AutoNation Inc (AN) 2010 Q2 法說會逐字稿

Thank you for standing by and welcome to AutoNation's second quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, may begin.

Good morning, everyone, and welcome to AutoNation's second quarter 2010 conference call. Leading our call today will be Mike Jackson, our Chairman and CEO-- Mike Maroone, our President and Chief Operating Operator-- and Mike Short, our Chief Financial Officer. Following their remarks we will open up the call for questions. I will also be available by phone following the call, to address any additional questions you may have.

Before we begin, let me read our brief statement regarding forward-looking comments, and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause actual results to differ materially from those expressed or implied. Additional discussions of factors that could cause actual results to differ materially are contained in our SEC filings. Certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. Reconciliations are provided in our press release which is available on our website at www.AutoNation.com. And now I would like to turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning, thank you for joining us. Today we reported second quarter adjusted EPS from continuing operations of $0.38, a 36% increase compared to adjusted EPS from continuing operations of $0.28 in the prior year. On a GAAP basis, we reported EPS of $0.31 ,compared to $0.30 a year ago. Second quarter, 2010 revenue totaled $3.1 billion compared to $2.6 billion in the year-ago period, an increase of 20%, and we had increases in all of our revenue categories. In the second quarter total US industry new vehicle retail unit sales increased 12%, based on CNW research data. In comparison, during the same period, AutoNation's new vehicle unit sales increased 20%.

The key to our top line growth is driving operational excellence through the use of leading technology and processes, combined with inventory optimization. Combining with our best-in-class disciplined cost structure, we will continue to drive our industry leading margins. We believe we have a compelling opportunity to create significant value for our shareholders over the next several years, as the industry recovers. We have made a major investment of over a $500 million in our company through stock repurchases, together with the acquisitions that we announced, and our continued reinvestment in our existing stores, reflecting our confidence in AutoNation's financial and operating strength, and the long-term prospects in the auto industry. The combination of these drivers present a significant long-term growth and value creation opportunity. With that, now I'd like to turn it over to our Chief Financial Officer, Mike Short.

Thank you, Mike, and good morning, ladies and gentlemen. Let's turn to our financial results for the second quarter. We reported adjusted net income from continuing operations of $62 million, or $0.38 per share, versus $50.2 million, or $0.28 per share during the second quarter of 2009. Our second quarter results for this year exclude $12.1 million, or $0.07 per share, of expenses related to debt refinancing costs, and the write-off of certain prior deal costs, following the refinancing transaction we completed in April. Our second quarter prior year results exclude a net gain on asset sales of $3.7 million, or $0.02 per share. Adjustments to net income are included in the reconciliations provided in our press release.

Compared to last year, revenue increased $512 million, or 20%, and gross profit improved by $57 million, or 12%. SG&A increased 6% as variable expenses, such as sales commissions, increased in line with higher sales volume, and gross profit. And we continued to leverage our fixed cost structure. SG&A was 72.5% of gross profit, a reduction of 390 basis points year-over-year, and down 110 basis points sequentially from the first quarter of 2010, reflecting our continued effective management of our cost structure.

Net new vehicle floor plan was a benefit of $4.7 million in the quarter, an improvement of $2.5 million from the second quarter of last year. Non-vehicle interest expense was $14.7 million for the quarter, up from the $10.5 million we reported last year due to our refinancing which closed in April. The refinancing increased our percentage of fixed rate debt, and increased our pricing under our revolver in our term loan facilities, from LIBOR plus 87.5 basis points, to LIBOR plus 225 basis points. Additionally during the quarter, we borrowed $195 million under our revolving credit facility.

Our second quarter non-vehicle debt balance was $1.367 billion, an increase of $234 million compared to the second quarter of last year, and an increase of $257 million compared to the first quarter of 2010. LIBOR rates were relatively flat compared with the second quarter of 2009. The provision for income tax in the quarter was $31.9 million, or 39%.

I'd like to spend a moment discussing our recent share repurchase activity. We remain bullish on the long-term prospects in the auto industry, and during the second quarter we repurchased 21 million shares, for $414 million at an average price of $19.83 per share. We ended Q2 with 149.3 million shares outstanding, down from the 169.9 million we reported at the end of Q1. We currently have 146.4 million shares outstanding, and our Board has authorized an additional $250 million for future share repurchases.

Capital expenditures for the quarter were $26.2 million, and our CapEx for the year remains at $150 million. We remain within the limits of our financial covenants, with a leverage ratio of 2.66 times at the end of the quarter. Our indebtedness number in this calculation is not on a net debt basis. If we had applied the cash on our balance sheet plus the cash available from our used inventory flooring, to reduce our debt, we would have lowered the ratio to below 2.4 times, compared to our limit of 3.25 times. As our EBITDA grows during the recovery, we will generate additional investable funds over time. We have the strongest balance sheet in our segment, and have always prudently managed our covenants, and will continue to do so going forward.

Our capitalization ratio measures floor plan debt, plus non-vehicle debt, divided by total book capitalization. Floor plan debt was $1.488 billion at quarter end, up $61 million from March 31, 2010. As of June 30, the capitalization rate was 45.1%, well within the covenant requirement of 60%. As a result of our April refinancing, the capitalization ratio now eliminates the impact of any goodwill, franchise rights, and property impairments subsequent to January 2007.

Our quarter end cash balance was $101.6 million which, combined with our additional borrowing capacity, resulted in a healthy total liquidity of $486 million at the end of June. As we discussed on last quarter's call, during the second quarter we closed on our refinancing of the Company's capital structure. These refinancing transactions extended our debt maturities, increased our available liquidity, and lowered our exposure to interest rate increases in the future, and provided us with additional flexibility to manage our business and optimize our capital allocation.

During the second quarter, $20 million before tax was expensed, related to our refinancing transactions, including $4 million for the writeoff of certain unamortized debt issuance costs associated with our old notes, and our prior credit agreement. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning. Compared to the period a year ago, AutoNation delivered impressive 20% growth in new and used unit volume, and a strong operating margin of 4%. We are very pleased with this performance given the difficult economy. The key drivers of our solid performance remain, disciplined inventory and cost management, and focus on our best practices that are in place to delight customers and deliver results. Our goal is to outperform the market as the economy recovers, and we are doing just that. With a more aggressive operating risk profile, our inventory is in great shape, and our sales efforts are growing volume profitably. Higher gross coupled with flat head count year-over-year has also led to higher productivity, and strong rewards for our valued associates.

Turning to detailed results, I'll begin with our segment performance. At $116 million, our total segment income increased $25 million, or 27% compared to the quarter a year ago, with the domestic segment being the largest contributor. All segments benefited from volume growth, and increased revenue per vehicle. As I continue, my comments will be on a same store basis unless noted otherwise. I'll begin with new vehicles, where according to CNW research the industry grew 12% in the quarter at retail, compared to AutoNation at plus 20% year-over-year for total stores with 52,000 new vehicles sold. Domestic volume increased 30%, followed by imports up 16%, and premium luxury up 15%.

Looking at key states, we had year-over-year unit increases on a total store basis of 25% in California, and 21% in both Florida and Texas. By vehicle type, full sized pickup trucks grew 39% year-over-year, cars grew 17%, and other light trucks including CUVs grew 16%. Same-store revenue per new vehicle retailed was $32,000, an increase of $1200, or 4% compared to the period a year ago. This demand for full size pickups grew as did vehicle content.

Gross profit per new vehicle retailed increased $107, or 5%, to $2,096 per vehicle. With 37,600 units inventory, new vehicle day supply at June 30 was 55 days, compared to 53 days a year ago, and 51 days at March 31. On the used side we retailed 40,000 used vehicles, a strong increase of 19% compared to a year ago, and a solid used to new ratio of 0.78. Revenue per used vehicle re tailed was $17,400, up $1100, or 7%, as supply of used vehicles remain tight.

Other contributing factors were a slight shift in mix toward premium luxury, and our certified preowned mix increasing to one-third of our used sales in the quarter, compared to 30% a year ago. At $1624 gross profit per used vehicle retailed was off $42, compared to the period a year ago, the decline was offset by continued growth of F&I PDR unused vehicles. In the quarter we noted a 27% increase in appraisals, and a 35% increase in trade-in acquired, compared to the period a year ago with nearly a 50% close ratio on potential trade-ins appraised, compared to 45% a year ago.

At June 30 our used vehicle day supply was 45 days. At $541 million, same-store revenue per parts, service and collision increased 2% compared to a year ago, while gross profit improved 1%, to $237 million. Customer pay revenue was essentially flat year-over-year and up 1% when adjusted for selling days, compared to the first quarter. We continue to work on strengthening this area of our business through service marketing initiatives. In the quarter, a 7% decline in warranty revenue was more than offset by a volume driven 21% increase in internal and sublet. Training is in progress for our customer facing service associates, that centers on proper handling of phone calls, as well as appointment setting and preparation, all in an effort to drive more customer traffic, enhance the customer experience and improve sales and service retention. In addition, we continue to actively sell prepaid maintenance programs as a retention tool.

Turning to finance and insurance gross profit per vehicle retailed of $1137 was off $12 from the period a year ago, I'll note that in the period a year ago we had a gross profit benefit of $67 per vehicle retailed from a favorable chargeback reserve adjustment due to reduced exposure. Excluding that, our gross profit per vehicle retailed this quarter grew by $55, reflecting a strong performance from our F&I team. Our preferred lender network, OEM service contract alliances, strong product penetration, and store level execution continue to drive growth in this area. In addition, increasing volume resulted in lower F&I chargebacks as a percent of gross profit.

The credit environment was favorable compared to a year ago. We noted an increase in approval rates by the majority of captives, as well as the majority of our preferred bank lenders for all customer segments, prime, near prime and subprime. However, the subprime segment, while improving, remains challenging. At June 30 our store portfolio was unchanged from Q1 with 204 stores, and 249 franchises in 15 states. We are extremely pleased to have entered into an agreement to have acquired Mall of Georgia Toyota, and Mall of Georgia Hyundai, in the Atlanta market. This is in addition to the acquisition of a Hyundai store in Seattle earlier this month. Together, the three stores represent an annual revenue run rate of nearly $200 million.

Our corporate development team continues to aggressively pursue acquisition opportunities that meet our market and brand criteria, as well as our return on investment objectives. We are committed to outperforming the market as the economy recovers. In the quarter we achieved pure group leading operating margin of 4%, and high levels of customer satisfaction for both sales and service.

Looking ahead we are enthusiastic about the recovery underway. We remain focused on continuous improvement, holding our low cost position, and advancing our capabilities. I'd like to take a moment to thank all AutoNation associates for their contributions to an excellent quarter, and with that I'll turn the call back to Mike Jackson.

Thank you, Mike. I continue to be optimistic about the long-term recovery of the auto retail sector, and AutoNation's ability to outperform the industry. For year to date through June new vehicle retail says at AutoNation are up 19%, and the industry, according to CNW, is up 10%. As we look forward we believe the gradual improvement in new vehicle sales will continue. We expect third quarter 2010 new vehicle industry sales will be over 11.5 million and will surpass the third quarter 2009 new vehicle sales, even though the prior year included the highly successful Cash For Clunkers program.

We believe the fourth quarter will exceed 12 million. We still believe for full year 2010 industry new vehicle unit sales will be in the range of 11.5 million units. We continue to see a solid automotive recovery going forward. With that, I'll throw it open to questions.

(Operator instructions). The first question is coming from Ravi Shankar, Morgan Stanley. Your line is open.

Thanks very much. Can you give us a little more color on sales by geography, especially in California and Florida. I think the last quarter you were pretty optimistic on what you were seeing in Florida, looks like that may be continuing through the quarter, and in California as well?

Ravi, it's Mike Maroone, our revenue in Florida for the quarter was up 26%, our new units were up 21%, so we continued to see solid progress in Florida. California revenue was up 26%, units were up 25%, and we've also begun to see some level of recovery in Arizona and Nevada that are not up to that same level but still are progressing nicely, and the other market that I'll call out is our Texas market, which didn't fall anywhere near as much as the two coastal markets, but Texas was up 23% in revenue, and 21% in units.

And this is not just easy comps, right? I mean you're actually seeing a structured improvement in customer traffic and mix in these regions?

Yes, our customer traffic is up, but not as much as our sales. We really credit a lot of it to the recovery in credit. The retail credit is much more normal, and it's really helped, so I think the demand was there, but the credit was not. Today we've got demand and credit, and we believe are well underway to recovery in those difficult markets.

Got it. And where do you think the inventory situation is like on the ground right now? I mean, we have been speaking with some dealers who are pretty concerned about how tight inventory is. Do you think the industry is losing sales because of low levels of supply right now?

I don't believe the industry is losing sales. I think the inventories are a bit tighter. I think it's good. You see, we have got a large floor plan credit that Mike Short called out, but there is available inventory. There's always some shortage in some segments. We are encouraged by the fact that it's been reported that production will be up in both the third and the fourth quarter, which we think fits in nicely with the recovery that Mike Jackson has called out.

And ideally you would want to be at what, 60, 65 days supply?

I think if you -- weighted average would be somewhere in the neighborhood of 55 to 60, so we are at 55 right now. And again, there's some spot shortages but all in all very happy with our inventory. We are down to about 100 2009 models, which is the best shape we have been in, in over 10 years.

All right. And last question, you had said the subprime still remains challenging. Where do you see that segment going in the near term? Do you see any encouraging trends, and what percentage of your sales are subprime right now?

We would guess our subprime, it varies tremendously by region, but if -- in aggregate, I would say it's about 15% of our sales. I think that we are seeing some progress in the sub prime segment. We've got a call out this morning's announcement of GM acquiring AmeriCredit, which we think is a very smart move. There's a lot of people that have distressed credit due to what's happened the last couple of years, so we think that market is going to get bigger, and we are happy to see GM doing this deal with AmeriCredit. We think it is strategically the right move, and we are optimistic about the recovery in subprime.

Very good. Thank you very much.

Our next question is coming from John Murphy, Bank of America Merrill Lynch, your line is open.

Good morning, guys.

Good morning, John.

You've been real tenacious on the cost side, and the SG&A performance in the quarter recently has really been quite good. Just wondering, is there anything else that you can do or have you done everything -- I mean it's impressive to date but is there anything else you can do internally, or are you at your low level in cost cutting, and you're now just waiting, and trying to ride this out, which you're doing a good job. But for sales to really recover to get the real leverage off the SG&A cost cuts that you've done? You've executed?

John, I would say a couple of things. First, thank you for that and that's, our hats to the management team are off to all of our associates, who are really responsible for helping us manage this on a day-to-day basis. In terms of how we think about SG&A, when you look at our cost structure, approximately 50% of our SG&A is what would be classified as variable and, again, these definitions of variable and fixed are not as clean as the words might imply, but those verifiable costs we see as generally rising with our overall sales pace and gross profit improvement but, again, as Mike Maroone pointed out, we are focused on productivity measurements, and so we expect there's some opportunities to improve even in that rate going forward.

The balance of our costs, the other 50% are fixed, and fixed costs have some inflationary type pressures on them. You can imagine that in some of our geographies, states, and local municipalities are trying to generate some revenues and whether that comes in the form of property tax increases, those types of things are -- would normally generate a slight increase in those fixed costs which we work very hard with our productivity initiatives, to try and improve. I think as you think about what our initiatives are going forward, I would bucket them into three general categories, one is productivity improvements that would help us mitigate any changes in the rate of increase in our verifiable costs and, secondly, I think within the -- our fixed cost structure, we were very focused on trying to leverage our position as the nation's largest, by our purchasing activities, and third is the investment that we have in our shared service center, which I think will continue to generate ongoing savings for us and certainly help us offset any increased pressure there might be on the fixed cost side.

This is Mike Jackson, congratulations to both Mikes for their excellent work on the cost side, productivity side. What we have really done is different than all our competitors. It's really structural cost savings driven by tenacity on process and technology, and I know there are those who point out the opportunity our competitors have who follow us. I would make two comments, it's been 10 years and they haven't done it yet, and it's not so easy to do, and I'm very impressed that we have the capability to look at projects that take five to six years to bear fruit, and invest in them, and grind out with tenacity, what it takes to get those structural cost savings which then, John, to your point, we have them. And you see with how the Company is performing now on the revenue side, that it leads to enhanced performance, where we are getting the ability to perform better in the marketplace for our customers, at the same time that we are taking our cost structure down. That's very different than what everybody else is doing.

Then maybe if we kind of flipped a coin to the revenue side, obviously close rates sound like they are up, and financing availability sounds like it's improving, and pretty good. Showroom traffic is the sticking point on executing on sales. Is there anything you think you can do specifically, or anything the industry can do to stimulate showroom traffic absent a recovery in the general economy?

No, John, this is Mike Jackson. I think it's just going to take time. If I look at the recovery, the way I characterize it is the following. 09' was the Great Depression as far as the absolute sales number, with the number dramatically reduced due to the withdrawal of credit. The only way you can get down below 10 million is deprive customers of credit. And 2010 is sort of the foundational year for the real recovery, but even though we are calling out an 11.5 million, that's still a depression level, and the components of moving from under 10 million to over 11.5 million all revolve around improvement in credit. For the recovery to have -- to hit its stride, you're going to need higher levels of employment, and additional stability around housing, which I don't think you can get this year, and I really don't think the industry should try to force it this year. So going back to production levels, I think the discipline is the right thing to do. But I'm very confident that just with more time, the employment and the housing situation is going to improve, and the stage has been set for additional levels of recovery back to 15 million, 16 million years -- 15 million, 16 million units per year. I think it's just going to take more time.

What excites me, though, is that with this more rational approach to the business, the profit opportunity on the way back up is really quite extraordinary, vis-a-vis what it was pre this downturn, so I think the industry both at retail, and at the manufacturing level have really taken this horrible, painful thing we have gone through and transformed the industry. So I think the profits at each level of recovery, are going to be much higher than anyone thought could ever be possible, and I think it's very positive for the industry. So I've applaud the industry for just saying, "It's going to take some time, let's give it some time, but in the meantime let's do everything we can, that as it takes hold, we take full advantage of it."

Lastly, pickups you guys to highlighted have been selling very well. Just curious who you see as the incremental pickup buyer, and why are those sales so strong? I mean, that's a pretty good indicator of an economic recovery.

This is Mike Jackson. The social lifestyle portion of pickup trucks has been dramatically reduced. I estimate in the past that was about 15% of pickup trucks. That's been dramatically reduced. This is really small business America that a year ago saw very dim prospects for the business, had difficulty getting credit for both their business, saw their customers having difficulty having credit, and even if they wanted a new pickup truck, we had difficulty getting them credit, and that really exaggerated the constriction of the pickup truck market. Today that small business entrepreneur feels he has better prospects, the vehicle really needs to be replaced. The difference in capability of what they get with today's pickup truck and what they are driving is considerable, and they're coming in. And it's a combination of better prospects with available credit so, John, to complete, to go all the way back to your earlier question, when I then say okay, let's just give that time, I think when it comes to that same person making decisions about employment, and the kind of work they think they are going to have, that's why I say, okay, some time later this year, sometime in 2011, you're going to see much better employment numbers, much better construction numbers, and then it's going to be off we go on the rest of the recovery back to 15 million, 16 million units.

Great. Thank you very much.

Our next question is coming from Rick Nelson of Stephens, Inc. Your line is open.

Thank you and good morning.

Good morning, Rick.

Good morning, Rick.

Great quarter. I'd like to ask you about July. Any commentary on sales? I know we back tracked a bit in June and I'm curious how the current month --

Yes, this is Mike Jackson. So we are saying that the third quarter is going to exceed the third quarter of last year, even though third quarter of last year had Cash For Clunkers, so you can do the math. That means you're going to need a selling rate, the third quarter is going to have to average you know, 11.6 million, 11.7 million, something like that. Our sales month-to-date are absolutely consistent with that statement, or I wouldn't have made it. If you want another point of reference, J.D. Power was out earlier today with a 12.2 million forecast for July. If you're asking me what's going on in the marketplace the way I'm looking at it, the customers are very sensitive to sales events and you see pulses of business on Memorial Day, Fourth of July. I think there's going to be a pulse of business around, model year end, and close-out ,all of which are going to move these numbers a little bit when you compress them down to a 30-day period. But our July sales are absolutely consistent with that statement and, as you know, we now report our new vehicle retail sales on a quarterly basis, consistent with the industry and I believe our next report is August 4.

Great. Also, I would like to ask you about the SG&A comparison as we look at the third quarter. A year ago with Cash For Clunkers were you able to indeed pull back on advertising, or did you get more aggressive, and how does that compare/stack up?

Hello, Rick, this is Mike Short. I do think there was some ability in the second quarter to spend a little bit -- a little bit less, but when we look at our overall SG&A profile, I don't think there was a huge impact on using Cash For Clunkers.

Yes, this is Mike Jackson. Really if you look at the second quarter, I would say there's minimal impact as far as what went on in the third quarter, we'd have to take a look at that.

Yes. Were there any property purchases in the quarter that affected the SG&A ratio?

No. The only thing that we called out for you, Rick, was last year we did have some gains on property sales, but those are not in SG&A. Those were in other income and expense.

Got it. And then in terms of acquisition pricing, you've made some recent acquisitions. Can you comment there on what you're seeing?

Rick, it's Mike Maroone. There's a lot more acquisition activity, a lot more discussions going. I think there's still a price gap in many deals, but it's clearly an improving environment. We are looking at all three segments, domestic, import, and premium luxury. Primarily in our existing markets we are very pleased with the deals that we announced today, which is large Toyota store in suburban Atlanta, a new Hyundai point in suburban Atlanta, and also a Hyundai point in Seattle. I would say the prices have moderated some, but there's still a gap in many discussions, but the good news is there's a lot of discussions underway.

I would assume you don't see any issues with OEM approval?

Toyota has approved our deal as has Hyundai and, you know, we think we have got a very constructive relationship with those manufacturers, and all manufacturers. We work very hard at those relationships, and we're pleased to have those deals approved.

Great. Thank you.

Thank you, Rick.

Our next question is coming from Patrick Archambault, Goldman Sachs. Your line is open.

Hi, good morning.

Good morning.

I guess two. Number one is, on gross profit margins for new vehicles, you certainly saw them improve year-on-year, which one would have expected, but I just saw that the delta of the improvement was a bit lower in the second quarter versus the first. I think probably up by about 80 bps year-on-year in the first quarter, and I think probably more like around 20 bps or 30 bps, I think, for the second quarter. Can you tell us a little bit more of that. Was it season -- well not season -- was there a mix issue there that might have been at play? I wanted to know a little bit more about that.

On the gross margins, as you called out, we were up $107 on new versus last year. We are pleased with our performance there. I think as more and more small cars are introduced, there will be some margin pressure but as you see, the pickup trucks in the truck business recover, that should offset it so I think we feel good about our margins going forward. As we look at our business on a same-store basis our volume was up 20%, our gross was up 26%, so I think we feel good about where we are and I think mix will influence it going forward. But as we begin to see -- as we get further into the recovery I think you'll see more truck business and I think our margins will be in pretty good shape going forward.

Okay. And then on -- as a follow-up, you had said that I think your used-to-new ratio was tracking at about 0.79, of course your used sales were very strong this quarter. Like 0.79 I think is reasonably higher than historically that's run, which I think has been probably in the sort of 0.5 to 0.6 range. How difficult is it to sustain a ratio that's that high? And I guess I'm particularly thinking about once new does recover, might there be sort of a shift -- sort of a share shift in a way from used to new, that people make that might bring that down or is that something that you guys think you can sustain with some of the initiatives you have, specifically targeting used sales?

Patrick, it's Mike Maroone. First of all, we are really pleased with our used volume in the quarter. I think the team did a great job. It was our -- one of our strongest focus areas in the quarter. Going forward, with our ratio at 0.78, I think it can go higher. We are putting a lot of emphasis on the used car business. We have added a lot of resources, we are really driving that business and looking for more opportunities to retail vehicles of all sizes, shapes and price points. In the quarter, we moved 11,000 vehicles from store to store to get optimal use, and what that allows us to do is to be more aggressive on the appraisal as we know where that vehicle is going to go. So I think the used car business is a big opportunity. The market used is double what the market in new is, and I think 0.78 we can move an even better level going forward.

I guess just on the back of that, was that like -- I mean, I guess it's a function of both the market being fairly robust and market share gains, that are driving that ratio up like that.

I think it's that, and I think it's the recovery of credit. I think there was used car buyers out there that wanted to buy, that couldn't buy, and I think the healing of credit, as Mike Jackson has termed it, was a significant factor. So we received more new vehicle trade-ins. We are aggressive in trying to retail more of what we took in trade, and I just am real pleased with that performance, but you've got to call out retail -- the healing of retail credit as a large factor.

Okay. Great. Thank you very much.

Thank you, Patrick. Good having you in the auto sector -- on auto retail sector on the coverage. Welcome aboard. Next question.

Next question is coming from Rod Lache, Deutsche Bank. Your line is open.

Good morning. This is Dan Galves in for Rod this morning. I wanted to follow up on the new margin question, you guys were down about -- fourth quarter and first quarter were very high in terms of historical margins, but you're down about 175 per unit in the second quarter sequentially. Is there anything specific you can attribute that to?

Dan, it's Mike Maroone. There was more dealer cash, and that's manufacturer to dealer cash, in Q4 and Q1 than there was in Q2, and I think there's always slightly different mixes. Q4 is always a very strong premium luxury quarter for us, but we are pleased that on a year-over-year basis, our gross per unit was up, and I think the gross performance was a good job, but sequentially you'll always get slightly different mixes, and slightly different manufacturer incentives to dealers.

Okay. Thanks a lot. One of the interesting things about looking forward in this industry is the -- the fact that we have had such weak sales over the last three years, is going to impact the pool of vehicle -- of newer vehicles in the population, and I think you've talked before about the impact on parts and service, and there could also be an impact on your ability to acquire used vehicles. Can you talk a little bit about how you think about those type of kind of long-term issues, and any initiatives that you have to mitigate that issue?

Yes, this is Mike Jackson, we talked about service and parts in the past and we think we have the initiative in place to counterbalance that but it's something that's absolutely going to take a couple years to work its way through, and on used vehicles we really see it as a share opportunity, just simply acquiring more vehicles at the right price, and retailing a higher percentage of our trades, and that's where our focus is, so it's really -- they're both headwinds, what you call out, but in both segments, we think we have initiatives that will counterbalance that, and eventually we'll work our way through the system.

Okay. Thank you very much for taking my questions.

Our next question is coming from Himanshu Patel of JPMorgan. Your line is open.

Just had two questions. How much was customer pay up this month, or this quarter?

It was flat for the quarter, this is Mike Maroone, and on a selling day basis it was up 1%.

Okay. And then lastly, how do you guys view the recent moderation in the Mannheim Index? I know that's been rising pretty steadily for a while. Do you view it as a blip, or a long overdue flattening out, or do you sort of see something more concerning developing there?

It's Mike Maroone. I think there's going to continue to be tight supply going forward. I think it's a blip. I think it went from [121 to 120], so we really see it staying at a high level, being short supply, and that's when Mike Jackson talks about the opportunity in used, we think a lot of it is on the sourcing side, and that's why we have put incremental resources in that area.

Okay. Thank you.

Our next question is coming from Matthew Nemer of Wells Fargo. Your line is open.

Thanks, good morning, everyone. First question for Mike Maroone, could you discuss the new unit performance in your key markets, versus any industry data you might have? I'm just wondering how your new units look in Florida, California, and Texas relative to those markets.

Matt, we measure our share every month based on manufacturer reported deliveries, and we have taken share in our markets for the brands we represent nine of the last ten months. So, Mike Jackson has talked in the past about us changing our risk profile, as we came into the early stages of recovery, actually before recovery, and we have stocked more, we have put more resources out there and it's really paying off in terms of market share performance. Our team in the field is doing an excellent job, and we believe we are outperforming the markets that we compete in, in the recovery.

I guess as a follow-up to that, you're gunning for more volume. Should we think this gross -- that these grosses -- is this gross level kind of a more sustainable level going forward because you're going for more volume?

I think it is sustainable. I think there's always opportunity as we continue to work to execute better, but I think the margin is sustainable to go with the increased volume.

This is Mike Jackson. We are really in a new world, it really was a transformational event. The push, the excessive push for manufacturers on inventory of stuff that we don't want and customers don't want, has really by and large ended. It's really a new world and that's a precondition for being able to manage gross. And also not only was irrational behavior sweeped out at the manufacturer level, but if you look at the consolidation that did take place, and the type of dealers who went bankrupt during the downturn, it was the irrational behavior dealers who went sideways and went out. So the competitive landscape has changed not only since that we don't have the push from the manufacturers, also a big chunk of irrational competitors were eliminated. And all that bodes very well for the future.

Switching to the used vehicle segment, you mentioned that your appraisals and your buy rates have been much stronger. Can you talk about what's changed in the appraisal process, and then as a follow-up to that, is there a point where you think we start to see more of a no haggle price structure at AutoNation?

It's Mike Maroone. In the appraisal process itself, we're using more and more software to try and make sure we've got the right value and it not only tells us what we believe that vehicle is worth, but which store in our markets we can go that will have the highest value, so we believe that's a competitive advantage for us and feel that we can get better and better at this as we go along.

And on fixed pricing, no haggle pricing?

Well, right now we're -- we've moved to market value pricing, so not only do we appraise the vehicle and say here's what it's worth on a wholesale basis, but here's what we believe you can get on a retail basis, and it's really reduced the bandwidth of negotiation. It's not a one price strategy but it's a market-price strategy, and it's certainly closer to a nonnegotiable strategy, than where we've been in the past.

Okay and then turning to SG&A, it looks like you're -- we're looking at gross profit retention, so how much of the incremental gross fell to the EBIT line was about 56% this quarter versus 60% last quarter, which is a great level. But going forward how should we think about the retention of gross? Obviously there's 30% that's directly variable, is it fair to think that another 10% or 15% goes to cost or how should we think about that?

Yes, I think the guidance that I give you is that we think of our SG&A structure is about half fixed and half variable, obviously over time with growth, variable will be a bigger piece of that but I think that's the way to think about it.

And then just one last follow-up question. Regarding the share repurchase, do you have a 10B51 in place and what -- when are you able to be back in the market buying stock?

We did have a 10B51 that covered the period of time between the end of last quarter, and now we are able to get back in some of the market essentially tomorrow.

Great.

10B5 will have expired.

Thanks so much.

Our next question is coming from Colin Langan of UBS. Your line is open.

Good morning.

Good morning.

Good morning.

I have a question around parts and services. I think in the first quarter it was -- warranty was down 12% if you excluded some of the recall impact. Was there any benefit in the quarter from the recall? And the other part is I think earlier you had expected parts and service to be flat for the year, so it's up the first quarter, up the second quarter. Has that changed, or do you think it will be up for the rest of the year?

It's Mike Maroone. Warranty was down about 7% in the quarter. Certainly impacted somewhat by Toyota. I think if you took Toyota out, we would have been down 11% in warranty, so there is an impact from Toyota, although certainly less than it was last quarter, and we have completed a high number of both the pedal entrapment, and the sticky pedal, although there's still more to do. In terms of fixed growth, I think that it's going to be a long process as the UIO continues to gain, as sales recover, the UIO will get bigger, that's the units in operation giving us a bigger population, and I do think our initiatives overtime will allow us to grow that fixed business, but it won't happen quickly.

But your outlook for flat this year, has that changed at all since it's actually better than flat so far?

I think we are up slightly. We are up 2% in revenue and 1% in gross, and don't really want to call out a change in that. That's just -- that's pretty close to what we forecast.

Okay. There's been a lot of talk about the Consumer Protection Act and the regulation, and obviously the dealers were excluded, but there's still a lot of chatter that there might be some negative implications for some of the financing fees that dealers get. Do you have any view on that, or any quantification of the potential risk if there is more regulation around that area on your F&I business?

This is Mike Jackson. I don't think so. I think we are fine. And even the way the regulation is written, if we had been covered, I think we would have been fine. Also, I think the fierce resistance that politically came from dealers and from us was that if you look at the underwriting discipline and the industry practices during the whole last 10 years, automotive deserves very high marks. We were collateral damage, we were not the source of the meltdown, and we're already very highly, and very effectively regulated and to add a new layer on that with whatever unintended consequences could come with it, is something we would simply rather avoid. So I think we are fine.

Okay. All right. Thank you.

I think we have time for one more question.

Our last question is coming from Brian Sponheimer of Gabelli. Thank you. Your line is open.

Good morning. You had a slight uptick in Toyota mix sequentially certainly from where it's been. What sense are you getting from a consumer sentiment basis on your Toyota dealers?

I think our Toyota business is healthy. I think Toyota has done a really good job of supporting their dealers, and navigating through a very difficult situation. By and large, the Toyota owners have stayed very loyal to Toyota. The service departments are still busy, but they are in good shape and people seem to have maintained their confidence in the product. Toyota has continued to incent the market at a higher level than they have in the past, but certainly not anywhere near the highest level in the industry. So I think Toyota has done an excellent job, and our Toyota stores are still our highest through put stores from a new vehicle volume perspective.

Along those lines, do you have any data regarding conquest business in either your domestic or your import stores?

We don't have that available to you today. We could probably get back to you.

Alright, and then one more if I may. Was the desire to be acquisitive, but also use your cash towards share repurchases, how do you prioritize the two as demand improves on the retail side?

Brian, this is Mike Short. We are very opportunistic, and we look for the investments that will generate the highest returns to our shareholders, and if those happen to be acquisitions, that's great, if it happens to be share repurchase, that also is great, and we're happy at this quarter we found an opportunity to do both.

Okay. Great. Thank you very much.

Thank you, everyone, for your time this morning. We very much appreciate it. All the best.

This will conclude today's conference. All parties may disconnect at this time.