AutoNation Inc (AN) 2013 Q3 法說會逐字稿

Welcome to AutoNation's third-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 call is being recorded. If you have any objections you may disconnect. Now I will turn the call over to Ms. Cheryl Scully, Treasurer and VP of Investor Relations for AutoNation. Ma'am, you may begin.

Good morning and welcome to AutoNation's third-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; Mike Short, our Chief Financial Officer; and Jon Ferrando, our Executive Vice President responsible for M&A.

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.

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 such forward-looking statements.

Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. And now I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning, everyone; thank you for joining us. Today we reported our fourth consecutive all-time record quarterly earnings per share from continuing operations of $0.75 for the third quarter, a 14% increase as compared to adjusted EPS of $0.66 for the same period in the prior year. The third-quarter 2013 revenue totaled $4.5 billion compared to $3.9 billion in the year-ago period, an increase of 14%, driven by stronger performance in all of our business sectors.

In the third quarter AutoNation's total new vehicle unit sales increased 13% and used vehicle sales increased 15%. This is the highest quarterly total retail unit sales since the third quarter of 2006.

AutoNation also announced that it signed agreements to acquire O'Hare Honda and Hyundai in Chicago, Illinois, expanding our existing footprint in the Chicago market. Annual revenue for the stores is approximately $85 million. This will be AutoNation's 22nd Honda store and its six Hyundai store. Now I will turn it over to our Chief Financial Officer, Mike Short.

Thank you, Mike, good morning, ladies and gentlemen. For the third-quarter we reported net income from continuing operations of $93 million or $0.75 per share versus net income of $82 million or $0.66 per share during the third quarter of 2012, that's a 14% improvement on a per share basis. There were no adjustments to net income in either period.

In the third quarter revenue increased $537 million or 14% compared to the prior year and gross profit improved by $74 million or 12%. SG&A as a percentage of gross profit was 69.6% in the quarter, which represents a 40 basis point improvement compared to the year-ago period.

Net new vehicle floor plan was a benefit of $12.6 million, an increase of $4.7 million from the third quarter of 2012, primarily due to higher floor plan assistance. Floor plan net debt decreased approximately $147 million during the third quarter to $2.6 billion at quarter end as we brought down days supply.

Non-vehicle interest expense was relatively flat for the quarter at $22.3 million compared to $22.2 million in the third quarter of 2012. At the end of September we had $320 million of outstanding borrowings under the revolving credit facility and total non-vehicle debt balance of $1.9 billion. This was a decrease of $80.5 million compared to June 30, 2013.

The provision for income tax in the quarter was $58.8 million or 38.8%.

During the third quarter 2013 we did not repurchase any shares. AutoNation has $314 million in remaining Board authorization for share repurchase. As of October 23 there were approximately 121.8 million shares outstanding; this does not include the dilutive impact of stock options.

As continued evidence of the strength of the cash flow generation of the Company, our leverage ratio decreased from 2.5 times at the end of Q2 to 2.4 times at the end of Q3. The leverage ratio was 2.2 times on a net debt basis including used floor plan availability and our covenant limit is 3.75 times.

Capital expenditures were $85 million for the quarter. We expect CapEx to be approximately $145 million for the year. This is down from original estimate of $180 million due to the timing of some projects that were pushed into next year. Capital expenditures are on an accrual basis excluding operating lease buyout and related asset sales.

Our quarter end cash balance was approximately $68 million, which, combined with our additional borrowing capacity, resulted in total liquidity of $940 million at the end of September.

As a result of our proven track record and financial strength Moody's upgraded AutoNation to investment-grade during the quarter matching S&P's upgrade from 2011.

We continue to generate strong cash flow and maintain our lean cost structure. Our focus and effective capital allocation strategy combined with our investment-grade balance sheet enable us to continue to maximize shareholder value. Let me now turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning. In the third-quarter we delivered our highest quarterly new vehicle sales on a total store basis in six years along with growth in both revenue and total gross profit across all business segments. In addition, we achieved a solid 4.2% operating margin and record quarterly EPS for the fourth consecutive quarter. As I continue, my comments will be on a same-store basis compared to the period a year ago unless noted otherwise.

Starting with sales, for the quarter combined new and used unit sales volume was up 9% and total gross profit for variable operations, which combines new vehicle gross, used vehicle gross and finance and insurance gross, increased 8%.

Looking at new vehicles in the quarter, same-store new vehicle revenue increased $203 million or 9% to $2.4 billion on new vehicle sales volume of 73,500 new vehicles, an increase of 5,200 vehicles or 8% with increases of across all through segments. New vehicle gross profit of $148 million grew $3 million or 2% in the quarter. Gross profit for new vehicle retailed of $2012 was off $105 or 5%. Sequentially we are able to increase gross profit per new vehicle retail by $16 despite continued pressure in the Import segment. Looking to Q4, we expect seasonal mix to contribute to a sequential improvement in new vehicle gross PVR.

Turning to used vehicles, at $893 million retail used vehicle revenue was up $81 million or 10% in the quarter on 50,500 used vehicles retail, an increase of 4,800 used vehicles or 11% with increases across all three segments. Retail used vehicle gross profit of $78 million was up $5 million or 7% and gross profit per used vehicle retailed up $1,539 was off $49 or just 3%.

Relative to inventory, both our new and used inventory are in very good shape. At the end of the quarter new vehicle day supply was 59 days or 60,000 units compared to 58 days and 51,700 units a year ago. And our used vehicle day supply was 31 days compared to 29 days a year ago. It was a positive story overall in the quarter for all of our core markets; our new vehicle volume was up 12% in California and 7% plus in Florida, Arizona and Texas on a same-store sales basis.

Rounding out the variable side of the business is finance and insurance which going forward we will refer to as customer financial services to better reflect the service provided. In the quarter customer financial services gross profit per vehicle retailed was $1,358, an increase of $68 or 5%. Total gross profit of $168 million increased $21 million or 15% compared to the period a year ago.

We remain focused on full transparency and providing value added products that help to drive long-term customer retention. I will note that our preferred lender network, OEM service contract alliances, strong product penetration and store level execution continue to drive our outstanding performance.

As I mentioned earlier, total variable operations gross profit increased 8% year over year by $30 million to $394 million. On a per vehicle basis total variable operations gross profit of $3,177 was relatively stable, down just $18 in the quarter compared to a year ago and up $39 sequentially.

Next, customer care or service parts and collision where the team delivered a 42.4% operating margin of 20 basis points as the business continued to grow across the board for customer pay, warranty, internal, wholesale parts and collision for both revenue and gross profit as our customer care team remains focused on operational improvement, margin improvement and driving sales effectiveness.

For the third quarter customer care revenue increased $34 million or 6% to $631 million. Customer care gross profit was also up 6% to $267 million, an increase of $15 million. Continuing the positive trend, customer pay gross increased 2.4% in the quarter; this marks the 13th consecutive quarter-over-quarter growth for customer pay gross.

We are pleased with the continued improvement in customer care. Our customer retention efforts and sales performance are driving improved results as we enter a multi-year recovery. At September 30, our store portfolio numbered 267 franchises and 226 stores in 15 states representing 33 manufacturer brands.

In closing, we continue to focus on the AutoNation brand and the tremendous opportunity it provides our Company. We also continue to work diligently in the area associate development, expansion of our digital capabilities and delivering on our strategic investments in IT that will enhance the customer experience and improve associate productivity.

With that I would like to thank all AutoNation associates for their commitment and dedication to the Company and for bringing our mission of delivering a peerless customer experience to life every day. Now I will turn the call over to Jon Ferrando.

Thank you, Mike. During the third quarter AutoNation signed agreements to acquire O'Hare Hyundai and O'Hare Hyundai in Chicago, Illinois. These acquisitions align with our strategy of offering our customers all of our core vehicle brands in our key markets. And the stores will enhance AutoNation's brand mix in the Chicago market.

The annual revenue for these stores is approximately $85 million with 110 associates and annual retail sales of approximately 3,100 new and used vehicles. We expect to close the acquisitions in the fourth quarter and, upon closing, we will operate the stores as AutoNation Honda O'Hare and AutoNation Hyundai O'Hare.

Over the last five quarters AutoNation has announced the acquisition of 12 franchises and the award of four new Premium Luxury franchises by the manufacturers. 2012 revenue for the 12 acquired franchises, together with the expected annual revenue of the four franchises awarded to us once they are fully operational, is approximately $1.1 billion.

We continue to actively look for acquisitions and new store opportunities with a focus on adding new brand representation within our existing markets. We will continue to be selective and prudent with our capital with a focus on investing to produce strong returns and long-term stockholder value. I will now turn it back to Mike Jackson.

Thanks, Jon. The auto recovery continues with the third-quarter SAAR at the highest level since the recession, the auto credit environment remains strong, and consumers continue to be attracted to exciting new products from the manufacturers.

As we look to the rest of 2013 we believe that the improvement in new vehicle sales will continue and expect new vehicle sales for the industry to be in the [mid-15's]. AutoNation remains focused on executing our coast-to-coast brand promises and providing a peerless customer experience as we continue to capitalize on the broader auto recovery. Thank you. We will now be happy to take your questions.

(Operator Instructions). Rick Nelson, Stephens.

Lately your peers have discussed a bit of a slowdown in late September and October. I am curious what you are seeing there and (inaudible) the outlook as you see it for the fourth quarter. I realize this is very back end loaded.

Yes, Rick, there is no question that the government shutdown had a disruptive impact on sales. Business was very strong from August going through Labor Day and once the prospect of a government shutdown became more certain it definitely was disruptive to sales.

If I was to describe it I would say sequentially it was about a 10% impact and year over year you are then running flat rather than having increases. That phenomenon continued into October. Now with the government back to work we see a gradual increase in the pace.

You'll have to wait until we announced our October results to see how that all worked out, but I expect that the increases we saw throughout the year will now resume in the fourth quarter. How much impact considering we lost the early part of October remains to be seen. But we are very confident that the final number for the year will be in the mid-15's with the possibility it is over 15.5.

That is good to hear. Also curious on the rate branded stores, what you are seeing there in terms of unit growth compared to the markets that they operate in. Does it take a while for that new brand to take hold or is there --?

Well, we never said that we felt the brand would be an instant market share benefit. Probably in the short run it is disruptive to walk away from 100-year-old local market brands. I think the fact that we have just set the fourth all-time consecutive record performance of the Company says the marketplace will accept it.

Because imagine -- we are selling customer care, service and parts, finance insurance, used cars and new cars under that brand. I would say overall we are holding our own on share with no significant gain.

And finally, you have announced some new acquisitions. If you could characterize the M&A environment today maybe versus a year ago or two years ago how that kind of looks to you?

Yes, Rick, this is Jon Ferrando. I think the market is clearly more active than it was three or four years ago when you had the major disruption in the marketplace. I would say over the last year or two it has become more normalized with prices becoming rational and balanced.

So what we are seeing out there is a solid pipeline of deals across the country. You have seen us close on some of those over the past year. The largest auto retailer in the US and with our financial capacity we get a large number of opportunities brought to us. And probably look at 15 to 20 for every deal that we actively pursue and ultimately close. So we see a good environment over the next several years to continue.

Sounds good. Thanks and good luck.

Simeon Gutman, Credit Suisse.

Hi, this is actually Dan filling in for Simeon; thanks for taking our question. Just a quick one -- sort of looking at the balance between manufacturer supply and consumer demand, can you comment on any changes that may be happening there? Does that balance still feel like it is intact? Are you starting to see it tilt one way or the other?

Dan, it is Mike Maroone. I think there is good balance. There are very rational incentives out and we haven't seen a spike in incentives. The inventories are in a very good way. We are in the 59 to 60 day supply. I think the industry is very healthy and we are not seeing the kind of disruptive behavior that we saw years ago. So I think we are in good shape.

Great, that's helpful. And then just one other quick one. Can you kind of comment on I guess sort of the percent of lease turn in's that are being bought and retailed at store? And are you seeing any changes with residual values being above market prices?

I think that the used car market is very strong; it is especially strong in the two to three year cars coming off lease. Those are performing at a very high level. The longer-term leases that have higher miles are probably where they are supposed to be. So I don't see any deterioration.

The used car market held up very well over the summer and we are active buyers of off-lease product. We think they're very good for customers, they provide big CPO opportunities and our CPO business is growing even faster than our used business overall.

Great, that is really helpful. Thanks again, guys. Best of luck.

John Murphy, Bank of America-Merrill Lynch.

First question on the acquisitions and the new points. I mean $1.1 billion is a big number in absolute terms and it is big relative to even your revenue base, it is about 6%. Do you think the acquisitions and the new points could continue at that pace? I mean not to put you on the hook for an exact number, but I mean is this kind of thing you think you could keep up at a similar rate over the next year, two or three?

John, it's Mike Jackson. You know, that is a very difficult thing to forecast and you really have to look at our track record to figure out what we will do with capital allocation. It is very opportunistic; it really depends on the circumstances. And our first investment is always on the existing business, we have been very astute at share repurchase, 7 billion at an average price of just under $17. And now, as Jon has described, we see the opportunity to build out our footprint in our existing markets and we are moving on that.

We are in a lot of discussions; you always need deal discipline around price. And you never know whether they get to the finish line or not. And that is one of the reasons why I don't want to make a forward statement. Because it weakens my hand in a negotiation if I put a stake in the ground that says we're going to go out and do x-deals a quarter.

And I simply want to stay in the position that we can stop at any time if the pricing gets out of whack of what we are willing to pay. So that is the main reason I don't give you a forward statement. I think the activity is there; whether the price agreement will be there is the wildcard that I cannot predict.

Great. We appreciate your remaining disciplined, obviously, that is good. Second question just as we look at the parts and service. I mean you guys have been putting up mid single-digit same-store comps for really two years straight now. And it seems like we are just about or hitting the (inaudible) in the growth of these year to five-year-old cars that will flow through your parts and service bays hopefully more aggressively.

I mean do you think you can keep these mid single same-store comps up in parts and service and potentially is that zero to five-year-old car population maybe even accelerated a little bit? I am just trying to understand how you are thinking about that going forward?

I think mid-single digits is a very reasonable way to look at it. There is no question that the zero to five car population is going to grow rapidly; next year we are looking at something like plus 9% in the zero to five. However, in the period of vehicles that are from six to 10 years old, that is going to take a couple years to work through, so that counterbalances it somewhat. So that is why I say mid single-digits is a very predictable place to be.

Okay. And then just on the October sales that slowed down maybe at the beginning of the month; sounds like they're picking up a bit. It doesn't sound like there is a change in incentive activity which is a good thing from the automakers. But have you seen anything on marketing dollars either to dealers or just broadly in the market to really kind of offset some of this disruption and the insanity in DC that really created some disruption with the consumer to really try to get people back in the showroom and feeling a little bit better about buying a car?

John, it is Mike Maroone. What we have seen with just a couple of brands is we have seen some enhancements to the volume-based incentives. Which, as you know, we are not a big fan of. But overall the incentive behavior has been very rational and I think everyone that I have talked to is very optimistic about the fourth quarter and I think you will have a good competitive marketplace, but so far very well behaved.

Yes, I think, John, the general view within the industry is that, yes, this government shutdown was disruptive, but it is clearly over and that nothing extraordinary needs to be done because the big drivers of replacement need, exciting new product and financing, remain. And therefore everyone expects the pace to pick up again.

To what extent we still have to wait and see, but I don't see anybody looking at the situation like, let's say, if you go back to September of 2001 where the view was clearly something had to be done to get the market moving again. That is not the view. The expectation is the sales pace will resume.

Great. And then just one last question. Mike Short, you had mentioned something about the assistance improving. And I'm just trying to understand is that just relative to you turning your inventory faster and making more money on the assistance relative to the floor plan interest expense? Or has there been an actual change in assistance program -- floor plan assistance programs from auto makers?

There is -- certainly the strong operating performance on turning the vehicles faster, John, but there is a piece of it also that is higher assistance from the individual manufacturers.

And is that rate-based or dollar-based?

It's -- on the manufacturer side it's dollar-based.

Okay, thank you very much.

Ravi Shanker, Morgan Stanley.

If I can just follow up on what you said on that new side. We have seen at least one other dealer this quarter complain about a fairly severe competitive environment out there especially for (inaudible) brands. And talking about stair step incentives, which, as you said, you have been a vocal opponent of. Have you seen any meaningful step up in that? I'm just talking about post the shutdown, but just a trend in 2013 and where do you see that going in the next year or so?

Mike Maroone. I think that we are seeing it really in one segment and that is the Import segment. There is a little bit in the Domestic segment, but Premium Luxury is pretty rational. We are actually seeing our margins expand there. The margins in Domestic are off a very small amount, very tiny amount. The real pressure is in Import and pressures in the midsize segment.

So we are seeing volume-based incentives. I am not seeing more people come into the game in terms of more brands coming into the game, but the volume-based incentives are disruptive. And again, the pressure is heavily in the Import segment. With that said, sequentially our margins were up and as we look to the fourth quarter we think we are going to get a benefit based on mix. So I don't think it is a dire situation but certainly there is pressure.

Got it. Just moving to F&I, we have heard that the CFPB is kind of forcing some of the lenders to send letters to some of the dealers. So can you confirm if any of your dealers have gotten letters? And also it seems like the CFPB is going after the captives as well. Do you see any step-up enforcement or any action from the CFPB that makes you think that something is going to change in the coming quarters?

There is no question that the lenders have started the testing process. The methodology they are using is top secret -- top secret, it has not been shared with anyone. And whenever a methodology is kept secret most likely it is flawed and lacks statistical rigor that would come from a little sunshine.

Now having said that, we have received -- our dealers haven't received letters -- we have received several letters. And I can basically give you the following assessment. On a sensitivity of $1 or $2 a month difference in payment -- think about that, $1 or $2 a month difference in payment -- 99% of everything that has been tested so far passed with absolute flying colors. And a number of deals I would say represent 0.001 of our deals have been said need to be looked at. And this is with a secret methodology that we believe is flawed.

I think that's confirmation that we have a very robust compliance program and a strict nondiscrimination effort throughout the Company over the years. So all of that is good news. However, we are dealing with a government regulatory agency that is bound and determined to do something whether a problem exists or not. So, I certainly can't announce an all clear at this point.

If they do something I think it will be to force the industry to go to some sort of fixed compensation for originating loans and contracts. I think that is going to be very manageable for us. But that is just a guess at this point. But I would say the first test results are, at least for us, our Company, I can tell you, it is 99% they can't find a thing and that is on a sensitivity of $1 a month, $2 a month differential. That is testing against six different protected classes and then we have this miniscule thing that we have been asked to look at. That is what we know at this point.

Understood. That is very helpful color. And just lastly on P&S, can you share what percentage of the cars that you service are zero to three years old and older than three years old?

It is Mike Maroone. We break it down into zero to five and that is about 65% -- 65% of the VINs that we service are zero to five years.

Thanks very much.

Patrick Archambault, Goldman Sachs.

A lot of my questions have been answered, but one on remaining one on used margins. There was an earlier call today where there was a little bit of optimism expressed in terms of used margins coming up just because of lower inventory acquisition costs as leased vehicles -- a greater number of leased vehicles came off. I wanted to see is that something that you are starting to experience and would you expect the same kind of opportunity from that going forward? Thanks.

Patrick, it is Mike Maroone. We would anticipate opportunity there. Our margins in the quarter were off slightly about 3%, but clearly of availability is loosening up a little bit and I think that does provide opportunity. But all in all the used business is very robust. On a total store basis our volume is up 15, on a same-store basis up 11. And we are very pleased with our performance there and think there is even more ahead.

Okay and then one other one if I may. I mean it sounds like, as per your comments, the industry conferences, the SG&A piece of the rebranding seems to be well behind you. And it sounds like certainly the stores where that has happened the performance has been good.

Can you just -- how do from that opportunity though in terms of performance opportunity relative to the overall SAAR, your opportunity set based on your brands? I understand that there are a lot of factors that can go into play, but how do you see the opportunity there from the revenue generation side? Thanks.

Well, I am thinking in a -- this is Mike Jackson -- I am thinking in a five- to 10-year horizon when it comes to something like branding the stores. And our positioning is that if you live and work in one of our markets, I can't make an intelligent decision without considering AutoNation, that we offer everything and that we offer a peerless experience that is different than the competition.

And the benefit that accrues to that is something that gradually builds over time. But once you establish that momentum it is very tough for the competition to match. So we are well on our way to having established significant positions in the markets that we are in, we are well on the way to building out all the brands.

If you look at everything we acquire it is right on that strategy. And that is the right strategy for us and we have such a head start in doing it; I don't think anybody else is going to try to match us on it. And so, yes, you are asking a very good question. But the exact moment where I can say that means far more revenue for the Company or big market share gains or the ability to have higher margins is very difficult to predict.

But I am absolutely convinced that when you take our market position strategy, combine it with our digital strategy where we say the biggest opportunity in automotive retail is to bridge the gap between the digital experience and the in-store experience and make it seamless. When you combine that I think it's going to put us in a very powerful position in the marketplace. That is what we fundamentally believe, that is what we are working on.

I think you are asking a very good question. But I would ask your understanding to put an actual number on it. I can't today. But I am convinced in a five- to 10-year horizon we are creating a sustainable competitive advantage for the Company.

That is a very helpful perspective, thank you.

Brian Sponheimer, Gabelli & Company.

Mike, you've spoken a lot about bad industry habits regarding incentives in the past. But I guess the other thing that concerns us here a little bit is on the lender side with loans extending beyond 60 months, 72 months, 84 months. Do you have any sense that this is somehow a ticking time bomb that may be pulling sales forward as we get into the 2014-2015 timeframe?

I really -- my sense is that is not the case. There is still -- I think our average contract is still sitting right at 62 to 63 months, something right there. It is only moved by 30 days over the past couple years. So I don't see anything happening that is fundamentally of concern. And you know me, when I see trouble I call it out and I have got a big mouth and there it is.

So we really -- when we look at the fact that in total the term has not really changed. On the margin you have some small percentage of clientele that those type of products work for. But for the core organic business that is not where it is going. And if I look at how people are making their payments I am not concerned. I think it is genuine replacement need.

I can't emphasize enough how attractive the marketplace is finding the new products. We have the best offering ever, especially the offering on fuel efficiency, which we did not have in the past. We used to have to convince people to go slower and smaller, tough sell. We no longer have to do that combined with very good financing.

The only thing that we are missing in the financing that would concern me if it did come back was the home equity game. That game is over, shouldn't come back, if that came back I would say that is really putting some froth on the situation. So I think these are genuine replacement pent up demand sales on a journey back over $16 million to $17 million. And I don't think we are sowing the seeds of the next downturn with some of these long-term products.

All right, that is helpful. And I guess along those lines one other thing and I think I know what the answer is going to be. As off-lease vehicles repopulate the market starting in the next few months or so, do you see that pulling away from new vehicle sales maybe someone is using enough content three-year-old vehicle versus a lower content new vehicle?

Brian, it is Mike Maroone. I don't think so and our average lease term right now is 36 months. So you are seeing vehicles that are 36 months old coming back in the market. They generally don't compete. And the big advantage we have is we can certify them and sell them as certified pre-owned which is a real great value for consumers.

If I could add one thing to Mike Jackson's prior statement, we tracked our average term from a financing point of view back into the 2007 timeframe and we are exactly where we were in 2007. We have been very consistent at 63, 62, 61; we are now at a 63. So Mike called it right and we are not seeing any extended term pressure in the marketplace.

All right, thank you so much. Congratulations on another solid execution quarter.

Colin Langan, UBS.

Any color -- going back to the CFPB. Have any of the lenders that you work with changed the payment practices following the CFPB bulletin early this year?

No, we haven't seen any change at all. And when you talk to the lenders they all loathe to be the first to move. Because the system that is in place works extremely well for the consumer, for the financial institution and we get reasonable compensation, it is highly efficient.

So they are very concerned to disrupt something that gives them a pipeline of loans in one of the most cost-effective ways you can imagine. And the first mover could have some difficulties depending if they have structured it in a way that works or not.

So right now everyone is standing firm, the testing is ongoing. I can't speak for others; I can only tell you the results of the testing on our portfolio. I am not surprised at the results that it is an outstanding position and doesn't seem -- it seems to be a regulator looking for a problem that doesn't exist, at least as far as our portfolio is concerned.

Maybe there are other issues elsewhere that I don't know about. But as of the moment no one has moved and everyone says they don't want to be the first mover. That doesn't mean though that something [couldn't] happen.

But you mentioned earlier that you seem -- it seems like the direction is most likely some form of a fixed fee. Is that a fixed mark-up percentage or a fixed dollar that you are thinking of maybe moving toward?

It could go either way, that is being debated and discussed. What the lenders are saying is, look, the amount of compensation we pay for the acquisition of these loans is very cost-effective. Any new system -- we are not looking to change the total dollar amount of compensation we are paying, we just want to change the system in how we pay you.

And so if they go to a fixed rate or a flat fee if you are a company like AutoNation which is already in a pretty narrow bandwidth, it is a very easy adjustment. If you are running your business like the Wild West and you are all over the place it is going to be a shock to you.

So I think we are well-positioned, well prepared. My preference is why change something that is working. We'll have to see what happens. I think whatever happens as far as AutoNation is concerned will be manageable.

Do you think -- I mean there is a different percentage today at least on average on new and used. I mean do you think if they switch to a fixed fee that it would distinguish new and used or you would go an average for all the loans that a lender provides?

I think they are looking at an average for all of them. I don't think they are making a differentiated between used and new. All the testing is on the total portfolio, not bifurcated along new or used.

Okay. All right, thank you very much.

Bret Hoselton, KeyBanc.

Two questions, first, on the SAAR, your longer-term expectations, do you have any sense, Mike, as to -- or a view on where you think the sales right here in the US might potentially trend? And then what might be the drivers, the things that are necessary to take place to kind of get to that maybe a peak level of sorts?

Yes, I would -- I have always said we are on a journey back to something over [$]16 million and I still think we are on that journey. And whether we then turn to a conversation about something more than $17 million I think is dependent upon the fundamental strength of the economic recovery in the US and whether the employment picture has significantly improved from what it is today. And so, I think that is still an open question at this point that remains to be seen.

I think the way I think about it though is the good news is that even if it is somewhere between $16 million and $17 million, that is a wonderful place for the industry to be considering the cost structure that exists in the industry today at the manufacturer, supplier and automotive retail level. We don't really need $17-million-plus to have very good times.

So I think we can take a wait and see, I think it will take a stronger economic recovery with better employment numbers to take it above $17 million. There are others who are more optimistic that see that happening just on the replacement rate driver. If they are right that is all great upside. But I think the plus $16 million to $17 million -- plus $16 million -- somewhere between $16 million and $17 million is going to happen for sure.

And then my second question, looking at gross profit per unit, thinking about new and used vehicles. I think the general impression within the investment community is that there's been some compression in new vehicle gross profit per unit over the past two or three years and I think that is reasonable.

However, as I look back at your results 2004, 2005, 2006, 2007, what I see is I see a gross profit per unit that is not unlike what you are doing currently. And I see a used vehicle gross profit per unit that is maybe a little bit higher than where you are at today. And I guess what am wondering is how do you think about maybe the longer-term outlook for gross profit per unit whether it be on the new side or used side?

Yes, certainly we have done the same exercise and I have looked at the whole cycle. I think we have some unique circumstances here that go back to the earthquake in Japan, which caused a serious disruption of the supply of Japanese products and front-end grosses went up dramatically and the Japanese lost significant share.

They would like as much of that share back as they can get and they sort of asked us to work with them on the front-end gross to get there. So they are very aggressive and we understand that that may be necessary.

At a certain point you have to say though, okay, now we are sort of -- you have gotten back as much as you are going to get and now we sort of have to back to, as you called out, what is a normal front-end gross? So we have had this abnormal period and it is particularly in the Japanese, let's be clear, for these very valid reasons. But now we have to normalize.

So that is the conversation that is going on right now. And I'm very -- the first step in anything like this is stabilization. I am very pleased on a sequential basis that we have stabilization. I fully expect in the fourth quarter with the traditional Premium Luxury balance working for us that we will see improvement sequentially. And then hopefully we can have a conversation that the idea of getting back to a normal -- let's call it a normalized state that was 2004, 2005, 2006 will be possible.

But stabilization is the first step. We seem to be there on that first step. Check with us over the next three months. I will tell you where we are at. But I see exactly what you are saying; we would like to get there. I can't promise you we will, but that is where we are trying to get.

Thank you very much, gentlemen.

Thank you. That is it for today. Appreciate all your questions. Thank you very much. Cheryl and Rob are available if anything else comes to mind over the next day or so. Thank you very much.

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