Seeking Alpha
Profile| Send Message|
( followers)  

Clearly the real opportunity going forward is to integrate and leverage our Ford assets around the world. And we've made a significant investment in all the PAG brands. And they are on a real positive profitable growth plans. And it just was clear to us that this is a good time to review our portfolio and decide the best thing for all of our brands going forward.

And of course as you pointed out. It's also very important for us, as we are leveraging the company, to, you know, work on improving the balance sheet going forward too. So it's all related. But it's really driven by what is the best thing we can do for long-term value creation starting with the Ford brand and integrating it. And doing the best thing for everybody associated with the other brands.

Source: Alan Mulally, CEO, Ford Motor Company Q2 earnings call, July 26, 2007. Response to question from JP Morgan analyst Himanshu Patel about Ford's (NYSE:F) decision to put Volvo (VOLV) under strategic review

Below are the 2007 U.S. light vehicle sales and inventory levels by month (including my estimates for the rest of the year).

Month Light vehicle sales % Chg from prior year % of my 2007 vehicle sales estimate Dealer inventories % Chg from prior year Inventory as % of my 2007 vehicle sales estimate
January 1,086,273 -4.7% 6.8% 3,507,300 -2.8% 21.9%
February 1,249,095 -0.6% 7.8% 3,567,300 -3.7% 22.3%
March 1,534,021 +0.6% 9.6% 3,571,900 -9.4% 22.3%
1Q07 3,869,389 -1.4% 24.2% 3,548,833 -5.4% 22.2%
April 1,331,433 -7.8% 8.3% 3,534,000 -7.0% 22.1%
May 1,555,947 +4.8% 9.7% 3,391,300 -10.4% 21.2%
June 1,450,199 -3.1% 9.1% 3,428,700 -10.7% 21.4%
2Q07 4,337,579 -2.0% 27.1% 3,451,333 -9.4% 21.6%
July 1,304,150 -12.4% 8.2% 3,012,067 -9.0% 18.8%
August 1,492,915 +0.7% 9.3% 3,008,439 -7.2% 18.8%
September 1,358,832 +0.7% 8.5% 2,868,310 -12.7% 17.9%
3Q07E 4,155,898 -3.9% 26.0% 2,962,939 -9.7% 18.5%
October 1,220,247 +0.6% 7.6% 2,873,291 -15.5% 18.0%
November 1,201,457 +0.6% 7.5% 3,243,665 -7.7% 20.3%
December 1,210,747 -15.0% 7.6% 3,108,225 -11.0% 19.4%
4Q07E 3,632,452 -5.2% 22.7% 3,075,060 -11.4% 19.2%
2007E 15,995,317 -3.1%        

Source: BEA, Ward's Auto, Automotive News, efficient insights llc

What I said April 4, 2007

"However, experience can be a dangerous thing (as you can miss real shifts that happen in the industry environment).  This is the first time I have ever seen the automakers make real strides in reducing their fleet mix.  It almost suggests that the employee buyouts at Ford and GM (NYSE:GM) (that reduced their hourly workforce by roughly a third since last year) have really lowered "manned capacity" and therefore it is no longer "cheaper" to pay consumers and dealers to keep the plants cranking. 

Maybe the domestic automakers are finally at a point where it becomes cheaper to run lower production schedules?  If this is the case (where the manufacturers' find it less important to pay consumers and dealers to keep their plants cranking), I think things will get even more difficult for dealers when the summer approaches.  And if the AutoNews article is even remotely close about half of all dealers in January losing money (granted it is a seasonally slow month), we may very well see some pretty dramatic shifts in acquisition multiples as the incentive to exit the market increases.  Unlike several years ago when dealers were saying "this will pass," I suspect a downturn this summer (after more than half a decade of eroding dealer profitability) might finally compel a bunch to sell or maybe even simply close their doors (if they can get out of the lease). 

So if we see pretty good results out of the public (and private) dealers this summer, it will be the "cycle" that I have come to know, observe and constantly discuss ("tug of war") for the last six or seven years. 

But if things don't improve out of the public and private dealers this summer.  Remember that "massive consolidation wave" I have been saying is likely to occur in U.S. auto retail sometime in the next five years?  Watch out, because this summer may push the industry into this "rationalization period" in 2008/2009.  So fasten your seat belts.  This may prove to be the most interesting (and telling) six months (to observe) in auto retail yet!"

Source: the Auto Retail Informer, April 4, 2007

Is the point of rationalization upon us?

Here is an interesting statistic.  How many times between September 2001 (after the terrorist attacks and the 0% financing offers were introduced) and September 2005 did vehicle sales and dealer inventories fall (on a year over year basis) in the same month? 

The answer: only 8 times. 

Seriously, over a 48 month period of time, less than 2 times out of 10 (16.7%) did sales and dealer inventories decline.  And it is not like there was a "lag effect." 

Generally what happened is that manufacturers came in and bailed out dealers with higher incentives that stimulated demand in the market place. 

People might think that I am off my rocker for dismissing the idea that housing and gas prices are impacting vehicle sales.  And in all fairness, I should point out that very respected industry analysts like Paul Ballew (General Motors director of global market and industry analysis) attribute the soft vehicle sales to the headwinds from housing and gas prices.  

But I thought people were off their rockers not thinking something was seriously wrong with the auto industry producing still near record vehicle sales after the economy slowed down in 2002.

Well, not initially.  But as I looked back, I kept saying, look, between 1986 to 1991 U.S. light vehicle sales fell 25% from peak to trough as sales slowed.  Up until last year, however, vehicle sales did not deviate by more than 2% from 17 million units.  "Something is wrong" I would write.

Yet (despite these record sales) industry-wide dealer pre-tax profit margins compressed (according to NADA data) to now a decade low of around 1.5%. 

I am sure that less equity in someone's house hurts their ability to buy a new vehicle.  And higher gas prices hurt their ability to buy a truck versus a car. 

But I think the rise in unemployment that occurred after 9/11 should have hurt a consumer's ability to buy a car (not to mention fears of going to war with Iraq), and yet they scooped up 16.8 million light vehicles in 2002.

Now ask me how many months dealer inventories have declined on a year over year basis since September 2005.  Are you ready?

The answer: 16 (out of 20 months).  And 13 of the months (over the last 20) saw sales declines. 

The point I am simply making is that for the first time in nearly a decade, you are seeing sales and inventories decline at the same time.  Take for example the following comments from the Ford sales call yesterday:

"The stocks at the end of July, an indication, by the way, of continuing progress to manage our production, our incentive spending, and also the inventory levels.  Because if your inventory levels become whether surpluses, excess levels of inventory, that will lead inevitably to higher levels of discounts to clear them. 

So one of the ways we have been able to maintain a consistent level of spending each month throughout this year is to manage our production and inventories.  And the result is that at the end of July we had 496,000 cars and trucks in inventory. . . Compared with a year ago, we had 674,000 units (cars and trucks), in inventory at the end of July.  Our inventory is 178,000 units lower. 

So very important part of the plan.  And progress toward the plan.  As we attempt to become a profitable company in North America with lower volume that we had historically in a changed product mix."    

Source: George Pipas, Head of Sales Analysis, Ford Motor Company, August 1, 2007

I don't know how long the manufacturers can hold out at these lower production levels. 

"Legitimately, the industry is complicating things for us as well as other manufacturers.  We are seeing competitive activity intense in some categories of the business. In part because of what we are seeing in the weakness of underlying demand." 

Source: Paul Ballew, General Motors director of global market and industry analysis

But so far this seems specific to trucks.  Overall, the general trend appears to be for favorable net pricing, which may suggest that the employee buyouts that took place over the last 12-months at Ford and GM may finally be allowing them to let demand fall to its natural curve. 

"The pace of sales I just mentioned happened, when according to JD Powers and some other experts out there, the addition to incentive spending diminished considerably.  So that softer sales pace was consistent with outside reports of a slower pace of incentive spending." 

Source: Ellen Hughes Cromwick, Ford Chief Economist.  August 1, 2007

And if it persists, I think it will put greater pressure on dealers.  Because I don't think a 22,000 dealerships are sized for a 16 (or less) U.S. light vehicle market.  And therefore a number of them are unlikely to survive the downturn. 

But here is the upside.  As the industry comes through the slowdown, I think we are going to end up with a better auto retail world.  A world where sales people don't have to sit around for 2 - 3 days before making a sale (because there are more customers going to fewer dealers). 

A world where customers can enjoy the car shopping experience more because supply is matched up better with demand, reducing the need to "push" product and even allowing for real internet transactions.  And in its place is a dealership that helps the manufacturer adapt to the individual needs of each customer by customizing "base" vehicles on the spot in the service center.

I know this world seems a million light years away.  And I admit it is idealistic.  But the main thing to understand is that the auto retailers that survive it, just like the large auto retailers in the United Kingdom that survived the block exemptions, are likely to garner a serious share of the market and generate attractive returns for shareholders/owners along the way.

 

Interesting quotes (Group 1 (NYSE:GPI), Sonic (NYSE:SAH), Penske (NYSE:PAG)

"Although market conditions were challenging in the quarter, we did see significant cost adjustments, which offset a large degree of the new and used vehicle gross profit pressure. . . We're beginning to see results from the strategic operating initiatives we have been implementing in our used, parts and service, and finance & insurance business.  We believe these initiatives are making the fundamental processes of the company stronger and better able to weather these challenging times."

Source: Earl Hesterberg, CEO, Group 1 Automotive, 2Q07 earnings call (July 31, 2007).

Why is this important?

In this environment, I think the focus has to be on constantly improving the competitiveness of the business.  Along those lines. . .

Could you comment on compensation?

Source: Rich Kwas, Wachovia

"Yeah, that's one of the biggest challenges that we have Rich.  If you look at the way we have done a reasonable job of mitigating this gross profit reduction from sales and margin pressure.  Is we have gone pretty far toward sizing our business to this level of activity.  We've done it pretty well with inventory, if you take the GM blip out from June.

We've got our advertising pretty well in line. 

But I don't think we quite have our personnel expense in line with where it needs to be with this level of activity.  And that is somewhat intentional.  Because we do need to go a little slower on the  human side of this.  Whether it is staffing levels.  Or performance related pay plans.  Or asking people to do more to try to get our productivity up.

 

And we've got some more work to do there and that's intentional because we try to be careful about our people. They are our biggest asset.  They are also the majority of our cost.  But a lot of our intellectual capital is with our people.  So that's a judgement call.  And we've got some more work to get done there. But we want to be careful how we do it."

 Source: Earl Hesterberg, 2Q07 earnings call (July 31, 2007).

Sonic Automotive

"Sonic has never had a more aligned and talented group of associates who are dedicated to delivering results."  

Source: Scott Smith, President, Chief Strategic Officer, Sonic Automotive.  Q2 conference call.  July 31, 2007

Why is this important?

The company has had some turnover as of late, so that always makes you worry.   But I'm pretty encouraged with management's ability to execute through the transition.    

Also,

"As you may know we are putting together in place the technology for centralized management of our used vehicle inventory.  And to assist our appraisal and pricing processes.  Over time this technology will bring us more sophisticated big box retail capability.  And dramatically change the way we market used vehicles."

Source: David Cosper, Vice Chairman, CFO, Sonic Automotive

Why is this important?

I think a centralized used vehicle management system is going to become critical in the coming years.  Especially if and when customers become more comfortable buying used vehicles over the internet. 

Importantly, a centralized system can afford a significant competitive (product offering) advantage as each Sonic store (in theory) then has access to all of the company's other stores inventory (a big competitive advantage CarMax enjoys today).  

Penske Automotive Group

"We're not sure today the traditional tv, radio , etc. newspaper advertising is the way you want to go long term.  Because if you use Smart as an indicator.  We have not run an ad yet.  We haven't run a radio commercial.  It's all been internet based.  Internet connection.  So I think we're going to get the benefit as the manufacturers continue to move more of their advertising to the internet.  Those leads that they get, then they're going to pass through to the dealer in a particular area where you have the zipcode.  That I think that's going to make a huge difference for us as we have scale in many of these markets. 

Also, when you look at the Smart customer, we asked them on the road show how do you want to be contacted?  And 62% of them said we want you to contact us by email.  So this email capture, the internet, CRM systems, I think that's what's going to drive our SG&A down as we get more efficient.  Because I can send an email blast out on a service special and get overnight response and it hasn't cost me a nickel.  So it's very efficient.  So I think that will be a big driver for us."

Source: Roger Penske, Chairman, Penske Automotive Group, July 31, 2007 

Source: July 2007 Light Vehicle Sales: Is the Point of Rationalization Upon Us?