AutoNation Inc (AN) 2013 Q1 法說會逐字稿

Thank you for standing by and welcome to AutoNation's first-quarter 2013 earnings 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. Now I will turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, you may begin.

Good morning. And welcome to AutoNation's first-quarter 2013 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our Chief Financial Officer. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that 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 the actual results or performance to differ materially from expectations. 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 will be discussed on this call. Reconciliations are available on our Investor Relations website at investors.autonation.com under Financials. And now I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Thank you. Good morning. Thank you for joining us. Today, we reported an all-time record quarterly adjusted EPS from continuing operations of $0.68 in the first quarter, a 21% increase as compared to $0.56 for the same period in the prior year. First-quarter revenue totaled $4.1 billion compared to $3.7 billion in the year-ago period, an increase of 12% driven by stronger performance in all of our business sectors.

In the first quarter, AutoNation's new vehicle unit sales increased 9%, or 6% on a same-store sales basis and used vehicle unit sales increased 10% or 7% on a same-store basis. Today, we also announced the acquisition of three stores to support our strategy of acquiring dealerships that will round out our brand offering in each of our major markets. We will add Toyota to the Dallas market and Honda and Hyundai in the Phoenix market.

Our coast-to-coast branding rollout, which began in February, is well underway and approximately 30% complete based on total unit sales as of March 31. We are pleased that we have seen positive marketshare gains in the markets we have rebranded. It is progressing well and we look forward to completing the rebranding in the second quarter.

AutoNation is well-positioned. To capitalize on the recovery with an optimal brand and market mix and disciplined cost structure, we will continue to drive strong results across all our business sectors during the multiyear recovery in auto retail. I now turn the call over to our Chief Financial Officer, Mike Short.

Thank you, Mike and good morning, ladies and gentlemen. For the first quarter, we reported net income from continuing operations of $83 million, or $0.68 per share versus net income of $74 million or $0.56 per share during the first quarter of 2013,(sic-see press release "2012") a 21% improvement on a per-share basis.

In the first quarter, revenue increased $439 million, or 12% compared to the prior year and gross profit improved by $61 million, or 10%. SG&A as a percentage of gross profit was 71.3% for the quarter, which represents a 50 basis point improvement compared to the year-ago period.

As part of our AutoNation rebranding initiative, we incurred approximately $6.5 million, or $0.03 per share, of incremental SG&A expenses during the first quarter of 2013. Excluding these expenses, our SG&A as a percentage of gross profit would have been 70.3%. We expect to incur approximately $11.5 million in rebranding expenses in the second quarter, bringing the total spent to $18 million as previously announced.

Returning to first-quarter results, net new vehicle floorplan was a benefit of $6.3 million, a decrease of $0.5 million from the first quarter of 2012 due to higher floorplan balances, partially offset by lower floorplan interest rates. Floorplan debt was approximately $2.5 billion at quarter-end, which was relatively flat compared to December 31, 2012.

Non-vehicle interest expense was $22.3 million for the quarter, an increase of $1.8 million compared to $20.5 million in the first quarter of 2012 due to an increase in fixed-rate debt from our 5.5% Senior Notes issuance in February of 2012.

At the end of March, we had $420 million of outstanding borrowings under the revolving credit facility and total non-vehicle debt balance of $2 billion. This was a decrease of approximately $139 million compared to December 31, 2012. The provision for income tax in the quarter was $53 million, or 38.8%.

During the first quarter of 2013, we repurchased 56,000 shares for $2.2 million at an average price of $39.42 per share. AutoNation has $317 million in remaining Board authorization for share repurchase. As of April 17, there were approximately 121 million shares outstanding. This does not include the dilutive impact of stock options.

Our leverage ratio at the end of the first quarter was 2.59 times, or 2.38 times on a net debt basis, including used floorplan availability compared to the covenant limit of 3.75 times. Capital expenditures were $23 million for the quarter. Capital expenditures are on an accrual basis, excluding operating lease buyouts and related asset sales.

Our quarter-end cash balance was approximately $46 million, which, combined with our additional borrowing capacity, resulted in total liquidity of $879 million at the end of March. We continue to demonstrate strong operating leverage, robust cash flow generation and disciplined capital allocation with a focus on driving shareholder returns. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike and good morning. We are very pleased with our start to the year. In the first quarter, AutoNation delivered strong growth in revenue and gross profit across all sectors of our business -- new vehicles, used vehicles, customer care and finance and insurance. Overall, we also delivered solid unit volume growth and were especially pleased with the strong recovery of our Florida and California markets where combined we had a 10% increase for new and used vehicle sales on a same-store basis. This along with very solid 4.1% operating margin and an all-time record adjusted EPS.

In addition to a very strong operational performance, we began the launch of the AutoNation brand that will be rolled out to over 200 of our domestic and import franchises coast-to-coast by the end of June. We also signed agreements to acquire three stores, one each for Toyota, Honda and Hyundai. I will expand on this later in my remarks. As I continue, my comments will be on a same-store basis compared to the period a year ago unless noted otherwise.

Starting with new vehicles, in the quarter, new vehicle revenue increased $194 million, or 10% to $2.2 billion on new vehicle sales volume of 65,300 new vehicles, an increase of 3800 vehicles, or 6%, with growth across all three segments, particularly the Premium Luxury segment. At $33,519, revenue per new vehicle retail was up $1100. We noted increased average selling prices across all three segments with the Premium Luxury segment being the largest contributor.

New vehicle gross profit of $137 million increased $3 million, or 2% in the quarter. Gross profit per new vehicle retail of $2097 was off $81, primarily attributed to aggressive volume-based manufacturer incentive programs that were more lucrative in the prior period and to a lesser degree, a mix shift within the Premium Luxury segment in the current period.

Our new vehicle inventory is in good shape and we will continue to buy aggressively for the remainder of the selling season. At March 31, our new vehicle days supply was 63 days, or 61,700 units, compared to 54 days and 47,400 units a year ago.

Turning to used vehicles, retail used vehicle revenue of $870 million was up $69 million, or 9%. In the first quarter, we retailed 49,200 used vehicles, an increase of 3100 vehicles, or 7%. Revenue per used vehicle retail of $17,687 increased $316.

Retail used vehicle gross profit of $81 million was up $2.5 million or 3%. Gross profit for used vehicle retailed at $1646, was off $56 attributable in part to the increased cost to acquire vehicles for certified preowned programs and our desire to retail higher mileage vehicles we would have previously wholesaled. At March 31, our used vehicle days supply was 29 days, the same as a year ago.

Next, customer care or service, parts and collision. In the quarter, we had solid growth across the board in customer pay, warranty, internal wholesale parts and collision for both revenue and gross. We also recorded our highest overall customer care margin in nearly two years of 42.8%, a 110 basis point improvement on a total store basis. Customer care revenue increased $23 million, or 4%, to $623 million and customer care gross profit increased $16 million, or 6%, to $266 million.

In the quarter, we noted impressive year-over-year increases in warranty gross of 15%, internal gross of 12% and customer pay growth of 4%. This marks the 11th consecutive quarterly increase in customer pay gross. We are very pleased with this performance, especially given the fact that the industry units in operation are just now bottoming out and the service space will start to grow again this year. We believe that the focus by our customer care team on operational excellence, margin improvement and driving sales effectiveness delivered very strong results and positions us well moving forward.

I will also note that the quarter had two less selling days than Q1 2012. So when adjusted for days, our customer care same-store revenue would be up 7% and gross would be up 10%.

Turning to finance and insurance, we had another great performance from our store and store F&I teams, who once again delivered a record gross profit for vehicle retail of $1323, an increase of $113, or 9%. Total F&I gross profit of $152 million increased $21 million or 16% compared to the period a year ago. Our preferred lender network, OEM service contract alliances, strong product penetration and store level execution continue to drive outstanding performance in F&I and we remain focused on continuous improvement.

On February 1, we opened Fiat of Roseville, our fifth Fiat location. This and other activity in the quarter brought our store portfolio to 222 stores and 263 franchises representing 32 brands in 15 states as of March 31.

As mentioned earlier, in the quarter, we signed agreements to acquire three stores -- a Toyota store in the Dallas area that will operate as AutoNation Toyota of North Arlington and Honda and Hyundai stores in the Phoenix area that will operate as AutoNation Honda Chandler and AutoNation Hyundai Tempe. Each of these acquisitions add brands we previously didn't represent in these markets. As noted in previous calls, last year, we were awarded new ad points for Maserati, MINI and Audi. Maserati of Stevens Creek will open on May 1. MINI of Valencia is on track to open in mid-June and construction is scheduled to begin on Audi of Orlando that will be completed in the first quarter of 2014. As always, we continue to actively pursue acquisition opportunities that meet our market brand and return on investment criteria.

In closing, we are particularly pleased that since Q4 2009 our revenue has increased 47% and gross profit has increased 40% while headcount has only increased by 15%. We attribute this to continuous improvement of our core business, including our disciplined cost structure and initiatives to advance our capabilities, which drive associate productivity and create a win-win for our associates and shareholders. We believe that our significant investments in facilities, technology, associate development and branding are helping to lay the groundwork to further differentiate AutoNation.

As we take the AutoNation brand coast-to-coast and continue to pursue our vision to be America's best place to buy and service cars and trucks, I would like to thank our 21,000 associates for their commitment and dedication to AutoNation. With that, I will turn it back to Mike Jackson.

Thanks, Mike. During the first quarter, we saw continued strength in auto industry sales as consumers enjoyed a broader array of choices than ever before, as well as a strong credit environment. We believe the recovery in auto sales will remain strong due to accelerated product launches of which we expect 55 for model year 2014, up from the already impressive 37 in model year 2013. Of course, we have continued replacement demand and robust availability of consumer credit. In addition, our customer care business will benefit as industry units in operation begin to recover in 2013. We are at the beginning of a broad-based recovery for the economy in auto retail.

As we look at the rest of 2013, we believe that the improvement in new vehicle sales will continue and we expect new vehicle sales to be in the mid-15 million units for the year. Thank you very much and we are happy to take your questions.

(Operator Instructions). Rick Nelson, Stephens.

Thanks, good morning. (inaudible) priorities seem to have really shifted here from buybacks toward acquisitions. Wondering if you can provide some color on that? Is it a case where the valuations are now coming in to the wheelhouse on the acquisition side?

Actually the process or the priorities have not changed one iota. We are doing every month several times a month exactly what we have been doing for the last 13 years. We sit there and discuss where our capital can be applied best. It is definitely done on an opportunistic basis. That has to do with where the price of stock is, where we think the market is going and what kind of acquisition opportunities are presented in the marketplace. Do they fit and can we come to a meeting of the minds on price?

Obviously if you look at the past six months, we have done over $800 million of revenue run rate on acquisitions. Meaning that it has been a very good period of alignment on acquisitions. We have further discussions going on right now. But, as I said in the past, you never know if you get to the finish line on these transactions, so I can't commit in the future.

So it is done on an opportunistic basis. That is the way we have always done it and right now, if we look at what is being presented to us in the marketplace and what we are discussing, it is the best return for our capital.

Thanks for that color. Also, you mentioned the improvement, that we are in an inflection point now with units in operation positive for the (inaudible) business. I am interested in the used car business, how that improving supply you see that evolving. The comps looked good this quarter and we did see a sequential improvement in margins. Is that supply-driven improvement?

Rick, it's Mike Maroone. I don't think the supply has yet changed, although we are anticipating that it will get better. Especially for the certified preowned units, they are still very tight and the supply is very limited. So we are having to pay a lot of money to get those vehicles and that is a growing part of the segment.

The other factor is the used vehicles out there are coming in with very high mileage and we are really working hard to retail those. So it is putting enough pressure on the margins, but I think as it loosens up going forward and there is more supply, I think there is more opportunity on the margin side, but we are pleased that sequentially our margins are up and looking for more.

And finally, if I could ask you about F&I, if you have seen any change at all on the pricing as a result of CFPB or discussions along those lines?

No, absolutely not. See no developments there; don't expect any developments. We are very confident of our added value in the finance and insurance business. We negotiate great wholesale rates for our customers because we have -- we can offer the financial institutions a very cost-effective way to acquire a lot of loans. We have a very reasonable margin on that business of 125 basis points. And so if you look at the added value we have for the customers and the financial institutions, I do not expect any changes in that business that would materially affect our performance or results.

Great, thanks a lot and good luck.

Thank you, Rick.

John Murphy, Bank of America-Merrill Lynch.

Hi, John, how are you today?

I am doing very well. How are you doing?

Excellent.

Great execution in the quarter here; it is really impressive. First question just on acquisitions to follow up on Rick's question. As we look at this, you are getting a little bit more aggressive on acquisitions or at least there is more coming through at this point. Has something changed in the way that you are evaluating your targets and maybe baking in more synergies because you are operating so much better or is this really just a function of what is available and how things are going in the market?

I would describe the journey this way, John. If you go back to '08, '09, transactions came to a standstill. You had a very disrupted marketplace and sellers said, hmmm, I will not get anything near fair value for my business in this environment and I am going to hang on. And buyers were in no mood to step up and pay the kind of multiples you would have to pay in that environment with the expectation that everything is just going to work out. So deals came to a standstill.

Now there is a natural flow of deals to the marketplace every year, the motivation to sell and we always talk to motivated sellers. We don't make offers that can't be refused. We talk to people who want to sell. Whatever the reasons are, capital demands from the manufacturers, succession problems with the family, etc., etc. So every year, there is a graduation of deals that would normally come to the market. So by the time you get to '10, '11, there is a backlog of deals. Then there was a gap in understanding around price, which further pushed things out and then there was finally a meeting of the minds of what is a fair price around our threshold returns and what sellers would take.

So now you are seeing the catchup from all that postponement, that there is a lot of discussions and a lot of opportunity and when we see a alignment, we are going to step up and do it. You will have to get our report card quarter-by-quarter. I am not going to sit here and say, you know, we are going to do X billion this year. That is not us, that is not how we do it. We take it quarter-by-quarter, but I would paint that as a background description of what is going on.

That is incredibly helpful. Second question, as we think about the success of your branding efforts, it sounds like early on in the markets where you have launched, you mentioned that you gained some marketshare. I was just curious if you can kind of quantify that for us because it sounds like it is very successful very quickly? I'm just trying to understand what the benefits are that you are seeing in early days?

It's not a step that we took without some trepidation. We had local market brand names. Some of them were in the marketplace 80 years old. You don't walk away from those too easy. We would have strategically taken this step even if we were to go backward for a given period of time to establish the new brand. If so, if we had to accept some disruption, we still would have greenlighted the project and we sort of said best case is we hold steady and the reality, as it turned out, that we actually have some marketshare gains. You could attribute those marketshare gains also to the surge in spending in those markets. You couldn't miss us in those markets during the rebranding period.

So we consider anything that is on the plus side of the ledger at this point out of the box a success. And bodes very well for the long-term future that we have had this kind of response from the marketplace and from our customers.

I can also tell you the enthusiasm and the morale of our associates in embracing this branding is nothing short of phenomenal. They are very proud of the company that we have built. If I go back years ago, we had a choice. We could brand early and overpromise and underdeliver or we could be patient and disciplined and when we finally brand it, really deliver on the expectations. And our associates know that we have a peerless product in the marketplace and now to be able to unify under one flag AutoNation and declare to the marketplace, yes, I am an employee, an associate of AutoNation has been a tremendous morale boost for the Company. And we are very satisfied with where we are at this point and are very excited to get back on the road after we wrap up these quarterly reports and do the rest of the Company and complete it here in the second quarter.

That's helpful. Then just on pricing and incentives, the industry seems to be relatively capacity-constrained right now, so it doesn't seem like there is big incentive or pricing actions that are being taken by the automakers. But there is this constant drumbeat of fear with the weak yen that the Japanese are going to start a price war. I am just curious what your take on that is and if you are seeing anything below the covers that we are not seeing externally that is going on?

Yes, John. I would differ with your premise slightly. I don't think the fact that we have rational behavior around incentives is because there is capacity restrain. If you look at inventories, they are actually quite healthy. I think where the industry is at 3.2 million units out there, that is probably $100 billion worth of inventory. So there is plenty of inventory out there and I think the discipline is more transformational in the sense that, at the end of the day, all the segments are filled by everybody. Everybody has a really high quality distinctive product offering and there is stability around share where you would have to pay a tremendous price to move a point one way or the other.

So I really see a stabilization around share with the Detroit being somewhere in the mid 40s, the Asians somewhere in the mid 40s and the Europeans taking the rest and I really don't expect a strategic incentive price war to be unleashed.

Second, in talking with all the manufacturers, I don't care whether it is Asian, German or Detroit, everybody understands in this business that you have to produce where you sell and you have to remove exchange rate from your business plan and balance them out. And everybody -- the situation is not comparable if we were having this conversation 10, 15, 20 years ago. Great progress has been made.

So on the margins, exchange rates do not play the role they once did. I understand for an export country like Japan, globally, it is an issue, but if you look at where they are in the US, it is certainly not the issue of 15, 20 years ago.

So my view is that we have genuine rational discipline around incentives. I don't see incentives going away. There will always be tactical incentives, but I don't see anyone unleashing a price war. I just don't see who is going to do that and I do not expect it to come from the Japanese because of what is happening with the yen.

By the way, they sort of view these exchange rates from a market perspective and I have been in this chair from a strategic point of view and the variability is profitability all in. They sort of take a strategic price positioning in the marketplace and either eat or reap the swings in the currency. But long term, they are all trying to balance it out with production.

And then just the last question, you mentioned that you thought housing was supporting truck sales recently, but housing starts in absolute terms are still relatively low versus where they have been historically. I mean is there something in the end markets that you can identify specifically because it seems to us like this housing recovery may actually not be the big driver. It might still be on the come for pickup trucks. I am just trying to understand what you're seeing in your data that gives you that level of comfort.

Here is what we are looking at. Okay, we all know we had a bubble in housing construction '04, '05, '06, up over 2 million units a year, including multiple households. Then we had the collapse and household construction dropped to less than 500,000 a year and basically we have been sitting there for four or five years clearing the inventory and anybody who was in home construction did not buy a new pickup truck.

We are now approaching a million units and I agree with you, John, completely. We are not back to trend yet on household construction. It should be let's say a sustainable rate of 1.5 million, something like that, but it is certainly double -- this year will be double what it was three or four years ago.

So you have to take into fact that we had a depression in housing and we had a depression in autos and housing has finally cleared the inventory and we are seeing that construction and all these contractors are looking out in the next several years and see they are going to have work and they are coming in and buying pickup trucks.

I would also not underestimate the impact of the energy sector, particularly in Texas, Colorado for us. This fracking technique is like a production technique. It is not like drilling a well. It is very labor-intensive compared to other ways to get petroleum and they are high-paying jobs. So all of a sudden, you have these two industries, housing and energy, that have jobs that can't be outsourced to India or anyplace else in the world. This is good American workers. And they all want full-size pickup trucks to drive to work and our pickup truck sales in the first quarter are up 18%.

So listen, I am not forecasting a V recovery in the economy, but I am saying, compared to two years ago, three years ago, there are bright spots in this economy in housing, energy and automotive that would say this tepid recovery is moving into a phase where it can stand on its own two legs and as fiscal policy and monetary policy become less supportive over the next year or two, we can still -- the economy can still probably support GDP growth of 2% to 3%. That is the transition phase that I feel we are in.

That is really encouraging. Thank you very much.

Ravi Shanker, Morgan Stanley.

Good morning, everyone. This is actually Jay in for Ravi. My first question -- I wanted to drill a bit deeper into the F&I business. Could you maybe break out for us what the growth drivers here were for the segment? Specifically maybe how much of the improvement was driven by banks and lenders getting more aggressive as opposed to increased penetration and things like service contracts and prepaid maintenance? And then maybe how much road we have ahead of us in terms of growth from here?

Well, first of all, I think there is tremendous competition and there is a lot of capital available for the space that really reflects on the strong performance of those loans even in the downturn. And Mike Jackson said many times, people pay for their cars before they pay for their credit cards or their houses and I think that is a fact. So we have got a lot more lenders who are very hungry for the business.

Our overall financial penetration hasn't changed a lot; it is still around 70%. Where the income growth is coming from is both in product penetration where we are seeing improvements in our service contracts, our prepaid maintenance on our other products and also where we have been able to use our size and scale to get incremental earnings from lenders and from companies that provide those products. So we are really leveraging our scale to do a better job of gaining more growth. We are certainly not getting it on the rate side.

Okay, would you say that it has been -- I guess the growth has been skewed more because of the product growth like the service contracts and the prepaid contracts as opposed to using your size and scale to get incremental earnings from lenders?

I think it is both. I think if you asked me to rank them, I would say product penetration would be slightly ahead, but we work hard in both areas.

Got it and that's very helpful. My next question, if we could focus more on gross profit per unit. I would love to hear your thoughts on both new and used, but given that we are now mostly passed the distortions caused by the Japanese tsunami and maybe to a lesser extent passed the effects of Hurricane Sandy, do you see yourself -- the Company -- being able to maintain GPU at current levels? Do you see this changing if we start seeing any incremental changes in the pricing environment, like if the yen maybe does start to have a negative impact on incentives?

This is Mike Jackson. We feel -- we are dissatisfied with our front-end margins and have the ambition to improve them. Saying that and doing it is two different things. It is a very competitive marketplace out there and it is a very complex marketplace out there. What do I mean by that? While I talked about the overall level of incentives or appropriate and tactical, the structure of many of the incentives are really out of step with today's customer and extremely disruptive. And there I am talking about stairstep incentive programs that are really out of step with today's customer and today's marketplace. And when they are unleashed in a marketplace, it really wreaks havoc in trying to manage front-end margin.

So we are hard at work on it. We have the ambition to improve. We think we can maintain where we are. The ambition is to improve and we are fighting tooth and nail not to go down. Mr. Maroone, do have anything to add to that?

No, I think that is a great description on the new side. On the used side, I think it is -- the opportunity is in better and better execution and I think our used car team has made very good progress and I think there is more that we can do.

Got it. And if I could sneak in one final one, could you guys comment a bit on where subprime penetration trends have been for you guys and if that has been a big driver in retail sales improvment or does that sort of remain steady and perhaps a source of improvement further on down the road?

I think subprime financing is more abundant. I think due to some credit failures in the downturn, there is more customers out there that are in that category. So I think it is a growth opportunity for us and I think that it will continue to be, especially in some of our bigger markets, the subprime business is a big part of that market.

Was that a big driver of growth specifically in 1Q?

I'm sorry?

Was that a big driver of growth specifically for the first quarter?

No, I think it has been that way for the last year, so we have seen improvements over the last year. I don't see it as radically changing in this one quarter.

Got it. All right, thanks very much, guys.

Jamie Albertine, Stifel.

Great, thank you very much for taking the question. Good morning and congratulations.

Thanks.

A quick housekeeping item, just had some follow-ups on a few of the comments you mentioned earlier. If you could clarify, I think you said pickup truck sales up 18%. Could you fill in the gap with respect to maybe car sales because I guess we had seen some choppiness on the car side as it related to cars versus trucks in the quarter?

And then as it relates to your M&A environment, can you talk a little bit about -- I mean we understand the cadence here and we are excited quite frankly about hearing more deals getting closed. But we understand it is tough to pull the trigger and there is a lot of stuff that can happen before you close. Can you give us a sense of how many deals you have reviewed and to the point where you could only find two that worked just so we could understand how active you are in that environment? Thanks.

I would say we are in discussion on 15 to 20 transactions at any time. That is the bandwidth of what is in discussion, so a lot of opportunity there. But I can't make a forecast on what would happen. I am not going to paint myself into that corner. On trucks versus cars where we are a company, 48% trucks, 52% car. That is our split. Mike, do you have some monoline?

Yes, I think on a total store basis, cars were up 9%, trucks were up 10%. On a same-store basis 6% and 7% for car and truck. So we are seeing growth in both sides.

But if you look at those numbers and then you say large pickup trucks up 18%, I mean that is really an outlier or a standout number. It jumps off the page. That to me says something about the economy.

Absolutely and we would share your sentiment and the response you gave earlier to that end with the energy sector and so on and so forth. I guess from a bigger picture question, and then I will get back into queue, can you help us parse how you are thinking about fixed cost leverage opportunities relative to growth in the future and organic? And to the extent that you can sort of delve into where you see the biggest opportunities within your existing footprint and how that plays into the magnitude of your longer-term plans. Thanks again.

Thank you, Jamie.

Jamie, this is Mike Short. The way to think about it from a high level is we generally look for about a 50% flow-through from the incremental gross profit dollars that we drive through the P&L, all the way down to operating income. And if you exclude the rebranding numbers that we called out earlier in our commentary, that is about what we drove this quarter and that has been a fairly consistent trend for us for the past several quarters.

The way we accomplished that is when you look within the areas of SG&A on the comp side within your variable compensation, you are really looking for productivity enhancements. Happy to pay sales associates a lot more money, but we'd like to see them drive a lot more gross profit associated with that and that is a win-win for us and our associates.

On our fixed cost comp, what we are looking to try and accomplish is identify areas for process improvement whether that is our shared service center or other opportunities that we have to improve technology, to drive in additional productivity and leverage that fixed cost structure.

On the advertising side, the other area of SG&A, we are putting a lot of analytical support behind trying to identify that 50% of your advertising that is really working for you that we can identify what the return is on that and how do we maximize it.

And then when you get into the SG&A categories, those other SG&A things, the administrative costs within our stores, it is benchmarking and trying to maximize the identification of best practices and roll those best practices out across the rest of the stores. That is basically the formula that we have been on now for several years and it seems to be working well for us.

It's very helpful. Thanks again and good luck in the quarters ahead.

Thank you.

Simeon Gutman, Credit Suisse.

Thanks. Good morning and nice results, everyone. There are a couple clarifications first. First, on F&I, the $1300 or so per vehicle, can you just break down maybe in order of magnitude how much is coming from either service contracts or penetration rate -- not rate, but just penetration dollars -- versus financing vehicles? And then the second follow-up, on gross profit for new, I heard in the prepared remarks you are cycling some incentives, but did you also suggest that the margin within Luxury or Premium was coming down? Can you just clarify that please?

First, in F&I, the way we look at it really is that two-thirds of the income comes from product, one-third of the income comes from rate and that is a very bold bucket. I don't have a breakdown for your within the product of how much each of those segments contribute. And the question on new vehicle gross?

Yes, on new vehicle gross.

Could you repeat the question?

Sure. I think you mentioned in the prepared remarks, part of it was you were cycling some incentives from a year ago, but I guess I would've expected if the mix of premium went up year-over-year versus import, the profit per unit would have looked a little better. And I didn't know if I missed the comment that you said there was some pressure within the Luxury Premium segment.

Yes, I think there's two pressures, one in the Import segment. It was very competitive with much higher volume targets in the stairstep incentives. In the Luxury segment, you are right. We did do a better job in Luxury. Where we really saw a change there is in the mix shift where there was a shift to some lower margin vehicles. And what I will call out is BMW where we had a really big quarter in BMW, but the X1 and some of the smaller products took a bigger piece of that share. So I don't think it is a major structural problem; I think it is just a mix in the quarter and we are happy to have that Premium Luxury business.

Okay, that's helpful. And then regarding the marketing program, it was mentioned that you gained share in some of those markets. Are some of the markets that are seeing the marketing changes, is the back end also seeing some of the shared service center change at the same time? Where I am going is are you leaving something on the table still as you go through this process? Meaning we should see stronger results once -- obviously when this gets done, but in this disruption period, you are losing something?

The shared service center was a precondition to launch the brand. We had to have no risk of systemic failure. So it took us quite some time to build out a shared service center. That gave us complete transparency and control of the business that we could not have a systemic issue at the same time, something that was very cost-effective and efficient. So that was a precondition and that's done across the enterprise.

Okay. And then my last question is on the parts and service margin. Can you talk about the drivers of why that is increasing and then how we should think about that going forward?

We announced that we were going to put a lot of energy and focus into customer care, including the arrival of a new Senior Vice President to lead that effort, Alan McLaren, who came from Mercedes-Benz. And we said that, in this approach as we made this effort, we would go for revenue first and come for the gross margin later. And so we spent a couple years just looking for new opportunities for revenue and really got into those business segments, understood them and then found a way to have added value and retain that business and gradually begin to expand our gross margin.

So it's a classic business move that we are executing very effectively and to say that we are seeing these kinds of results when we just now are approaching the structural bottom of the customer care business due to the meltdown back in '08, '09 gives us a lot of encouragement for the future.

And as the units in operation come back, are there levers in the gross margin where that creates leverage or does that come down to I guess SG&A leverage as well?

I am not sure I understand the question.

As units come back into the operation, so you see more volume, are there any levers in the gross margin side, whether it is either you are leveraging the cost of the service person doing the work in that gross margin continues to go up as the units come back or is that leverage all contained in your SG&A line?

It is primarily contained in the SG&A line. There is a little bit of fixed cost leverage within the customer care business. And as Mike mentioned, the continued press for improvement in margin as we get into this next phase will help that as well, but most of that operating leverage will occur at the SG&A line.

All right, thanks.

Patrick Archambault, Goldman Sachs.

Yes, a number of my questions have been answered, but one I wanted to delve in on is the used performance this month. You had a used-to-new ratio of 0.75. That is the highest you have seen in three quarters. Can you tell us a little bit, how much of that is market dynamics, potentially used normalizing a little bit if the wholesale inventory is becoming a bit more available and how much of that is marketshare and things you are doing to capture a bigger piece of that business?

Patrick, I think you will recall, over the last several quarters of last year, we called out that we were dissatisfied with our used vehicle point of view and thought we had an operational opportunity. We are always very frank when we look at an issue that if it is us, it is us and we say it. And so we have worked very hard to improve our capabilities around used cars, have made changes, and they seem to be working. It is still a tough environment out there on the supply/demand side, but we definitely consider the first quarter a step forward. Mike, do you want to add anything on that?

I think you said it. We have got a new team, Steve Strader we brought in as a Senior Vice President, heads up that team and he and the used car folks really focused on wholesaling less, retailing more, moving units appropriately and pricing to market, controlling our discounting. There is a whole series of execution issues that I think they have done an excellent job of working through and we think there is even more opportunity in that business in the recovery.

Okay, terrific. That is all I had. Good job in the quarter, gentlemen.

Great, Patrick. Thank you.

Matt Nemer, Wells Fargo.

Thanks so much. Good morning, two questions. The first is, as you look at the units in operation recovery, how do you think that that -- the cadence of that varies by brand or by market segment, i.e. does Luxury rebound first? And what are the implications of that on your margins? And then secondly as you have rebranded the markets, can you talk about any early changes that you have seen on Google or other Internet platforms in terms of how you are ranking?

First, on the units in operation, it is a pure math exercise. We assume that we are caring for vehicles from brand new to year five or six. You go back and you look at the sales rate from our various markets, we have calculated it all out. And I would say our bottom and inflection point is actually the third quarter, something like that and it is a very gradual turn. I would say Premium Luxury is leading the way of the turn, but it is -- we are just so happy not to be going down anymore and to be leveling off and to see the turn coming. And Mike, do you want to talk about digital?

Yes, when Mike talked about attacking different areas of the business, we also brought in some incremental talent in the marketing group headed by Greg Revelle, who has got a very strong digital background. So in the rebrand, we have really focused on driving more traffic to our website and our traffic is much improved. And certainly in a rebrand opportunity, we are spending a lot of money to drive that traffic, but we are really pleased with the progress we are making both in our phone calls, our e-leads and our walk-ins to our stores. So I think a lot of that is driven by our digital efforts in addition to a strong media buy to make that so that consumers can make that connection between our old brand and our AutoNation coast-to-coast brand.

And just bigger picture, given Greg's hire, and I know you have brought on people from other Internet companies like eBay, how do you think the digital experience will change for AutoNation, bigger picture, over the course of the next few years?

Well, we are making significant investments both in bringing in real talent, some of which you called out and in technology. So we are excited about the future. We think consumers are having experiences in other industries that they are very pleased with and yet auto retail in many cases has lagged. So I am hopeful that you will see a lot from AutoNation and you will see us be the leader in that space. I probably won't take it any deeper than that until we can come out and demonstrate our capabilities even to a higher extent.

Colin Langan, UBS.

Great, thanks for taking my questions. You mentioned earlier in the call that you are confident there will be no impact from the proposed changes from the Consumer Finance Protection Bureau. I just wanted to clarify, does that mean if they move to a flat fee structure, which is I think what they are recommending, that your profits wouldn't change or do you think that the rules just won't get adopted that they are proposing going forward?

It is not certain at all that there will be a change to a flat fee arrangement, but if that is what it comes to, I think we will find a way to manage it. So we are very close -- we have a very narrow bandwidth on our markup. As I said, it is 125 basis points. They are already talking about a flat fee out of the box of 100 basis points. So it seems to me to be an entirely manageable situation if that is what it comes to. But I think it has got a long way to go before we can say for sure how it is going to go.

And any color on your F&I how much actually comes from the finance side of the business?

Yes, we covered that earlier. One-third from finance, two-thirds from product.

Okay, and product means the --?

Product means service contracts, warranties.

Okay, okay. And then my last question is just wanted to clarify, you made comments that you gained share, but when I look at the same-store sales on the new side, you were up 6%, which was pretty in line with the market. Were you gaining share in just the markets where you rolled out the new brands or am I just misreading the data?

No, that is correct. In markets where we changed the brand.

Okay. Because last year you actually outperformed. So any reason why you are just in line this quarter (multiple speakers) and is there a brand mix or a geography?

We are overweighted on the Japanese. 50% of our retail unit volume new is branded Asian. Primarily all that is Japanese. Last year was a recovery year for the Japanese after the collapse of 2011 due to the earthquake. Therefore we benefited from the over-recovery of the Japanese last year.

Okay, all right, that makes sense. Thank you very much.

Rod Lache, Deutsche Bank.

Good morning, it's Dan Galves in for Rod. Just two quick questions. The first one, as late-model supply of used cars does start to improve and acquisition prices come down, in your opinion, does that impact the consumer choice between used and new and do you think that the OEMs will respond in terms of lowering the price on new to counteract that?

No, I really don't see that happening whatsoever. Mike, do you want to add anything?

Well, I think the OEMs have a big incentive to support their CPO product and what they do is, when that gap gets tight, they will put interest rate incentives or other warranty extensions to make that CPO product more desirable. I think they need to support both. What I think the reference there is, as more supply becomes available, I think it will be slightly less competitive and maybe give us some gross margin opportunity.

Okay, thanks. And just one other one, a more modeling-based question. The incremental $18 million of rebranding spend in the first half this year, should we consider all of that to be one-time in nature and so won't be in the cost structure next first half?

That's correct.

Okay, thanks very much.

Time for one last question.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. I first wanted to start off on used cars and just -- it sounds like you made a personnel change in the used car department. You have seen some positive changes there and so therefore you are optimistic about the outlook for your used car performance from a volume standpoint going forward. Is that a fair conclusion?

Yes, I think it is more than just one person; although we did bring in new leadership. I think Mike Jackson called out earlier that we were very open about our dissatisfaction with our performance and felt there was more there and our whole team is focused on the very basic fundamentals of used and what we felt we needed to do and we have put more training resources, we have got more people in the field who are working hard at acquiring product at the right time at the right price. So it is a comprehensive effort. And that is what gives us confidence that we think going forward we will be able to continue to perform in a good way here.

Thank you. And we have seen wholesale prices, the auctions, kind of drifting down a little bit, which would suggest that we might see a little gap or increase in the gap between the value of the used car versus the new car, which might allow you to improve your gross profit per unit or discount your used car prices more. Do you think it will have any effect on your gross profit per unit or volume?

Not sure. I don't think we have seen that much weakening in prices and you really have to go inside to look at the segments. So the more desirable the product, the less movement in price. So used car prices are holding up pretty good. I think that our opportunity is really on the execution side and I think everybody in our organization knows that.

Okay, and then on the parts and service margins, three quarters in a row you have seen some year-over-year improvement there. It sounds like you have seen some company-specific initiatives positively impacting you, as well as some market dynamics positively impacting you. The outlook seems like we should continue to see some improvement there. Would that be reasonable? Would that be a reasonable expectation?

I think that is a reasonable expectation.

And then finally just on acquisitions, you bought a couple of Japanese and Korean brands. Your thoughts on brand preference? The domestics are in there doing well recently and the product has certainly improved over the years. Do you have any particular brand preference or bias at this point in time?

As often discussed, our strategy is to have all the major brands in any market that we are in. So if you look at these acquisitions, those were brands that we were missing in those markets. If you look at last month in Texas, we were missing the Chrysler franchises, so we bought a big Chrysler store. So that really -- filling out our offering to the market is our number one acquisition goal. We want to really be able to say in a marketplace that if you live or work in one of our branded markets, you have to shop us. There is us and everybody else and to really have that said in the marketplace in the most compelling way, you really need to offer all the major brands.

And as I have discussed earlier, I think that the Detroit renaissance is for real, it is sustainable. The products are marvelous. The Europeans have a unique selling position and we have a big position with the Japanese. So we are very comfortable with where we are at. So thank you everyone for joining us today. We appreciate it very much.

Thank you.

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