AutoNation Inc (AN) 2010 Q3 法說會逐字稿

Welcome to AutoNation's third-quarter conference call. At this time all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn to call over to your host, Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation.

Good morning and welcome to AutoNation's third-quarter 2010 conference call. Leading our call today will be Mike Jackson, our Chairman and CEO, Mike Maroone, our President and Chief Operating Officer, and Mike Short, our Chief Financial Officer. Following their remarks, we will open the call for questions.

I will also be available by phone following the call today to address any additional questions you may have.

Before we begin, let me read over 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 the actual results and performance to defer materially from expectations. Additional discussions and factors that could cause actual results to defer 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 located on our website at www.AutoNation.com.

And now, I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us.

Today, we reported third quarter adjusted EPS from continuing operations of $0.39, an 8% increase compared to adjusted EPS from continuing operations of $0.36 in the prior year, which included the highly successful Cash For Clunkers program. For the fourth consecutive quarter, we have seen a solid increase in revenue and adjusted EPS, year-over-year.

Third-quarter 2010 revenue totals $3.3 billion, compared to $2.9 billion in year-ago period, an increase of 13%, and we had increases in all of our revenue categories. In the third-quarter, total US industry new vehicle retail unit sales decreased 4%, based on CNW Research data. In comparison, during the same period, AutoNation's new vehicle unit sales, increased 1%, on a same-store sales basis, and 3% including acquisitions.

Also in the third quarter, AutoNation had strong performance in used vehicle with retail units up 25%. In the third quarter, we continued to see a gradual recovery in the auto industry. For the second consecutive quarter we saw strength in domestics led by Ford and Chevrolet, which make up the vast majority of our domestic portfolio.

On a sequential basis, new vehicle margins were lower for the Japanese imports. We saw a share shift back towards domestics, especially Ford. Additionally, Japanese import inventories have tended higher, adding to the margin pressure. Going forward, we'd expect markets to stabilize.

We believe that upcoming elections on November 2, 2010, will be a pivotal event, as a change in Washington will result in improvement consumer sentiment, and will continue to improve the outlook for the auto industry and recovery.

I'd now like to turn it over to our Chief Financial Officer, Mike Short.

Thank you, Mike, and good morning, ladies and gentlemen.

Turning to our financial results for the third quarter, we reported adjusted net income from continuing operations of $58.5 million, or $0.39 per share, versus $64.4 million or $0.36 per share during the third quarter of 2009, an 8% improvement on a per-share basis. There were no adjustments to net income in the third quarter 2010 or 2009.

Compared to last year, revenue increased $382.9 million or 13%, despite a challenging Q3 2009 comparison due to Cash for Clunkers. Gross profit improved by $35.8 million, or 7%. We experienced an increase in volume-related expenses, such as advertising and compensation in the quarter. Additionally, pressure on new and used vehicle margins adversely affected SG&A, which was up 7% for the quarter, in line with gross profit. Additionally, impairment charges of $2.8 million were recorded, primarily related to property held for sale, based on an analysis of current market conditions for those properties.

Net new vehicle floorplan was a benefit of $4.7 million for the quarter, a decrease of $2 million from the $6.7 million benefit in the third quarter of last year.

Non-vehicle interest expense was $16.1 million for the quarter, up from the $10.2 million we recorded in the third quarter of last year, due to our refinancing, which closed in April of this year. The refinancing increased our percentage of fixed rate debt from 33% to 46%, at the end of the third quarter, and it increased the pricing under our revolver and term loan facilities from Libor plus 87.5 basis points, to a Libor plus 225 basis points.

During the quarter, we drew an additional $15 million under our revolving credit facility, resulting in $210 million of outstanding borrowings under the revolving credit facility at the end of the third-quarter. Our third quarter non-vehicle debt balance was $1,381 billion, an increase of $266 million, compared to the third quarter of last year, and an increase of $13 million, compared to the second quarter of 2010. Libor rates were relatively flat, compared with the third quarter of 2009.

The provision for income tax in the quarter was $35.1 million, or 37.5%. This reflects the benefit of certain favorable tax adjustments.

During the third quarter we repurchased 2.9 million shares for $55 million, at an average price of $19.08 per share. We ended the third quarter with 148 million shares outstanding.

During the third quarter, as previously discussed, we acquired a Honda -- sorry, Toyota and Hyundai dealership in the Atlanta market, and Hyundai store in Seattle for $60.6 million.

Capital expenditures for the quarter were $40 million and our CapEx estimate for the year remains at $150 million.

We remain within the limits of our financial covenant, with a leverage ratio of 2.64 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 available borrowings from our used inventory to reduce the debt, we would have lowered the ratio to under 2.4 times, compared to the 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 among our peer group, and carefully manage our covenant and will continue to do so.

Our capitalization ratio measures floorplan debt plus non-vehicle debt, divided by total book capitalization. Floorplan debt was approximately $1.6 billion at quarter end, up approximately $150 million from June 30, 2010. As of September 30, the capitalization ratio was 46.1%, well within the covenant requirements of 60%.

Our quarter-end cash balance was $85 million, which combined with our additional borrowing capacity, resulted in a healthy total liquidity of $474 million at the end of September.

Now, let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning.

In the quarter, AutoNation aggressively grew new and used market share revenue and total gross profit, while delivering a solid operating margin of 3.7%. We are pleased with this performance, and note that the period a year ago included the government's Clash for Clunkers program, which impacts retail sales and gross margin comparisons in the current period.

Beginning with our segment performance at $110 million, total segment income was in line with the quarter a year ago. Domestic segment income at $43 million, increased $10 million or 29%. Premium luxury at $48 million was up $4 million, or 10%, and imports segment income of $51 million, decline of $12 million or 18%.

As I continue, my comments will be on a same-store basis, unless noted otherwise.

In the third quarter, we retailed 54,900 new vehicles, an increase of 1% compared to the period a year ago, and favorable to the industry, which was down 4%, according to CNW Research.

We were able to capture profitable market share, utilizing aggressive advertising, time to take advantage of great inventory mix, and value-conscious consumers. On a total-store basis, domestic volume increased 15%, premium luxury increased 3%, and import volume was off 3%.

By vehicle type, full-size pickup truck volume grew 39% year-over-year, and car volume dropped 9%, both impacted by Cash for Clunkers in the period a year ago, when consumer focus was on small, fuel-efficient vehicles. In the current quarter, other light trucks, including CUV grew 7%.

Same-store revenue per new vehicle retailed was $31,800, an increase of $2100 or 7% compared to the period a year ago, due to increased vehicle content and a mix shift toward trucks.

Gross profit for new vehicle retailed of $1995 was off $186 or 9%, driven in part by our pursuit of profitable market share in the current quarter, margin pressure on imports, particularly import cars, as well as the supply and demand dynamic that followed Cash for Clunkers, that had a positive impact on gross profit in the period a year ago.

While we expect new vehicle margins to be stable going forward, note that we expect to recognize a total of about $20 million of certain performance-based manufacture incentives over the next two to three quarters, primarily related to premium luxury vehicles previously sold. This amount is incremental and will benefit our new vehicle margins during this timeframe.

I'll also note that the approximate $20 million pretax benefit from these incentive-based programs is a net amount, as related cost were expensed at the time the vehicles were sold. On an ongoing basis, we anticipate the benefit to overall gross profit for new vehicle retail will be approximately $30.

In September 30, new vehicle day supply was 57 days or 41,800 units, compared to 48 days a year ago, and 55 days at June 30.

On the used side, we retailed 42,000 used vehicles delivering an impressive unit increase of 24%, and revenue increase of 29%, compared to a year ago. Our used-to-new ratio in the quarter was 0.77, compared to 0.63 a year ago.

At $17,100, revenue per user vehicle retailed increased $760, or 5%, driven by the domestic and premium luxury segments.

Gross profit for used vehicle retailed was off 7% or $111 to $1579, compared to the quarter a year ago. Contributing factors were our pursuit of profitable market share, which is in line with our strategy on new vehicles, increased acquisition costs, conservative lender advances, and a strong effort to recondition and retail more higher mileage, lower-priced vehicles. At September 30 our used vehicle day supply was 46 days.

I would also like to share that in the quarter we expanded an additional used vehicle offering that we piloted in Q2 to address the continued tightening of used vehicle supply, as well as consumer demand for lower-priced vehicles. These outlets are in centralized locations, at select stores within our existing markets. They offer a wide selection of value-priced vehicles that we would have traditionally wholesaled. Our objective is to retail a greater percentage of trade-ins and fill a strong market demand. It's a no-haggle environment, with vehicles backed by worry-free attributes, such as money back guarantees.

In the quarter, average selling price at these locations was $7800. Our value vehicle outlets were selected based on location, brand, excess real estate, and service capacity. At this time, we have a total of 16 value vehicle outlets, with six more scheduled to be in operation by the end of the first quarter of 2011, which will bring us to a total of 22 value vehicle outlets .

Turning to parts, service, and collision, same-store revenue of $552 million, and gross profit of $240 million, both increased 4% compared to a year ago. In the quarter, warranty revenue was flat compared to a year ago, bucking a long-term trend of declining warranty revenue. We attribute this to the increase in manufacture recalls.

We also noted a 22% increase in internal revenue in the quarter. Customer pay revenue increased 2% year-over-year, resulting from ongoing service marketing initiatives and increased focus on the retail opportunities in our service department.

We remain keenly focused on growing our customer pay business, and also on customer retention.

Relative to gross profit, improvement in the quarter was driven, primarily, by a 21% increase in internal gross, as we prep more new and used vehicles for sale. Warranty gross increased 4% and customer pay gross was relatively flat. Customer pay service comprised 43% of our parts and service gross profit. Warranty accounted of for 18%, and internal accounted for 16%.

Results for finance and insurance were positive with gross profit for vehicle retailed of $1134, reflecting an increase of $63, or 6%, compared to a year ago. The credit environment was, again, favorable compared to a year ago. We noted an increase in approval rates by the majority of the captives, as well as the majority of our preferred bank lenders, for all customer segments, and in particular, for near prime. However, loans for subprime customers, while improving, remain challenging.

Our preferred lender network, OEM service contract alliances, strong product penetration, and store-level execution continue to drive our strong F&I performance.

In the quarter, we completed the acquisition of Toyota Mall of Georgia, Hyundai Mall of Georgia, and Hyundai of Seattle, along with one divestiture. Our store portfolio at September 30 stood at 206 stores and 251 franchises in 15 states. Our corporate development team continues to seek acquisition opportunities that meet our market and brand criteria as well as our return on investment objectives.

I'll also share that AutoNation has received seven Fiat locations, all in our existing markets and will be the largest Fiat dealer in the US. We will look forward to exploring other opportunities with Fiat and Chrysler.

In closing, our stores performed at a very high-level in the quarter, driven by strong associate productivity. In fact, on a year-to-date basis through Q3, same-store total revenue is up 16% and headcount is relatively flat compared to the same timeframe a year ago. In the quarter we also experienced significant new and used vehicle market share gains, record CSI performance as measured by manufacturer benchmarks, and low associate turnover.

We are continuing to invest in facilities, training, and technology to drive even higher level performance in the years ahead.

We're also pleased with our year-to-date performance. Where on a total-store basis, revenue is up 17%, new and used unifying is up 16%, and adjusted earnings per share is up 28%. We remain committed to outperforming the market as the economy recovers, and thank our 19,000 associates for their dedication to providing a superior customer experience and shareholder value.

With that, I'll turn the call back to Mike

Thanks, Mike.

I continue to be optimistic about the long-term recovery of the auto retail sector and AutoNation's ability to perform. For year-to-date through September, new vehicle retail sales at AutoNation were up 13%, and the industry, according to CNW, is up 4%. As stated last quarter, we expected third quarter 2010 new vehicle industry sales would be over $11.5 million, and they came in at $11.6 million. We also said our third quarter would equal or surpass third quarter 2009 new vehicle sales, even though the prior year included the highly successful Cash For Clunkers program, and we achieved that with a sales increase of 1%.

We still believe that the full-year 2010 new vehicle unit sales will be in the range of 11.5 million units. That means the fourth quarter will average, approximately, 12 million units on a seasonally adjusted basis. In the month of October, sales are tracking towards this pace. On November 4, 2010, we announce our October new vehicle sales.

With that, I would like to take your questions.

(Operator Instruction) The first question comes from John Murphy, Bank of America/Merrill Lynch. Your line is open.

Good morning, John.

Good morning, Mike. How are you?

Very good.

A quick question on SG&A. And I apologize, I got on just a few minutes late on the call. There was an increase on an absolute basis. What I am trying to understand is, is there more opportunity to take SG&A out on an absolute basis at this point? Which you're doing a very good job at, but -- or should we just be looking for a leverage as grosses improve going forward, and this kind of being the floor in the SG&A absolute dollars?

Hi, John. This is Mike Short. Let me give you some color on that.

When you look at SG&A within the quarter, it was up $27 million or 7% in line with the increase in gross profit. Within that, let me give you a couple of drivers. The Mall of Georgia acquisition added about $4 million to our SG&A line. Comp was up in line with gross.

Generally, we see some leverage in there, because there's certain elements of store compensation that are fixed. We didn't see that this quarter because of the lower margins offset that.

Advertising was up more than gross profit, within the quarter on a year-to-year basis. You've heard us talk about our initiative to drive share, and also remember that last year, we didn't have to advertise quite as much because there was a raise in natural demand because of the Cash for Clunkers initiative.

Other SG&A is up a little bit, as well, about 4%. Within that, you've got things like deferred maintenance that we're catching up on a little bit, as we come out of the downturn. We indicated previously that some of that would come back, higher accruals for bonuses, given the strong performance that we've had so far this year, and then additional training and things like that at the store level.

At a high level, you're right. We strive for it and are dedicated to continuing to generate leverage in our operating cost structure. And we'll continue to do that, and I think as you've heard the commentary about stabilization and margins, we look forward to being able to generate that level of operating leverage once we get to the more stable margin environment.

Then -- thank you for that -- second question, on the used car market. It's obviously -- it seems like it is running pretty hot now, and demand is outstripping supply and you're getting this great rise in used car prices, and it's driving a lot of attention in that market.

I'm just wondering, AutoNation's kind of gone through this strategy previously, and it didn't work out so well. You guys are not going quite as aggressively after it as you did once before.

But, I am just wondering, as you look at this two, three years down the line, and hopefully, new vehicle sales have recovered significantly at that point, is this the kind of operation that might get lost as you get this leverage on the new vehicle side? And is this real ramped-up focus just a function of the used car market, and weaker new car market? Or is this something that you think, going from 16 locations to 22, could go to 50 in the next three years, and this is a real corporate initiative?

John, it's Mike Maroone.

We think this is a tremendous opportunity for the company, but I have to contrast it with the earlier years. These facilities, or these used-car outlets, are part of our existing footprint. What we're are doing is, we're utilizing vehicles that we once wholesaled. We're now reconditioning to a good standard. We're providing money-back guarantees. It's a one-price selling environment, but it uses our existing supply and they're really driven by the supply. And we are creating incremental sales and incremental retail customers. So, we're confident that, not only it's the right strategy, but we think it's a strategy that we think we can grow intelligently going forward.

Okay. That make sense.

The last thing on the subprime opportunity, or for the subprime customers. You were mentioning that there wasn't great financing for those folks, as they were coming into your dealerships. I am just wondering, how much incremental sales you think you can get if the auto financing companies bought a little bit deeper? I am trying to understand what that opportunity is incremental on sales?

This is Mike Maroone, again, John.

I don't know if I can put a number to it. But I would tell you, the last few years have put a number of people into a difficult credit situation and credit scores are lower. So, there's a big population of people out there. I think the industry is gotten better -- or the financing opportunity has gotten better from a subprime basis, but I do not know that we're prepared to say how much more business there is.

We're just glad it's improving, and I really want to call out AmeriCredit as one that's really stepped up. And our business with AmeriCredit has more than doubled on a year-over-year basis.

Is it fair to say that the large majority of the customers coming into your showrooms, though, are still prime or near prime customers, and that it's a small percentage that are subprime?

I think it varies tremendously by market. In some of our markets there's quite a bit of subprime, as much as 25%, although I would not want to call all of our markets that way. It varies.

Thank you, very much.

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

Good morning, Rick.

Good morning. Thank you. Question on the acquisition environment. Looks like you made a couple of acquisitions here recently. How does the pricing look there and how do you stack that up with other alternatives that are available to you for capital (inaudible)?

Rick, this is Mike Jackson.

I would say a number of discussions and negotiations that are ongoing is escalating. Of course, the issue at the end of the day is price. We're willing to pay a fair price, but we're not going to overpay. Negotiations are difficult around the issue of the value of the real estate, and the multiples, and who pays. They want to be paid for future earning increases and we want to pay on what the business is making today.

So, it's tough negotiations, but you never know. We're probably having more discussions than ever. We have a very good reputation on acquisitions in that, we always do what we say we're going to do. We give a fair price, and our check is always good.

What sort of brands would you be looking at? Is it still focused in the luxury segment?

At this point, we are really interested in any of our core brand,s including on the domestic side, Chevrolet and Ford as a brand. And then the Japanese Big Three. We, obviously, have bought more Hyundai as of late. And as they've modified their retail policy, it looks like they are not going to [overdeal here]. And of course, we're always interested in any premium luxury. We still see plenty of opportunity in our existing footprint and don't really see the need to move to new markets.

Thank you for that.

Also, I'd like to follow-up on the [ indiscernible ] noted your forecast for the fourth quarter of $12 million. What does your crystal ball tell you for next year? You've been pretty accurate today.

In the interest of accuracy I will hold up for a never couple months and I will tell you why, Rick. I think this election is pivotal. I think Washington has gotten in the way of this economic recovery, and we certainly felt it in the third quarter. And I think there needs to be a rebalancing in Washington. The only way to do that at the moment is to elect Republicans, and I think that's going to happen. We have to wait until next week to see if indeed that does happen, and then if Washington can get out of the way of the recovery, I am pretty optimistic.

And the Federal Reserve has sent every indicator you can imagine that they want to embark on quantitative easing, after the meeting next week. But, indeed, you have to wait and see if that happens. If both those pieces fall into place and, indeed, we are tracking at $12 million in the fourth quarter, then we'll make a forecast towards the end of the year on an exact number. But it'll, obviously, be higher than this year. I'd like those big pieces of the puzzle to be in place before I put a number out there is.

Thanks a lot. Good luck.

Thank you, Rick.

Our next question is coming from Matt Nemer at Wells Fargo.

Good morning, Matt.

Good morning, everyone. My first question is on new vehicle margins. You mentioned that you expect them to stabilize.

Typically, on an sequential basis, your grosses are up a little bit in the fourth quarter versus the third. I think that might be a mix shift to luxury. But, do you think that typical sequential trend holds or do you actually expect them to be flattish with the third?

We expect that to hold.

Okay. Secondly, on the used vehicle outlets, just to clarify, are those, actually, adjacent to existing dealerships or are they on separate pieces of land? Then, are they branded along with the market branding, or are they branded with a common brand?

Matt, it's Mike Maroone.

What we've done is we've dedicated space on our existing facilities. We've segregated that inventory. So, it is under our local market brand and the vehicle value outlets have a different value proposition and are segregated, but are in our existing sites.

Okay. Great.

Lastly, on inventory, you were up about $160 million sequentially, which is a little bit abnormal going into the fall. I'm assuming part of that is related to the acquisitions, but if you could give a little bit more detail on that.

Our inventories today are in the low 40,000 range. We are pleased with it. We're still buying inventory. As we said earlier in the call, we're aggressively going after profitable market share and feel right now, we've get good mix and good quantity. We are comfortable where we are.

This is Mike Jackson. Basically, the way I would describe it, during the downturn, we tried to always stay a step ahead of the downturn, not knowing where the bottom was. That applied to everything from headcount to inventory levels, advertising, commission plan. You can clearly see how we performed.

As soon as the bottom turned and we knew we were on an recovery, we might not know the angle of the recovery, but no question we're on an recovery. We switched to a very aggressive mode. We think we were in the strongest position to take share during the recovery. And so now, once again, we're trying to stay a step ahead, in every sense, whether it is inventory, advertising, or our commission structure.

So, if you look at our third-quarter performance, where the environment got tougher from the third quarter to the second quarter, we stayed on the recovery mode meaning, be aggressive. I'm not willing to hit the breaks to enhance short-term profitability in return for giving up our momentum of significantly taking share, for quite a number of quarters in a row. We think we can continue to do that.

That's the basic mindset that we have moved from conservative to aggressive, and we'll stay in that mode, open-ended as I think this is a multi-year recovery.

Great. Thanks for that detail. Good luck in the fourth quarter.

Thank you.

Our next question is coming from Rod Lache of Deutsche Bank. Your line is open.

Hello, good morning. This is Dan Galves sitting in for Rod. How are you doing?

Good, Dan.

Good, good. Two questions on new margins.

First of all, it looked like an overall basis, it was down about 100 basis points year-over-year. You talk about import margins being the weakest. Can you give me any color on how domestic and luxury new margins acted in the quarter?

This is Mike Maroone, Dan. I think they margins on domestic and luxury were actually in pretty good shape. Most of our pressure came on the import side, specifically on the car side of imports.

Okay. Got it. A couple of your competitors have called out several reasons for margin compression in the quarter. One was inventories, which you mentioned. Another couple are lower incentives seem to be almost coming out of the pocket of the retailers right now. And also, other items such as less advertising support from the OEMs. Are you seeing the same things? Are we seeing a structural change in new vehicle margins?

This is Mike Jackson. I think what we are dealing with is a different competitive dynamic in the marketplace.

I'll have to look it up, but I don't know the last time that the domestic was [consistently] taking share from the Japanese. So, this is a new competitive dynamic for our Japanese stores to have to deal with, with a customer that's got a different shopping list than they have had before. We see all the pressure in the Japanese margins.

We have reacted to the situation. It's required some retraining, some new processes on our part. We have the situation stabilized. And as discussed earlier, in the fourth quarter, you usually see an uptick in our margins because of the mix shift towards luxury and we expect that to happen.

Okay. Thanks very much. One other one.

Can you give us any color on expected capital outlays for the Fiat dealerships? And how quickly -- when will the money be spent, compared to when you'll start selling vehicles out of those dealerships?

This is Mike Jackson. We are very excited to have been awarded seven franchises for Fiat, with great locations from Washington DC to Washington state. We go with those locations we will be the largest Fiat retailer in the US. We like the vehicle because of it emotional design and fun driving dynamics, great fuel economy, and the very attractive price point.

I think there is a base demand for Fiat, Fiat C 500, even with gasoline below $3 a gallon. Obviously, there is the potential for higher gasoline prices. In which case, we think the Fiat C 500 will do extremely well.

Since we're using existing facilities, it's more image [fit up] that the amount of money is relatively minor. We are not disclosing the exact amount, but it's relatively minor.

We are excited to have seven. We're in discussion for more, whether they'll be in alignment with our footprint, and what's offered to us, I can't say today. But we've done seven for sure. The amount of capital we are not disclosing, but it's not going to be a meaningful impact on our statement.

That sounds great. What type of franchises are you dualing them up with? Are they Chrysler franchises?

It is not just Chrysler but it's mostly Chrysler, but it's not just Chrysler.. The ones we're in discussion with additionally, are not necessarily linked to Chrysler. We'll have to see how it develops. Well, we have seven for sure. That may be it, but we're in discussions for more.

Great. Thanks a lot for your answers.

The last question is coming from Colin Langan of UBS. The line is open.

Oh, Great. Thank you. Just following up on the new vehicle margins. Obviously there's inventory issues. That sounds more quarter-specific.

Should we thinking about those margins going back to 7% range over time? Sounds like also the imports are under a different environment.

This is Mike Jackson. I think our first step was to stabilize where we are and still be able to drive revenue growth and taking share. We're pretty confident that we've done that.

To actually rebuild the margins back toward 7%, I think we need a somewhat more robust economic recovery than what we have at the moment. We've got a pretty anemic recovery. It is pretty tough out there. With this struggle around share, exchange rates, everything else, it's a lot to contend with. So, I would be say, be watching for signs of a more robust recovery before I commit that we can get back to 7%.

Okay. And in terms of the value of the local outlets, does that change what a normal used-to-new ratio would be? Is that going to negatively impact the overall margin, if that rolls out for used vehicles?

Colin, it's Mike Maroone. I think it actually helps your margin as percent of revenue, because the average selling price was $7800. I do think it'll improve the used-to-new.

And again, what we are doing is, we're retailing vehicles that we once wholesaled, doing a very good reconditioning process and a different consumer proposition. I think it's going to allow us to grow our used vehicle business nicely, and we are excited about it. We think it's a big opportunity for our company.

Okay. One last one.

On parts and services I think you started the year expecting it to be relatively flat, and it's been up 2% year-to-date. Do you expect that growth to continue? And what do you think has really been driving the performance year-to-date? Has it been partly recall-related?

Again, it's Mike Maroone. I think you can look forward to modest growth going forward. I think the driver this year, certainly, is internal gross, and recalls, and we are seeing a small lift in customer pay.

We've also seen an end to the deterioration of warranty. Our warranty was stable. But again, the recalls are embedded in that number. So, that is recall-effected.

We are changing our outlook from the flat to modest growth.

Okay. Alright. Great. Thank you very much.

Thank you. I think that is all the questions for today. Thank you, very much, for your time, and all the best.

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