AutoNation Earnings Call INSIGHTS: Luxury Inventory, Upped Sales Pace Factors
On Thursday, AutoNation Inc (NYSE:AN) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
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New Car Size
Richard Nelson – Stephens, Inc.: The new car size, a unit growth that would be throughout the quarter, do you think that sort of level can be maintained within the third quarter where comparisons would appear to be potentially even easier given the supply constraints a year ago?
Mike Jackson – Chairman and CEO: Yeah. Obviously, I just confirmed that we still believe it will be in the mid-14s, so anywhere from 14,250,000 to 14,750,000, somewhere in there. I think the third quarter is going to be fine. I think the only questionable period or risky period is how the year closes and nothing to do with the automotive recovery or underlying drivers, just simply the election and the fiscal cliffs and all the real drama that will come with that. At the end of the day, I believe there will be a grand bargain, but it could even bake into the beginning of next year and how disruptive that will be to the economy and to business, nobody really knows, but I think we are on the journey back to 16 million units. The only question is the pace with which we get there, but we think it is mid-14 for this year, and really the risk is in the fourth quarter and not the third.
Richard Nelson – Stephens, Inc.: And if you could comment on inventory as it appears that the Japanese imports I believe normalized there. We are hearing about some issues and challenges on the Luxury side and how you see that shaking out?
Mike Jackson – Chairman and CEO: Yeah, Mike Maroone can about it in detail, but I would say, in principle the inventory situation compared to five years ago were in an entirely new world. When something is not selling, the manufacturer stops making it rather than putting on additional shifts. The quality of the inventory as far as its configuration is dramatically higher. Manufacturers are really trying to produce exactly what people would like to buy and the absolute levels of inventory are totally acceptable. But, Mike you can talk about specific manufacturers
Michael E. Maroone – Director, President and COO: Rick, you are correct in calling up Premium Luxury. There is a little bit more pressure in Premium Luxury, but we still have between a 40 and 45-day supply of most products there, we have a 60-day supply in aggregate for our inventory, but there is pressure in certain product lines for certain manufacturers, just for example, BMW certainly has had some production issues with the 3 Series launch, I think those were behind us, and I think you’ll see our inventories build nicely in the fall. And as you know, at the end of the year is really the time to shine in Premium Luxury and I’m confident that we’ll have the inventory to meet the demand, but that’s probably the primary tight spot, there is also some select other gaps, but all-in-all, we’re very pleased with our inventory and are continuing to buy aggressively.
Richard Nelson – Stephens, Inc.: And if I can just ask one more on finance, and I know you called that out as a driver of goods recovery. In terms of looking at prime, the near prime and the subprime, do you think we are back at prerecession levels or do we still have a way to go on the subprime?
Michael J. Short – EVP and CFO: No. I wouldn’t describe this way. I think as far as automotive finance, we’re fully back to ’06 and the availability is just terrific. But what is different of course is using home equity lines as a piggybank, those days are over, and that has nothing to do with auto finance, but it certainly was part of the business that people could use home equity for down payments or even to pay for the entire car, so that game is over. So, I think in the period where sales were depressed, you had a certain savings from individuals in order to make some sort of appropriate down payment and now we’re through that the people have down payment and so the decision point that the consumer is at is a postpone, replacing a car that’s now very old, they postponed a lot of maintenance work. They have saved some money, so did they spend money fixing this old clunker or do they do something and its very positive constructive conversation on the showroom floor whether it’s just going from a very old car to something that’s newer or brand-new car and then you have exciting products and a great financing is the combination that’s driving the business.
Upped Sales Pace Factors
John Murphy – Bank of America Merrill Lynch: First question, your sales pace increased on the new vehicle side, it was really basically doubled the industry in the quarter, I was just trying to understand is that a function of geography and brands or is there something else going on at AutoNation where you’re able to really take some market share from your competing dealers?
Mike Jackson – Chairman and CEO: There are three factors there, John, I would say the first and most important factor is the brand mix, so we were overly impacted by the situation with the Japanese last year. In that, 50% of our unit volume is with a Japanese brand and so therefore this year of course, relative to the industry, we’ll outperform with the recovery of the Japanese, we were up 44% with the Japanese. We were also disproportionately impacted with our geographic mix. We were ground zero for the housing meltdown in our big states, Florida, California, Arizona and Nevada. What we now see is that housing has stabilized in those markets and there are the first indications of a housing recovery and we had excellent performance in those markets this past quarter. Finally we are indeed taking share and Mr. Maroone can talk about the drivers of that.
Michael E. Maroone – Director, President and COO: John, we’ve been very aggressive this year. We’ve been aggressive buying inventory, we’ve been aggressive marketing and we’re really pleased with our performance. We thought we had an opportunity and I think it goes back to what Mike Jackson’s objectives were when we entered the downturn, and that’s going to come out as a stronger company. So he and our Board allowed us to continue to invest in acquiring talent, we invested in facilities, we invested in IT and of course continue to invest in process and I think it paid off for us very nicely.
Michael J. Short – EVP and CFO: So, if I was to rate those for you John, just back at the end envelope, I would say it’s 50% to Japanese situation, then the geography is probably another 30% and taking market share is probably 20%.
John Murphy – Bank of America Merrill Lynch: Then a second question, just on the parts and service business because it appears to be sort of reaccelerating here. I think, last quarter you were up about 4% same-store, this quarter you’re up about 5%, there’s been a fear that UIOs have declined, yet you seem to be trumping that quite handily. We’ve also heard a lot of noise about some weakness in the aftermarket in General from some of the retailers and even the tire companies. So, just curious, what you are seeing in your parts and service space, what’s going on there, what the consumers are coming in for and what kind of efforts that you are putting forth to really outpace what appears to be a weak aftermarket in General?
Mike Jackson – Chairman and CEO: I’ll start. This is Mike Jackson again. Starting with the big picture, no question (today, tonight) a decline in units and operation has been a headwind for our customer care business for the last several years, and we can really feel that we are at the trough at the moment and the rate of decline has slowed significantly, and you can feel it bottoming out. And we are certain that a headwind will become a tailwind going into next year. Like anything in life when we face this difficult headwind, we redoubled our efforts and focused on customer care, and we are determined to come out of this tumultuous period stronger than we went into it, and that included structural changes here with our organization, creating a separate division for customer care with a singular focus with an executive to lead that effort, with Alan McLaren joining us from Mercedes-Benz. And Mike, you can talk about some of the specific initiatives we have underway.
Michael E. Maroone – Director, President and COO: There is a lot that’s going on, John. I’ll call out a few. One is, we’ve made some real investments in collision and are really seeing a nice growth in the collision business. We’ve consolidated some parts wholesale opportunities and finding ways to use our size and scale, and lastly on our tire business which is up about 25%, we’ve got very effective and efficient tire operations in every single store, which we were just developing a year ago and I think there’s a nice payoff but there’s a real retail focus here as Mike said, we’ve add some real talent in the organization and we’re really pleased and we’re growing 5% at a time, we’re hitting the bottom of the UIO cycle, which we expect to begin to increase at the end of this year and into ’13. So, we’re very optimistic about our efforts and we’ll continue to look for ways to invest in our capabilities.
John Murphy – Bank of America Merrill Lynch: Then, just lastly on SG&A, you guys continue to surprise on the positive side there and we sort of used to, as a rough rule of thumb historically think about SG&A as about half fixed and half variable. Are we at the point where you’ve cut real deep here, are you going to get much better leverage and we should think about maybe three quarters fixed, and one quarter variable? I’m just trying to ballpark this, because you do continue to surprise to the upside there?
Mike Jackson – Chairman and CEO: Yes John, again Mike Jackson to make a basic statement. We really view it as a productivity drive. We’re not trying to cut or squeeze. We really want to put in place a system of productivity that we can attract talent and the talent that’s with us can really be successful both with their career and with their earning capacity and that leads to great morale in the Company, and we have achieved that. So, that’s a great place to be and we have our associates today, who are, the whole culture is how do we do it smarter, better, faster next year than we did it the year before and how do we find, I call a win-win or win-win-win, win for the customer, win for the associate and win for the Company. That’s a very different approach than a pure cost-cutting approach and it’s difficult to predict exactly when all that falls through, but the trend line is absolutely in the right direction, and Mr. Short, why don’t you add something?
Michael J. Short – EVP and CFO: Sure. John, we’ve been focusing on this productivity theme for many, many years with the investments in the shared service center. We are almost complete with the extended model, we will be completed before the end of the year with the Florida region, which is the last region to go in and that has allowed us to take some of our costs and make them more fixed, adding lower cost structure and to my point, it is much a focus on how do we get our business to generate growth as it is to how do we get our business to operate at a lower cost level. I think just in terms of main themes on SG&A, we know that we’ve operated below 70% of gross profit in the past and it’s been our target to get there so we’re very gratified to see the organization at that level or essentially meeting that 70% threshold right now and we think that there is room to go beyond that. In terms of how do you think about the cost structure going forward, 50% fixed, 50% variables is fairly close and our goal is to continue to deliver about 50% of the increase in gross profit as it follow through to the bottom-line, so we continue to focus on that and I think if you go back over time, you’ll see that we can just only execute at that level, so we’re very pleased with contribution from all the associates against that productivity initiatives.
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