Napi Gazdaság - An interview with Anthony James Denny, AAA Auto’s CEO

An interview with Anthony James Denny, AAA Auto’s CEO
AAA Auto is able to make a profit despite tough market conditions

Many have criticized AAA Auto for expanding too hastily. Anthony James Denny, AAA Auto’s majority owner and CEO agrees with this criticism adding that the sudden market backdrop was impossible to predict. He believes his company will be able able to make a profit despite the current market conditions. 

Expansion into Russia may be delayed until 2010

- AAA Auto’s shareholders have so far had little reason to be satisfied with their investment as both the company’s financial results and stock price have caused disappointment. What has led to these problems? Have you been expecting such results?
- Let us look back a little in time. I founded AAA Auto 16 years ago based on a special business model which means that unlike other car dealers, we do not work as agents but we buy all the cars first and we buy them on an immediate basis paying for the cars in cash. This model was an instant success in the Czech Republic, our profits were growing year by year so we decided to expand into other countries as well. And our model seemed to work in those countries, too. Last year’s first two quarters were proof of that successful model, we had record-breaking sales and our newly opened branches were profitable from the very first day of operation. So we had ample reason to be optimistic about the second half of 2007. 
Despite delays in the opening of some branches, the third quarter was all right but problems started to appear in the fourth quarter. We had difficulties finding qualified staff for the new branches, especially for those located in the countryside of Hungary and Poland. The most severe problem hit the company in November when sales in our key markets suddenly dropped 20% and this fall continued in December as well, both in volume and in value. 
Just a little time before that, in October, we celebrated with champagne that we broke our monthly record with the sale of 8500 cars. This plunge in sales hit us as a bolt from the blue.
We were starting to look into the roots of the problems and we found that the uncertainties on the global market (especially the soaring oil and petrol prices) made our clients delay their purchases. I have had to face this kind of reaction several times in my career before: first, in Sidney, in 1989 and 1990 which made me move my business into Los Angeles where two successful years followed. Then, in 1992, there was another fall in sales and I realized that uncertain economic conditions tend to make clients delay their used car purchases with 6 to 18 months. I think we see the same happening at present. 
- Has this year-end backdrop hit the other players as well or was AAA Auto the only sufferer?
- There were car dealers whose sales dropped by a higher percent than ours and there were car dealers who suffered worse losses than AAA Auto. Data collected by leasing companies show that the drop in demand for used cars on our key markets was under 10%, in Hungary, the demand was down 5-7%. However, AAA Auto suffered a 10% fall. We receive a lot of – just – criticism for the rapid expansion. But let me ask: who could have seen such a backdrop? And it came right after our IPO which is quite embarrassing for me. If we had foreseen this backdrop, we would have revised our expansion policy putting more focus on our existing branches and the maximization of profits. I have built this company from scratch, I have faith in this company and I saw the IPO as an opportunity to share this success with others. One of the biggest subscribers, for instance, was my family members living in Australia investing more than one million euros in AAA Auto. Can you imagine how all this makes me feel now? But there’s no time for grieving, we have to move on, we have to act.
- So what are your plans for the future?
- I cannot give you future forecasts but I can tell you what we are doing in the current situation. The biggest part of the expansion costs was paid last year and we have reached the necessary economic size. This year will be about consolidation and cutting costs. About intensive cost-cutting. First quarter sales were similar to the last quarter of 2007 implying that the market is still in an uncertain condition. We have taken serious action to cut operational costs and we have achieved the desired result more or less by now. We concentrated primarily on cutting labour costs, including the reduction of the number of company cars by 20% (formerly they numbered 900). We were happy to see that early April brought life back to the market. The only hint I can give about our first quarter results is that our year-on-year sales have risen but the conditions are still very, very tough. 
- Are you expecting the market to return to former levels?
- We apply a conservative approach in this respect assuming that the current 20% backdrop remains steady prompting us to introduce stringent measures in order to restore profitability. My experience from Los Angeles and Sidney tells me these depressions last for 15 to 18 months but I think the crisis in East Europe will end earlier. 
- Do you think profitable operation is possible if the market fails to return to earlier levels?
- Yes, our calculations confirm that we can be profitable despite a 20% fall in sales. Of course, it would be the best if the market revived but we do not expect that to happen until the first quarter of 2009.
- Does a slower expansion mean you postpone your entry on the Russian market?
- Yes, that’s right. But we are lucky as a new act on the trade of used cars without which we cannot start operations in Russia will only enter into force at a later date, meaning we are not missing any opportunities. The earliest date of our entry on the Russian market is the second half of 2009 but it is also possible to be postponed until the first quarter of 2010. 
- How many new branches are you planning to open this year?
- We would like to open 5-6 new branches.
- When are you expecting your profits to return to the pre-IPO levels? Certain analysts do not expect it to happen before 2013.
- I am unable to predict that. But I can tell you that the situation is not as bad as that, our own forecasts show otherwise. Last year was a very busy year: our company was doubled in size, we orchestrated the IPO that wa soon followed by the market backdrop. Many factors combined resulted in the loss, it was like a twister which I doubt to happen once again.
- I am asking the majority owner: do you still have faith in the CEO?
- He had led this company successfully for 16 years, then came a tough – really tough – year. I have faith in the team, in the market and I see profitable years to come for the company.
- Did I hear you correctly: you are planning a profit for this year?
- We have to be profitable as soon as possible…