AutoNation Inc (AN) 2014 Q1 法說會逐字稿

Welcome to AutoNation's first-quarter 2014 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 Robert Quartaro, Senior Manager of Investor Relations for AutoNation.

Thank you. Good morning and welcome to AutoNation's first-quarter 2014 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; Cheryl Scully, our Chief Financial Officer; and John Ferrando, our Executive Vice President responsible for M&A.

Following their remarks we will open up the call for questions. I will also be available by phone following the call to address any additional questions 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.

Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release which is available on our website at investors. AutoNation.com.

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 first-quarter adjusted EPS from continuing operations of $0.75, a 10% increase compared to $0.68 for the same period in the prior year. This is our 14th consecutive quarter of double-digit year-over-year growth in adjusted EPS from continuing operations.

First-quarter 2014 revenue totaled $4.4 billion, compared to $4.1 billion in the year-ago period, an increase of 7% driven by stronger performance in all of our business sectors. In the first quarter, AutoNation's retail new vehicle unit sales increased 6% or 4% on a same-store basis.

Our coast to coast branding rollout which began in February of 2013 is now past the one-year anniversary and has been embraced by our customers and our associates. AutoNation is very well positioned with an optimal brand and market mix and a disciplined cost structure. We continue to drive solid results across all our business sectors.

I will now turn the call over to our Chief Financial Officer, Cheryl Scully.

Thank you, Mike, and good morning, ladies and gentlemen. For the first quarter we reported adjusted net income from continuing operations of $91 million or $0.75 per share versus net income of $83 million or $0.68 per share during the first quarter of 2013, a 10% improvement on a per share basis. Our first-quarter 2014 results exclude after-tax net gains of $5 million or $0.04 per share related to business and property dispositions. There were no adjustments to net income in the prior year period.

Adjustments to net income are included in the reconciliations provided in our press release.

In the first quarter, revenue increased $267 million or 7% compared to the prior year and gross profit improved $43 million or 7%. SG&A as a percentage of gross profit was 70.8% for the quarter which represents a 50 basis point decrease compared to the year-ago period. Net new vehicle floorplan was a benefit of $11.3 million, an increase of $5 million from the first quarter of 2013 primarily due to higher floorplan assistance. Floorplan debt decreased approximately $185 million during the first quarter to $2.8 billion at quarter end due to lower inventory balances.

Non-vehicle interest expense decreased to $21.6 million compared to $22.3 million in the first quarter of 2013 due to lower debt balances. At the end of March, we had $285 million of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of $1.8 billion. This was a decrease of $36 million compared to December 31, 2013. The provision for income tax in the quarter was $60.3 million or 38.7%.

During the first quarter, we repurchased 2.4 million shares for $115.7 million at an average price of $47.92 per share. AutoNation has approximately $400 million of remaining Board authorization for share repurchase. As of April 16, there were approximately 119 million shares outstanding. This does not include the dilutive impact of stock options.

Our leverage ratio decreased from 2.3 times at the end of Q4 to 2.2 times at the end of Q1 as we continued to generate strong cash flow. The leverage ratio was 2.0 times on a net debt basis which includes used floorplan availability and our covenant limit is 3.75 times.

Capital expenditures were $34.5 million for the quarter. Capital expenditures are on an accrual basis and exclude operating lease buyouts and related asset sales. Our quarter-end cash balance was $69 million which combined with our additional borrowing capacity resulted in total liquidity of $982 million at the end of March.

Our capital allocation strategy has not changed. We remain opportunistic with a focus on investing to produce strong returns and long-term shareholder value through our solid pipeline of potential acquisitions and new store opportunities as well as share repurchase.

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

Thank you, Cheryl, and good morning. AutoNation delivered record first-quarter adjusted EPS from continuing operations, an operating margin of 4.2% when adjusted for business and property dispositions and grew revenue and gross profit across all business sectors. We are pleased with these results particularly given the soft start to the quarter from an overall industry perspective due to harsh winter weather.

As I continue, my comments will be on a same-store basis when compared to the period a year ago unless noted otherwise.

For the first quarter same-store, total gross profit for variable operations increased 6% and on a per vehicle basis was up $117 or 4% to $3352 per vehicle driven by solid contributions from used vehicles and customer financial services. Combined new and used, same-store unit volume was up 3%.

Relative to new vehicles in the quarter same-store, new vehicle revenue of $2.4 billion increased $131 million or 6% on new vehicle sales volume of 69,700 new vehicles, an increase of 2565 vehicles or 4%. New vehicle gross profit of $144 million grew $2 million or 1% in the quarter. Gross profit per new vehicle retailed $2060 was off $50 or 2%, largely due to continued pressure in the Import segment where the environment remains very competitive for both volume and gross particularly for Nissan and Toyota.

At March 31, our new vehicle inventory was at 61 days compared to 62 days a year ago and at year end.

Turning to used vehicles, in the quarter same-store retail used vehicle revenue of $932 million increased $32 million or 4% on 51,100 used vehicles retailed, up 600 units or 1% with unit volume increases in the Premium Luxury and Domestic segments offsetting a volume decline in the Import segment. Revenue per vehicle retailed increased $421 or 2% to $18,225.

Retail used vehicle gross profit of $91 million was up $8 million or 10% and gross profit per used vehicle retailed of $1788 increased $137 or 8%. We had a challenge with tight used vehicle inventory in the quarter when the new market froze. As a result, our attention turned to maximizing margin and we are very pleased with the result.

The supply challenge emphasized the need to accelerate initiatives and expand our alternatives for sourcing used vehicles in a strategic manner that consistently drives the right product and the right price at the right time and is not entirely linked to the new vehicle market.

External sourcing initiatives including a centralized buying team, partnerships with various third parties and a -- We Buy Your Car guaranteed offer pilot program that will launch this summer. Internally, we are focused on increasing appraisals, winning more trades, reducing third-party wholesale and equity monitoring in the service lane.

At the end of the first quarter our used vehicle days supply was 31 days.

Rounding out the variable side of the business is customer financial services where in the quarter gross profit per vehicle retailed was $1407, an increase of $85 or 6% which is a record for our Company. Total gross profit of $170 million increased $14 million or 9% compared to the period a year ago. We continue to be extremely pleased with our performance here and remain focused on the overall customer experience, continuous improvement in store level execution and long-term customer retention through value added products offered through customer financial services.

Next, Customer Care or service, parts and collision. In the first quarter, Customer Care revenue increased $24 million or 4% to $661 million. Turning to gross, despite the severe weather early in the quarter, we were pleased to report gross profit increases across the board for Customer Care and we are particularly pleased with a 6% increase in warranty gross, an 11% increase in collision gross, and the 15th consecutive quarterly increase in customer pay gross which was up 2%.

In total, Customer Care gross profit was up $10 million or 4% to $282 million for the quarter. Our Customer Care team remains focused on operational improvement in the areas of traffic, appointments and customer satisfaction. This includes updating and expanding our express service capability for added customer convenience. The target is to have 180 stores operating under this updated model by year end. In the first quarter, 30 more stores were installed bringing the current total to 110.

As I wrap up my remarks, I will note that at March 31, our store portfolio number 269 franchises and 228 stores in 15 states representing 33 manufacturer brands. The franchise and store count each increased by one on April 1 when we proudly opened an Audi in South Orlando for business. This manufacturer award add point further strengthens our Premium Luxury position.

Our entire team is excited about the sales and service opportunities in the spring market. We are investing aggressively to build our brand awareness in both traditional and digital channels and early results are quite positive. A key foundational component of our efforts is the unified commitment to deliver a peerless customer experience at every touch point.

I would like to thank our 22,500 associates for their efforts in serving our customers and their dedication to building a great Company.

With that, I will turn it back to Mike Jackson.

Thanks, Mike. Certainly in the last 10 days of March with the thaw, business was exceptionally strong. We see the same intensity continuing into the month of April which gives us optimism that in the second quarter we can recoup some of the disruption that occurred in the first quarter because of weather which gives us the confidence to confirm our forecast for the full year of industry growth between 3% and 5% breaking through 16 million units.

I thank you for listening to us and we will now take questions.

(Operator Instructions). Gary Balter, Credit Suisse.

Congratulations, first of all, on another strong quarter.

Thank you, Gary. Welcome.

Just one question maybe with a follow-up. Just parts and service, you mentioned customer pay was up 2% in the rollout. What are the efforts to improve that and are you seeing like is car -- we were on the spike in SAAR so we are assuming that as we age in a couple -- this year and next year you're going to see a pickup more in the warranty and then gradually in customer pay. Are you seeing that trend start to develop?

Yes, Gary, it is Mike Maroone. As we mentioned, this is our 15th consecutive quarter of improvements in customer pay. The vehicles that are zero to five years old, that population is growing rapidly. We are estimating it up 9%. It is a little bit offset by the six- to 10-year year population as we still have a bit of a hangover from the 2008, 2009 downturn. But we expect mid single-digit growth over the next few years.

We are very optimistic about the business. We made nice investments in collision and service capacity and the express service rollout is an important one for us as we just refresh our capabilities to serve customers that are in the maintenance mindset as we compete with the independents.

Have you given any numbers on the difference when you do put in the express service capabilities in the stores versus the ones that you haven't yet rolled it out into?

I don't think we have shared that. What that is is that is an upgrading of those capabilities and it is broader than oil changes and it is into real basic maintenance and we don't have metrics to share today.

Okay. Then just finishing up and then I will turn it over to somebody else. Mr. Jackson, you had highlighted at the Auto Show your concerns on inventory levels per the manufacturers. Obviously your inventory is in very good shape. Do you feel that the industry as a whole has pulled back in and is listening to your words of wisdom?

Gary, I think we are definitely in a better position both as a company and as an industry than we were back in January. It is either they listened to me or the epic winter gave them a great deal of concern. Don't know which one made a greater impression but certainly they were more prudent in their forward planning on production and while it is not absolutely ideal for the industry, I certainly feel better than I did back in January.

Thank you.

Elizabeth Suzuki, Bank of America.

Good morning. Can you talk a little bit about the dispositions you made in the quarter. Were they just underperforming dealerships and do you expect any additional dispositions for this year?

Yes, Elizabeth, what that was, that was the divestiture of our customer lead distribution business so that was not store related on the dispositions, that was related to the customer lead generation business.

Okay, great. Just one quick other one, are you expecting to see any bump in parts and service revenue and gross margin from the GM and Toyota recalls since you have a fair amount of exposure to those brands? More broadly, do you think the size and frequency of recalls is structurally increasing?

Mike Maroone. The recall business actually has been fairly consistent in terms of its contribution. It is only 3% of our Customer Care growth so it is not a big factor. Certainly the pressure on all manufacturers and there has been a flurry of activity with GM and Toyota, but I think that it is still a small part of the business. I think it will continue to be part of the business as there is certainly pressure in those areas.

Great, thank you.

James Albertine, Stifel.

Great. Good morning and thanks for the question and may I offer my congratulations to Cheryl on her recent announcement and appointment as no longer the interim but now the CFO.

Thank you, Jamie.

Very quickly, could we dig in a little bit on the used side? Noticed the 8% -- I think it was 8.3% growth in gross profit per unit. Maybe you can give us a little bit of background detail there as what was driving that during the quarter?

Jamie, it is Mike Maroone. We really have worked hard at delivering and promoting a market pricing strategy and delivering on it, worked really hard to educate our customers on the value proposition including providing data to them on market pricing. So we do feel that we have made some improvements on the operating side but the other factor clearly was inventories were extraordinarily tight in January and February and I think that when we were unable to acquire the quantity of inventories we want, we really went to work on the margin side. And really pleased that our retail gross was up 10% on a same-store basis but certainly would like to pick up the volume a little bit more.

Okay, so something below 8% is -- but still positive you think is sustainable as we start to see the volume kind of rebalance into the second quarter?

Yes, we clearly feel that we can sustain those efforts. Whether they are at that level or not, I don't want to make that prediction. Let's let that play out over the next few quarters but we work really hard on our margin management.

Then just as a quick follow-up to that, is there anything with respect to the acquisitions that you have integrated over the last kind of year or two that would have shifted the mix of your used channel so maybe more premium luxury that could be driving that higher or otherwise or is it still too small to have had an impact? Thanks?

We have been very aggressive in the Premium Luxury segment and that growth was about 9% on a unit basis so it was by far the strongest growth on the used vehicle side so I think it did have some impact there. We were softer on the Import segment of course.

Got it. Thanks again.

Rick Nelson, Stephens.

Thanks. Good morning. (multiple speakers) stock buybacks in the March quarter, if you could comment there and what you are seeing in terms of acquisition pricing, is this a reflection that things are getting aggressive?

Rick, it is John Ferrando. On the acquisition side, we see a solid pipeline of acquisitions that we are currently evaluating and we feel like we are well executed to execute on deals not only in discussion today but the pipeline that we will see over the next several years. Our advantages include our access to capital, our resources and expertise on deals. We have the ability to get deals done with manufacturers. We have the facilities expertise to deal with a lot of sellers that come to market with facility upgrades that they are facing.

We can navigate that well and certainly included in our valuation and then also sellers view -- a lot of the sellers do care a lot about the future for their employees and the unparalleled career opportunities we can offer is an advantage for AutoNation.

So that is putting us in a position to have deals under discussion. At the end of the day we've got to come to agreement on price and the price bandwidth has narrowed since the big dislocation back in 2008 to 2010 so those discussions are a bit easier and more rational but we still -- we will have a strong discipline on price and what we are going to pay on deals.

Thank you for that. Also it looks like your unit sales outpaced the industry a year and to the rebranding. Do you think that has been a driver there and do you think we could see the AutoNation brand on the premium luxury stores in the future?

Rick, this is Mike Jackson. We are certainly thrilled with the success of the brand launch over the past year that has clearly been embraced by our customers and our associates. I think it is still though too early to declare it is taking share for us.

What we do see though and as you recall, one of the major factors as to why we decided to take this step is we felt that in the digital world having one name and one brand to put our resources behind would be a significant advantage and there it has exceeded our expectation with our traffic increasing compared to a year ago digitally by 20%. And that the AutoNation sites generate more sales than all our third-party relationships combined.

So that has caused us to decide to accelerate our investment in the digital brand AutoNation and the digital capabilities of our site on the magnitude of $100 million over the next several years, over $100 million on the next several years. And so we are ahead of schedule and we are excited about the possibilities but to the moment where we would say it is taking share for us, I still think that is somewhat over the horizon but we are absolutely convinced we are on the right track.

Thanks for that. Also like to ask about the sales strength that we saw in March. How much of that do you think is fueled by incentives and as the inventories work lower and the OEMs back off of incentives, do you think the type of pace we saw in March is sustainable?

Rick, in my opinion while there was some tactical enhancements of certain incentives due to the 10-week sales lull, the building of inventory and the realization that we needed to get going by the industry, I don't think that was it. I think you could've had those same incentives in February, they wouldn't have made a whit of difference. It really was a hibernation on the part of the consumer due to an epic winter.

And when the consumer finally came out, yes, there was great selection, somewhat improved incentives but that was not the deciding factor. Also usually we see a big fall off in intensity when you have a period like the end of March and then you start a new month but that didn't happen this time and business has been very strong in April right from day one.

So that to me says there is something more going on here, namely that people who simply postponed in January, February and early March are now back in the marketplace. So that gives me the confidence again to confirm our breaking through 16 million plus [fleets] to 5% and I think you are going to see a strong spring for the industry.

Good to hear. Thanks a lot and good luck.

Thank you, Rick.

David Lim, Wells Fargo.

Good morning, everyone. So the question that I want to sort of follow-up on is I know that you mentioned, Mike, about the $100 million that you are going to invest over the next several years. Apparently there was article out saying that you are trying to not necessarily displace the third-party leads but in theory if you were to displace the third-party leads, I mean how much would that save you on a per vehicle basis? Are we talking about $200 to $300 per unit, those that would have been generated by let's say a TrueCar or another third-party provider?

First, when we look at the investment of our marketing resources and how it generates business, third-party lead providers are our most expensive business. And that was one of the reasons a year ago that we looked at it and said they are increasing prices every year and they are taking the money we are giving them and building their brand and if you just play that out over the years, we become more dependent upon them and we have to continually pay higher prices and this can't be the answer.

You combine with that that I think the third-party lead sellers why they do have a certain value for consumers, there is a disconnect and a disruptive handoff between the third-party providers, sellers and retailers that is not very efficient or not very customer friendly.

So with those factors, we decided to launch the brand, AutoNation and enhance our investment in digital and what we foresee in the future is that we can give a more seamless integrated experience for our customers because I don't view the world as an online world and a brick and mortar world, I think the customer wants one experience with a retailer that is seamless between their interactions with digital and brick-and-mortar and clearly mobile, where they bring the devices right into the store confirms that.

So we are in a unique position to do that in that we have the scale, we successfully launched the brand and we have the footprint of stores to pursue that.

Now for your question what happens on the cost side? I am not viewing this as a cost-cutting period by taking money away from third-party providers. I am simply saying I would rather take that money I am spending with third-party providers and spend it on AutoNation brand and AutoNation sites to generate the business. That will be far more efficient and far more effective than spending it with third-party providers.

Now exactly what is the pace of that transition? We are still doing business with the third-party providers today. We are not pulling the plug from one day to the next but certainly there will be a conversation that says -- hey third-party providers, you are going to have to become more cost-effective to stay in the game than what you are today. And if their costs continue to go up, then it will be a fast migration to the AutoNation sites if they become more competitive and we can work out some of the disconnect issues, then we will have a longer-term relationship.

Clearly we see alternatives. Clearly we see a strategic opportunity for AutoNation which going back to Rick's question in a somewhat longer-term horizon will once again create a unique capability for AutoNation. That is the opportunity we see.

Think about it a lot like the shared resource center where it took us five years of investment to realize the efficiencies and the transparency and the control that comes with that and the capabilities it gives to us. So we have a longer view on this issue. We kicked the ball a year ago, we are thrilled with where we are after one year and we have made the decision to accelerate our investment in this capability and we are very optimistic what it means for the Company in the longer term.

So all in all I mean, this initiative that you are taking if we are looking at the longer time horizon is it is going to obviously help you drive the topline revenue for new cars and also possibly expand the gross profit per unit per new cars. Would that be a fair assessment?

Yes, but we are viewing digitally and the brand in a much more -- in a much broader point of view. This will include capabilities in used cars, service, parts, finance, insurance. So we are really looking at the whole spectrum of how we interact with our customers and we are also going to be looking to broaden the brand attributes of AutoNation and move into different business fields with branded products from AutoNation whether that is service contracts, warranty contracts -- we are full of ideas.

So it was a beginning a year ago. We saw the opportunities, we are thrilled with where we are after a year. We have more ideas and more conviction today than we did a year ago and clearly though in digital, what we want to deliver within a year from today is that customers when they go to an AutoNation site in the digital world, they can select specific vehicles, get a smart choice, fair price from AutoNation, buy that vehicle online by putting down a deposit in a transaction. That vehicle is then pulled from our inventory, the customer has issued a certificate that they have purchased that specific vehicle for that specific price and when they arrive at the AutoNation dealership, we welcome Mr. or Mrs. Smith and say here is your car, it is right here. We have a copy of your certificate and then we expand those capabilities for all the other parts of the business.

So we are on our way down that journey and it is not that we are looking to save the cost savings by cutting off third parties to the extent that we shift the business to the AutoNation site. That money will be reinvested rather than third parties building their brand, we will be taking that money and building our brand. That is the way I think about it.

Got you. Got you. One last question. SG&A to gross profit definitely impressive this quarter. I think it was like the best Q1 since 2006. What more can you do to even further lower that?

We continue to be very focused on all elements of cost. There are a number of things from procurement initiatives to shared service centers, certainly gross profit influences that as well. And we continue longer-term. There is variability so you get seasonality in that. We continue to target below 70% and there is several initiatives we have in place that we can continue to focus on and that is at the same time while we are making these investments in digital as well.

Great. Great, thank you very much. Appreciate it.

(Operator Instructions). Brian Sponheimer, Gabelli & Company.

Good morning, everyone. Thank you for having me on. Just want to dig into the segment performance particularly what you are seeing in the Import segment and how long you expect the negative pricing particularly for Nissan and Toyota to be a headwind?

This is Mike Jackson. I will give you an overview and then Mike Maroone will get into specifics.

If we look at the marketplace, truck sales are very strong, that is a period that is just traditional strength for the Domestics. Trucks have moved over 50% of the marketplace so that is going well. Then we look at the growth in the Premium Luxury, that is with this bifurcated economic recovery we have, Premium Luxury is very strong, will grow faster than the volume market and the manufacturers' investment in the cadence and the type of products that they have coming is absolutely amazing.

Then if you look at our Asian business, the mid-car segment is overall slow. It is not growing the same as the rest of the marketplace and the customers in that segment have more choice than ever and I would say yes, we now have a marketshare battle on sedans that is under way that is very intense and there is a lot of competitor pressure at retail.

Mike, why don't you talk about it?

The pressures we called out is all through the sector. It really is highlighted by real pressure in Nissan and Toyota and they are both a little different situation. Toyota is just -- there is a lot of dealers doing some very deep discounting, selling vehicles at a loss and certainly that is not our business model but we are in the business to compete and want to win that customer.

With Nissan, they built a business model around volume-based incentives and continue to raise the targets and so you've got retailers really chasing those targets hoping and praying to hit the levels and they start deep discounting from unit one.

So it is a competitive environment. It has been that way for a while. It may be getting a little bit worse. Thank God it is offset with us by a very strong position in Premium Luxury. And when we look at the business, we really look at our overall gross margins and our variable gross overall is up $117 over prior year.

So yes, we've got pressure in the Import segment. We have got big opportunity in the other segments and the Domestic segment is much more rational than the Import at this point.

That is quite a change versus where we were about eight or nine years ago. Would it be wrong to say that your gross profit improved per unit in the Domestic side as well as in the Premium Luxury?

No, that segment was off very slightly, nothing like the Import side. It was relatively flat but it was off a few dollars.

Mike Jackson, you have got obviously a lot of influence with your vendors. At what point -- do you speak to the fact that this is no good for brand, this is no good for the companies and this is exactly what the domestics did 10 to 20 years ago?

I have had that conversation and been having it -- my concerns have been there for some time and at the moment, I don't see the exit door. So we are continuing to have the conversation but I cannot say that I see the turning point at this time.

I appreciate the color. Another nice quarter. Thank you very much.

David Whiston, Morningstar.

Good morning. On -- an electric vehicle question. I am just curious, what are AutoNation's Mercedes, BMW and Porsche of buyers saying to your sales reps about Tesla and how are those customers responding to the new plug-in offers from BMW and Porsche relative to Tesla? Do you think Tesla is costing you some business at the margin?

We have a number of customers who have bought Tesla as an additional vehicle, second, third, fourth, fifth something like that and that are putting it in their portfolio and are using it on a local basis. Generally speaking, they have very favorable comments about the car. They like the design, they like the way it drives.

We have taken some in trade with the comment the user interface was a big screen where you have to touch screen. Everything is not what they want to do and the fact that it is really for local use they can't really use it over the road is somewhat limiting but overall, they have a favorable impression of the car. By the way, so do I. It is a good vehicle.

Right and do you expect high sales at your stores though from the offerings coming in from BMW and Porsche in those segments?

I think the BMW i3 and i8 and the Mercedes B Class are going to give choices to the customers interested in electric that have not been there before. I think electric vehicles in the high end luxury are the natural place for that segment to develop. From everything I have seen and heard and spoken about, the battery costs are still too high to really be able to make it an economically rational decision for the volume market. That feels to me like it is still a few years out.

And there are those who say that they will never arrive and that fuel sales costs will come down faster than battery costs and that ultimately for the volume market it is going to be fuel sales, not pure electrics.

Plug-in electric hybrids are somewhere in between and a pure electric and I am not sure how fast that market is going to develop.

Okay, that is very helpful. I appreciate it. Just a balance sheet question for Cheryl. You have got $800 million of debt coming due late 2016. I just wanted to know do you plan to pay all of this off, refinance all of it, part of it? Just trying to gauge how this debt will impact the Company's ability to keep doing acquisitions, CapEx, buybacks?

Yes, we are in a terrific liquidity position. We have close to $1 billion of liquidity. We certainly continuously refinance at appropriate points. We pick our points in the market. We have an incredible banking group some of that involves some OEM captives as well so we have broad receptivity to the name. We are the only investment grade credit in the space and we will certainly plan to refinance that into a terrific facility well in advance of the renewal.

Okay, thanks much.

It is not a constraint on any level of acquisition for us. In fact, we could get additional capital if desired or needed to complete acquisitions or share repurchases at the appropriate time.

Okay, thanks. Appreciate it.

Thank you everyone for joining us today. We have one more, sorry.

Patrick Archambault, Goldman Sachs.

Made it in under the wire. Thank you. A couple have been answered but two left. One is just on the -- kind of following up on the discussion about used margins, not everybody is a fan of the used to new ratio but that ratio had been rising through I think almost all of last year on a year-on-year basis. In the first quarter, it declined a little bit year on year.

Just wanted to know is that kind of part and parcel with kind of some of the constraints that you spoke to and is there a little bit of a trade-off I guess between margin and volumes there that we have to be thinking about going forward?

Patrick, Mike Maroone. I think there is opportunity involved and I really think that we are going to continue to work hard to source vehicles so that we are not totally dependent on that new vehicle cycle. I think there is almost unlimited opportunity on the used side and I don't think we have to give up a ton of margin to get there.

It is very different than the new vehicle business. Every single used vehicle is different and if we acquire them properly, recondition them to our AutoNation standard and deliver the right experience, I think that we have big-time opportunity.

So we don't feel constrained and don't want to be constrained from new vehicle trade availability and want to supplement that with the things that we talked about earlier. It is well underway. We just want to get better faster.

And then just building on that, the outlook for inventory acquisition costs, just with leasing and everything else, how do you guys think about that?

There are a lot of vehicles coming off lease and we like them. They are a lot of times three-year-old, four-year-old which is a real sweet spot. An awful lot of the trades that are coming in are extraordinarily high miles as people still recover from the disruption of the 2008, 2009, 2010 timeframe. So it is a nice complement to what we have.

The certified preowned business is really growing quickly. For us certified preowned was up 12% in the quarter, it was about 32% of our sales. So that nearly new vehicle has got opportunity, the off-lease vehicles have opportunities and are coming in pretty good quantity and we still have the high mileage cheaper inventory that is still in very high demand and turns very quickly.

Got you, okay, that is helpful. One last one for me. Forgive me if I kind of miss the discussion but like on the parts and service margin which certainly came in ahead of what we were thinking, can you tell us a little bit more about that? I feel like there had been some pressure at some point as maybe you were getting into other segments but in aggregate, that has done very well. So maybe just directionally some color there?

I am really pleased with our Customer Care team. Alan McLaren leads that team and I think they have done a real good job of working on pricing, responding to local market pricing. We have some people at headquarters that work centrally to try and make sure that we are competitive and we are taking advantage of the opportunities in the market.

But our real goal is to serve that customer across all of their maintenance needs from basic oil changes to routine maintenance to mechanical breakdown to collision. I really like our effort there, rolling out our updated express service initiative is very important to us and we will have 180 stores done later on, doing about 30 stores a quarter.

So we are making really good progress. We've got 110 done so that is a big piece of it and we just want to capture all of the customer business and really believe in our brand and our mantra of delivering a fearless customer experience.

So not really a mix shift, more just good pricing and blocking and tackling?

I think it is just good pricing, blocking and tackling and of course we want to grow the customer pay business and the collision business and I think we are doing a good job in that area.

Okay, terrific. Thanks a lot, guys.

Now this is it. Thank you everyone for joining us today.

Thanks, everyone.

Thank you. This concludes today's conference. Thank you all for joining.