluding these charges estimated gross profit would have been 72.4% a decline of 80 basis points compared to the prior year, reflecting disciplined expense management.
We continue to expect full year 2019 estimated gross profit to improve year over year compared to 2018.
The provision for income tax in the quarter was 37 million were 27.1%.
As a reminder, or prior year tax rate of 22.6% was favorably impacted by 340 basis points due to adjustments made in connection with the 2017 tax cuts and jobs Act.
Airplane interest expense of 33 million was relatively flat compared to the third quarter of 2018.
We managed inventory lower resulting in lower average floorplan balances, which were offset by higher average interest rate.
Non vehicle interest expense decreased to 26 million as compared to 28 million in the third quarter of 2018, primarily due to lower average debt balances as we paid down debt from free cash flow.
Non vehicle debt was lower sequentially at the end of the third quarter by 170 million ending a 2.3 billion.
Other operating income was 5.1 million in the third quarter of 2019 compared to 17.4 million in the prior year, a decrease of 12.3 million.
Other operating income was primarily comprised of gains related to store and property divestitures in both periods.
The company has approximately 219 million remaining board authorization available for share repurchase.
As of September Thirtyth, there were approximately 89 million shares outstanding not including the dilutive impact of certain stock awards.
Net capital expenditures were 60 million for the quarter compared to 81 million in the prior year.
Capital expenditures are on an accrual basis and exclude operating lease buyouts and related asset sales.
Our leverage ratio decreased to 2.6 times at the end of the third quarter compared to 2.8 times at the end of the second quarter.
Total liquidity was approximately 1 billion at the end of September .
Our strong cash flow generation investment grade balance sheet continue to enable us to invest in the business and effectively allocate capital to maximize shareholder returns.
And with that I'll now turn the call back over to Sheryl. Thank Chris earlier. This month Autonation sponsored its third annual drives tank across America that day, where thousands of Autonation associates delivered thousands of care packages to children and adults across the country.
This day as a reminder, that we're not just servicing and selling vehicles, but that we have a purpose and the purpose is to drive out cancer. Each and every day, it's not just the statement, but it is a part of Autonations core Autonations drive Pink campaign has raised more than $20 million for cancer research, we remain focused on executing our strategy for.
Our core business and our commitment to our brand extension strategy and our drive pink efforts and with that we'll now open up the line for your questions.
Not at this time I would like to remind everyone in order to ask a question to please press Star then the number one on your telephone Keith.
We'll pause for just a moment to compile acuity roster.
Your first question comes from the line of Bret Jordan of Jefferies. Your line is open.
Hey, good morning, guys.
Hi, Brad one rep.
Could you give us I guess further update on the Autonation USA I think you said it was breakeven second consecutive quarter, but maybe as far as trends and what's yours sites are as expansion and where inventory sourcing is coming from you know how you're doing as far as that direct purchase program.
Absolutely. So if you look at that trend there second quarter, where the groups broke even and certainly there are some stores doing even stronger than that within the mix. We have not at this point announced any further expansion from a sourcing standpoint, we do have the successful will buy your car initiative, but keep in mind also that Autonation has a high.
All self source is between trade ends will buy your current lease returns over 70% of our inventory and so that's a great competitive advantage for us so really volume as the name of the game. So as we think about those stores, we are focused on increasing that sourcing and driving additional volume through those stores.
Okay. So you are taking trades up autonation franchise stores and allocating that used inventory autonation USA stores for a retail.
Absolutely, we've always done that and so when you think about our system, we take trades at different locations across Autonation, USA, and we move and share that inventory, where it best suits our customers.
Okay, Great and then I guess question on incentives obviously some of your peers that have already reported talked about one particular.
Import program incentive, but what do you see I'm out there as far as are we incentives across the board from a cadence standpoint, either increasing promotional levels are decreasing promotional levels.
So I'd say incentives as a whole are reasonable they're up 4% to 5% year over year I would say with respect to a particular.
Import manufacture were actually encouraged by their overall approach to retail.
Their incentive dollars are now accompanied by more realistic targets and so we like that approach we were supportive of them eliminating the wholesale program. So we feel like.
We are in good position relative to our performance versus incentive.
Great. Thank you.
Your next question comes from the line of risk now first right Derek Glenn of consumer edge. Your line is open.
Hi, good morning, Thanks for taking our questions just given the improvement in new GP is X that non recurring pay me can you elaborate more on how you're thinking about the trade off between.
Pricing volume, particularly as we think about Fourq, you and heading into 2020.
Yeah, we're thinking about maintaining balance there so you've seen that we've been a slightly ahead of peer with respect to PVR perform adds were slightly but on a unit basis are you saw us catch up a little bit compared to industry on units in the most recent quarter versus where we were earlier in the year, we want to strike that right balance when we strike the.
Right balance you see good flow through and so if you exclude the onetime or from SGN. I. You saw good flows are in good cost discipline and we'd like that balance I will continue to keep an eye on that but we want we want balance we don't want to over index on volume or price in new and importantly, you see exceptionally strong.
Jeff and I on the backend so customer financial services important part of the business and we strike that right balance there's good flow through in that as well.
Okay got it and then also notice Capex, just running down significantly year over year year to date, how should we think about the normalized run rate that spend on an annual basis and what are the expected major buckets of spend we should keep in mind over the next year.
So we haven't given a specific target on it but I will say year over year. If you look at our Capex.
Two years, we had some of the build out of the auction and initial Autonation USA stores. The brand extension strategy. We also had some OEM awarded add points during that time period, you can see this year that capex is down somewhat and that was also intentional as a broader part of our cost discipline plan, we put in place or.
Earlier this year, but we are making sure that we are providing great facilities for customers and we feel like at this level of Capex. We can will continue to evaluate that as we go into 2020, depending on the pace of brand extension strategy is no announced plans at this stage on Autonation USA, but as we continue to update you in the upcoming quarters.
I will determine the cadence of Capex into 2020, but we feel really good about Ah the returns and being prudent about our capital spend this year.
Okay. Thank you.
Thank you.
Your next question comes from the line of first Nelson of Stephens. Your line is open.
Thanks, Good morning.
Good morning rhetoric.
Talk about a trade off.
Hello.
For GPU.
A new car side.
You know we saw declines in volume this quarter, but yes.
We've been.
Vince.
Crave.
But less than 10 was on the first house.
Yeah, I think that's a great observation Rick said, we did try to rebalance that a little bit we still like.
Having some strength and in the GP. So we don't want to go all the way on that but we like that sort of mid point of balance with respect to new GPU at the same time, you saw a lot of strength in U.S, yet. So we have to keep in mind that we're looking at the totality of customer preference, which is also towards nearly now so we're always trying to optimize that line for customers.
Between new and nearly new and where they're playing depending on a segment that they're buying.
Yeah.
HM.
Oh occasion.
Turning.
Our churn, we haven't seen much buyback activity or acquisitions.
Uh huh.
Something we should come to expect is.
Push forward.
Yes, I think it is important that we took a look at the debt we were getting towards three times and we've now de lever to bed and with the strong cash flow generation never business. We are in good position as you know we are always opportunistic so we're not programatic at the wrong prices.
And acquisitions out the things in the market and so we like our strong balance sheet is there for a reason and we will be opportunistic as we go forward with deploying capital to that's used to be that M&A and that could be M&A and a in the brand extension area that could be additional development of our brand extensions as well as we always have them.
Tension all at the right time periods for share purchase.
Hey.
Thanks, and good luck.
Great. Thanks, Rick.
Your next question comes from the line of Chris Bottiglieri of Wolfe Research. Your line is open.
Hi, Thanks for taking my question.
[laughter], maybe hit back on Bretts question, a little bit atrophy answered it.
How are you I guess one for Shirley how are you thinking about that business is there any change in your personal view relative to your predecessor, and then two I guess what are the milestones or.
I don't know anyway to frame like what are you. What are you looking for before deciding the future feet about his name is saying whether to accelerate that growth again like what should we be looking for nurses and overseas.
Yes, I think that thing you're looking for as volume. So its throughput. That's the biggest thing we're focused on right now is the throughput through those stores no change in approach and you can see from recent numbers that used is very strong and we continue to be bullish on used not only in our nation USA stores, but throughout.
At our total portfolio and you see customers as affordability in certain time periods gets a little bit stretch do you see customers go back and forth between new and used Fortunately now we have a bit of a tailwind as well so instead of having three rate hikes for the year, we'd had two rate cuts, we'll see if we get a third tomorrow. So the indicator I'm looking for as volume I'm looking for flow through of.
Those and we want to make sure that we have that model to a we'll look to see the increases in self sourcing. So we already have strong self sourcing across our portfolio at 70% and we'd like to see that edge, even further up to be able to show that that volume. So if we look comparatively we think weekend supply.
At a higher number of units on the existing store sizes.
That's that's helpful and then kind of digital related but.
How are you thinking about the roof investment is that still pass at this point or is there any kind of collaboration going on and then do you see that changing.
Yeah, I guess that's it.
But then we think about investment and partnership so from room to Waymo, we think about learnings and so as we've said before with around some of that is understanding and learning a there are some things that we do together with respect to reconditioning and other things that that we generally learn from how.
I mean that investment in there on the Waymo side as we think about portability. We're excited I in the coming months to be launching autonomous parts delivery. We're excited about the extension of that multiyear servicing agreement, where we are servicing vehicles on the ground and Phoenix that are very technically.
Complex and not that really plays to our skill set of being able to work on electric being able to work on autonomous and being able to meet future customer mobility needs. So we think about our strategic investments in those arena.
So just what's the problem is ports delivery what does that actually is.
Yeah, So if youre a parts customer from Autonation Toyota Tempe. So your energy offense and you are an independent a car repair shop and you by Toyota parts from us and from that store, we will now instead of putting a person.
Nickel, we will now put a part in the coming month in a vehicle in a waymo and then we will deliver it autonomous late to our customer.
That's interesting cool thank you.
Great. Thank you.
Your next question comes from the line of Frechette got stuff of JP Morgan Your line is open.
Hey, good morning, Thanks for taking my question or just how the question of thoughts and services you know going into the fourth quarter, two you're obviously pretty solid results in Threeq you.
Oh, it looks like warm becomes probably get a little Gulf War, you know I didn't know if you have any impact from the GM strike, but.
Should we expect a similar god of drill Threed can turn into the fourth quarter, you're on bought from services or just want to make sure. There was any one time, we're doing stuff comes to keep in mind, there and I'll follow up.
Yeah warranty comps are tough to predict said, we've seen some improvements and warranty rate, which helps with that but it's always hard to predict the pace of recalls another item. The G.M. strike from an vehicle inventory perspective, we're in really good shape parts got a little bit tighter there was no material impact of the GM strike.
In the third quarter, we're continuing to keep an eye on not as regular parts movement resumed into Q4, and so we feel really good about parts and service and its relative flow through.
And do it I think that that business remains strong and certainly that's supported so despite the fact that new unit sales have plateaued and certainly you lose the.
Pre delivery and section income on those used units are strong you pick up the reconditioning on those so when you when you add those and combined with customer pay in warranty, which were up 67% in the quarter, we feel good about Q4.
Got it Oh, and then on as Julie or execution was solid once again.
I appreciate the color on the floor, that's why guidance there, but we're just to put a finer point on the fourth quarter.
Typically those expenses up you know for Threeq and Fourq you all in your own adjusting for the severance payment this quarter.
Should we still expect that go to fees argued to continue during the fourth quarter I'm, just trying to get a little bit more closer and be a gen. Two gross profit number here for the fourth quarter.
Hi, Raj out its Chris So typically we actually see leverage on us DNA during the fourth quarter. So we don't see any reason why that historical trends would be any different. This time around we've we had we did a great job on SGN a this year I think really even amidst.
Some onetime payments related to severance in the like we feel that we've done a really good job from a cost discipline perspective, and especially when you think about it in the context of our brand extension investments, which have an estimate investment component to it as well even with that we're still running below the annual levels that we ran out last year, So and that's one investments that are not.
At this early fully mature at this point and may not be mature for several more quarters.
So we don't even have the gross pull through yet on that and we're still seeing improved SG nine and we're happy with where we're at.
[noise] got it did just last question on effort by our Gpus number do you view again pretty solid there, you're roughly 150 bucks a harder or year over year.
There is really to just Brigode board and do the confidence you know that's driving that because I mean, you knew we called adult newfield or down or was it views.
This is like you had been blood.
Is there anyway do you know report you know, what's what's driving that year over year improvement, including you know things from done extension and things like that.
There are those Chris again, so yes for sure as you move more of a mix towards used away from news. There is a difference in total left and I PVR. We've we said in the past that that's usually a few hundred dollars difference between the two on when you combine that though with higher penetration rates in some pricing.
Power that we have now in our brand extension that's been overall supportive. So it's helped to counterbalance some of the mix shift we've seen towards used but that that mix shift if the new to use ratio or that used to new ratio continues to strengthen as it will they'll still be upward pressure on that mix impact.
Got it okay. Thank Oklahoma.
Your next question comes from the line of John Murphy of Bank of America. Your line is open.
Good morning, everybody I'm, just a if you follow ups first I mean on Autonation USA has there been any changing your thought process about opening new stores I mean, I know you're talking about throughput increase and you're just seeing stores, but you're at breakeven and they've been operation for a while it is there anything sort of change in the in the thought process there that you might get.
More aggressive and start opening stores again.
I think when you see that group for the second quarter gets a breakeven that certainly increases the confidence level, but we would like to see some of that flow through certainly we have the balance sheet to do the rollout, we certainly know how to how to build and send them up and what markets. We would do that but we're continuing to follow through for that Incruse.
Increased throughput.
Okay. So we're still we're still we're still waiting for that before you decide to do it I mean, just seems like you've been in operation at the you you might be just a question of timing at this point is that correct Sheryl or.
Yeah, I would think of it probably in terms of timing, we want to make sure and look we piloted things over the years and when we move to quickly on things before we perfect them, we get mixed results and so we want to make sure that we're focused on tuning things to the point, we want to before we proceed with the brought a rollout.
Okay. That's helpful. And then if we think about floor plan I mean, there could be a real opportunity there as rates.
The decline there does seem a bit of money on floor plan expense.
As you know how do you see that that opportunity going forward and also are you seeing any sort of offset on floorplan assistance or should we think about a rate reduction is as really dropping to the to the bottom line for you guys.
It definitely drops to the bottom line said it the thing I like about inventory levels right now as were down 7000 units year over year. So if you look at the Dsos down to 55, which is still healthy level. It's a good level to meet customer demand, but its rightsize. The you have lower inventory balance and then we'll be hitting flexion point soon where rate.
That's what we'll be dropping every year. So if you think about last year you had a three rate hikes now you've had to rate cuts we might have a third one tomorrow and actually provides a benefit in floorplan cost. It provides better customer affordability and it also provides lower on non vehicle debt and a lot of our non vehicle debt is fixed but it does we do have some floating where it.
Provides a benefit so certainly for us it's a nice tailwind to the business and it's a nice tailwind for the consumer.
Okay, and then on gain on disposition, obviously, they're lumpy in tough to the call but is there any way that we can think about sort of the backlog.
Assets or real estate that you have.
Sort of in your portfolio that that might be for shale. So we can think about how that might flow out overtime is that something you've dimension or is that a moving target.
Yeah, if you think about any quarterly timing its little hard to predict exact timing of where something closes I would say we have we did state a couple of years back some select dispositions were substantially through a lot of that so there's always periodic portfolio training that we will do but I'd say the bigger portion of dispositions we successfully done every.
The last couple of years.
That's helpful. And then just lastly volumes on on your auctions, which are stepped up folks.
Focus for you is that all flowing through the wholesale line and enter the auction profits running through the gross line for wholesome just finished and where that's showing up in the in the segment to any income statement.
Yes, that's exactly correct, that's where it shows up and so we're pleased with the auctions that we have today.
Great. Thank you very much.
Just to be clear, John it's not affecting PV ours, either since this go through the wholesale line.
Yes, I try not to reach out yet in the retail numbers yet got it. Thank you so much.
Thanks, John .
Your next question comes from the line is arm interesting condition. Your line sorry from Morgan Stanley . Your line is open.
Great. Good morning, Thank you for taking my question.
The the you know that the new days supply came down nicely here to 55 days as you just mentioned how are you thinking about the right levels here, because it's a bit lower than than last year. So.
Thinking about the fourth quarter, you looking to take up inventory or or should we see some seasonality off of that were fourth quarter comes down a bit just any any color there would be helpful.
55 to 65 is usually a good broad target range you can run a little lighter you can run so heavier we certainly always position well in front of holiday selling season. So we always we do centrally managed inventory and we will make sure we had the appropriate amount of inventory for the hotter model line as you know at the blended balance that you want to make.
Sure that even if the averages 55, it's important that you understand what the barbell looks like around demand and so we feel well position that we'll have the right amount of inventory.
Hit a strong.
Holiday selling season at the end of the year, which is typically the seasonally strongest month of the year.
Okay. And then you know you mentioned that you tried to rebalance a little bit as far as units versus a GPU on the new side.
I think last quarter. The conversation was that there was no change of strategy going to the dealerships and Im just curious was there something that change inter quarter that made you.
Bush push more units versus GPU or.
Yes, definitely think of that as broad strategies. The way I think of our strategy is executing a strong core focusing on brand extensions on strategic partnerships and said within each of the individual line.
Keeping in mind now that you're seeing customer set on that line of new versus nearly no. So they might come in thinking they want to new and then we look at broad pricing affordability. They may say, hey, look theres, a three year old lease return in premium luxury looks pretty good today, maybe I'll opt for that and so as we think about the execution between new.
Unit demand without.
Really giving up too much in the way of PVR and I think we struck a decent middle Dallas.
Okay, and then last one here for me.
Mike Mike was always you know forward thinking here when it when it comes to the industry. Carl was excited about the potential of digital.
You know in your current role how do you view the you know the impact or the influence the opportunity so to say from from digital.
It's hugely important and I think you have to think of it does not just an initiative, it's really embedded in retail businesses. These days. So you have to think about.
Our early days of a unfinished express where we had people reserving vehicles on line transparent pricing now you've got on line one price in use and importantly, as we extend the veranda further into customer care the ability to do more digital on it.
Backend in the parts and service part of the business. So I think it's not just one initiative in one place I think it throughout the business and we continue to focus on that in multiple areas.
Great. Thank you.
Thank you.
And again, ladies and gentlemen, if he would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
Your next question comes from the line as David Lynch.
Morningstar Your line is open.
Thanks, Good morning.
Three questions for you guys are for some leasing and particularly around premium luxury are you seeing that getting more expensive for the lux instrument three customer now either due to supply issues or due to the rise of the model three from Tesla.
Yeah, we actually we see strong performance and premium luxury and we've always seen great support from the premium luxury captives with respect to leasing so leasings at a reasonable stayed at 20, 930% of the industry volume and certainly premium luxury always has a heavier lease.
And component then does domestic or imports soon so we feel good about customer relationships in premium luxury and Lisa.
And saying on premium luxury that segment compared to other to its earnings were up six plus 16% much better than the other two can you just talk about what was driving that.
Yeah, some really great product coming out that you had great refreshes Mercedes had any way class the Jie Li CLS BMW three series and they also had a new eight series a and out he was out with the Q3. So if you just look across the board you had some really strong product that helped drive great results in premium luxury.
Okay and I.
I know, it's still October but do you have any thoughts on a 2020 sorry.
We have not yet maybe oracle prediction, but I will say for this year, we do expect 17 million. So when you take a little bit more fleet sales and you add into rate cuts and possibly a third we think that supports a 17 for the year and if you asked us early and here, we probably would have thought it wouldn't have quite made it but now it looks like it's going to.
Okay retro.
Hi, there no further questions last night.
Thanks, So much everyone appreciate our on time today.
This concludes today's conference call. Thank you for participating you may now disconnect.
HM.
[noise].