This is a summary of the third quarter fiscal 2008 earnings call conducted by AutoNation, Inc. (AN) on November 6, 2008.
Management:
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Vice President, Investor Relations: John M. Zimmerman
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Chairman of the Board, CEO: Mike J. Jackson
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Chief Financial Officer, Executive VP: Michael J. Short
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President, COO, Director: Michael E. Maroone
Key Investor Issues:
- The automotive retailer lost $1.41 billion, or $7.99 per share, compared with a profit of $72.1 million, or 37 cents per share, a year ago.
- Revenue fell 21% to $3.5 billion from $4.5 billion a year earlier.
- Industry wide new vehicle sales declined 31%, while AutoNation''s fell 24%, according to CNW Research.
- The domestic segment income was $23 million vs. $54 million in the year-ago period, with a 36% drop in new vehicle sales.
- Imports declined to $53 million, from $69 million last year, with an 18% drop in new vehicle sales.
Third Quarter Highlights:
AutoNation reported a third quarter net loss from continuing operations of $1.4 billion or $7.95 per share. In the quarter the company recorded noncash charges for goodwill and franchise impairment of $1.46 billion after tax. Despite these charges AutoNation remains in compliance with its debt covenants. After adjusting for the impairment charges and certain other items, net income from continuing operations for the 2008 third quarter was $44 million or $0.25 per share compared to $73 million or $0.37 per share in the prior year.
In the third quarter total US industry new vehicle retail sales declined 31% based on CNW research data.
In comparison, in the third quarter AutoNation’s new vehicle unit sales declined 24%. This performance relative to the US retail total is attributable to a combination of increased market share as well as the benefit of the geographic and brand mix relative to the total market.
In the third quarter the US economy moved deeper into recession as the credit crisis escalated to a credit panic in September as credit freeze ensued which broke consumer confidence which has been under pressure throughout the year. The industry saw a decline in floor traffic at automotive showrooms and for those customers who were in the showrooms credit availability was very tight.
The recent total cuts of 100 basis points by the Federal Reserve is a sign that all tools are being used to get the US economy back on track. LIBOR spreads continue to narrow which has been the case for the last 18 days.
The recent decline in gasoline prices is another sign of positive news for the consumer. Once the housing market stabilizes and credit becomes available, AutoNation expects to see increased signs of stabilization in the US economy.
In continuing response to the ongoing macroeconomic and industry challenges AutoNation announced in the second quarter earnings release a cost reduction plan with a targeted annualized run rate of $100 million and the company is on track with the previously-announced cost reduction efforts. AutoNation continues to look at future cost cutting opportunities beyond the $100 million.
The company has shifted its capital allocation strategy from share repurchase to debt reduction.
So far this year AutoNation has repaid $589 million of combined non-vehicle debt and floor plan debt. This was made possible by strong operating cash flow including a significant contribution from working capital improvements. Going forward the company has targeted an additional $500 million of total debt reduction.
Prior to the third quarter of 2008 the company operated as a single operating segment. During the third quarter of 2008 in response to changes in the automotive retail market including the disproportionate decline in revenue and earnings from the domestic franchises relative to the import and premium luxury franchises, AutoNation made changes to the management approach and divided the business into three operating and reportable segments: domestic, import and premium luxury.
Beginning in the third quarter resources are allocated and performances assessed based on financial information from each of these segments.
AutoNation continues to generate strong cash flow in this challenging market despite the current and possibly ongoing levels of depressed vehicle sales.
AutoNation recorded charges for goodwill and franchise impairments of $1.75 billion before taxes or $1.46 billion on an after-tax basis. These charges resulted from accounting requirements to assess goodwill and franchise rights for impairments as a result of adverse market conditions and the decline in the stock price. The goodwill charge is an estimate which the company will finalize in the fourth quarter with any adjustments reflected in fourth quarter results.
AutoNation tested goodwill at both the single reporting unit level and on its new segment structure.
As a result of the testing the $2.75 billion in goodwill AutoNation started with was reduced to $1.15 billion with approximately 15% of that amount allocated to the domestic unit. Future testing of goodwill will be conducted on a segment-by-segment basis.
