AutoNation Inc (AN) 2014 Q3 法說會逐字稿

Welcome to AutoNation's third-quarter 2014 earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time.

I will turn the call over to Robert Quartaro, Senior Manager of Investor Relations for AutoNation.

Good morning and welcome to AutoNation's third-quarter 2014 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Michael Maroone, our President and Chief Operating Officer; Cheryl Scully, 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. Rob Quartaro and I will 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 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 in 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 our 16th consecutive quarter of double-digit year-over-year growth in earnings per share from continuing operations or $0.90 in the third quarter, an all-time record and 20% increase as compared to EPS from continuing operations of $0.75 for the same period in the prior year.

Third quarter 2014 revenue totaled $4.9 billion compared to $4.5 billion in the year-ago period, an increase of 10% driven by strong performance in all of our business sectors. In the third quarter, AutoNation's total retail unit sales increased 8%; operating income improved 11% to $207 million.

AutoNation also completed the acquisition of Mercedes-Benz of Bellevue, Barrier Audi, Barrier Porsche, and Barrier Volvo in Seattle Bellevue. The annual revenue for these stores is approximately $355 million. In addition, AutoNation was awarded a new Porsche franchise in Orange County, California which is expected to open in 2016 and will have annual revenue of approximately $100 million. This will be our 20th Mercedes-Benz franchise, eighth Audi franchise, the fifth Porsche franchise and fifth Volvo franchise.

In 2014, we have repurchased 8% of our outstanding shares. Regarding the recent discussions on used vehicles, we view the improved supply and lower acquisition costs of used cars as a positive development. We believe volume and improved front-end opportunities will exist in the used vehicle business due to increasing supply of used cars and lower acquisition costs.

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

Thanks, Mike, and good morning, ladies and gentlemen.

For the third quarter, we reported net income from continuing operations of $107 million or $0.90 per share versus net income of $93 million or $0.75 per share during the third quarter of 2013, a 20% improvement on a per share basis. There were no adjustments to net income in either period.

In the third quarter, revenue increased $438 million or 10% compared to the prior year and gross profit improved $56 million or 8%. SG&A as a percentage of gross profit was 69.4% for the quarter which represents a 20 basis point decrease compared to the year-ago period. Net new vehicle floorplan was a benefit of $14.9 million, an increase of $2 million from the third quarter of 2013 primarily due to higher floorplan assistance. Floorplan assistance increased due to higher new vehicle sales and an increase in the floorplan assistance rate per unit.

Floorplan debt decreased sequentially approximately $94 million during the third quarter to $2.8 billion at quarter end due to lower inventory balances.

Non-vehicle interest expense decreased to $21.7 million compared to $22.3 million in the third quarter of 2013 due to a decrease in mortgages and capital leases that carry longer-term rates. At the end of September, we had $410 million of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of $1.9 billion. This was an increase of $50 million compared to June 30, 2014.

The provision for income tax in the quarter was $67.1 million or 38.6%. From July 1, 2014 through October 27, 2014, we repurchased 5.8 million shares for $304.4 million at an average price of $52.23 per share. Today we announced that our Board authorized the repurchase of up to an additional $250 million of AutoNation common stock. AutoNation has approximately $281 million of remaining Board authorization for share repurchase. As of October 27, there were approximately 113,000,000 shares outstanding. This does not include the dilutive impact of stock options.

Our leverage ratio remained at 2.2 times at the end of Q3 as compared to Q2. The leverage ratio is 2.1 times on a net debt basis including used floorplan availability and our covenant limit is 3.75 times. Capital expenditures were $52 million for the quarter and we expect CapEx to be approximately $190 million for the year. This is up from our original estimate of $180 million due to expenditures related to recent acquisitions.

Capital expenditures are on an accrual basis and exclude operating lease buyouts and related asset sales.

Our quarter end cash balance was $68 million which combined with our additional borrowing capacity resulted in total liquidity of $862 million at the end of September. We continue to demonstrate financial strength and robust cash flow generation. We remain committed to driving long-term shareholder value through our opportunistic approach to capital allocation.

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

Thank you, Cheryl, and good morning. We are pleased with our results from the third quarter having delivered a 4.2% operating margin along with solid overall performance. This marks the 16th consecutive quarter of double-digit EPS growth and a record quarter EPS.

As I continue my comments, we will be on a same-store basis and compare to the period a year ago.

Starting with sales, we were pleased to grow total gross profit for variable operations in the quarter by 6%. On a per vehicle basis, total variable gross was up slightly to $3176 per vehicle, increases in gross profit per vehicle for both used vehicles and customer financial services were offset by a decline in new vehicle gross profit per vehicle which I will expand on in a moment.

Relative to new vehicles, in the quarter same-store new vehicle revenue increased $229 million or 9% to $2.8 billion on the sale of 82,500 new vehicles, an increase of 5700 vehicles or 7%. New vehicle gross profit of $155 million was flat and at $1876 per vehicle was off $145 which we attribute to the new vehicle marketplace remaining intensely competitive particularly with respect to the import segment.

I will also note that manufacture value-based incentive programs with high sales targets are becoming more prevalent in all segments and are contributing to intra-brand margin pressure. In Q4 we believe that the seasonal margin lift driven by the premium luxury segment coupled with operational improvement should deliver a sequential lift of approximately $200 to new vehicle profit per vehicle retail.

At September 30, our new vehicle inventory was 57 days compared to 58 days at a year ago.

Turning to used vehicles, in the quarter we redoubled our efforts and the result was a solid performance. In the quarter, retail used vehicle revenue was $1 billion, an increase of $103 million or 11%. We retailed 56,000 used vehicles, an increase of 3400 use vehicles or 6%.

Revenue per used vehicle retail increased $769 or 4% to $18,500. Retail used vehicle gross profit of $91 million was up $10 million or 13% and gross profit per used vehicle retailed was $1620, an increase of $92 or 6%. We grew our use vehicle inventory through Q2 to position ourselves for increased volume in Q3 and it paid off. We are working hard to increase sourcing of used vehicles from trades to optimize our mix of used vehicles and to price each and every used vehicle to the market.

At the end of the third quarter, our used vehicle day supply was 32 days compared to 31 days a year ago. At this level we feel we are well-positioned headed into the end of the year.

Next, customer financial services where in the quarter we achieved gross profit per vehicle retail of $1403, an increase of $52 or 4%. Total gross profit for customer financial services of $194 million was up $20 million or 11% compared to the period a year ago.

The commitment of our CFS team to continuous improvement of store level execution and the customer experience once again drove positive results. Additionally, we continue to focus on building long-term customer retention through value-added product offerings.

Next, customer care or service parts and collision where the third-quarter marked two consecutive quarters of record customer care revenue and gross profit. In the quarter, customer care revenue of $710 million increased $58 million or 9% and total customer care gross profit also grew 9% or $24 million to $301 million. I will note that looking ahead, we anticipate customer care gross comps will be in the mid single-digit range we previously discussed absent elevated recall activity.

Expanding on gross, warranty gross increased 23% with recalls accounting for about 60% of the increase on a dollar basis. In the quarter, recalls comprised approximately 4% of total customer care gross profit. We also delivered a 9% increase in collision gross and the 17th consecutive quarterly increase in customer pay gross which grew 4%. We are very pleased with the performance of our customer care team, ongoing efforts on operational improvement in the areas of traffic, appointments and customer satisfaction are driving results.

In closing, we continue to develop both digital and store capabilities that will further support our mission to deliver a peerless customer experience. I would like to thank our 23,000 plus associates for their commitment and dedication to the Company and for their contribution to another record quarter EPS.

With that I will turn the call over to Jon Ferrando.

Thank you, Mike. Last week we completed the previously announced acquisition of Barrier Motors, a premium luxury business in the Seattle-Bellevue market with annual revenue of $355 million. The closing of the transaction and pre-closing integration were well executed by our team and the stores are now operating as Mercedes-Benz of Bellevue, Audi Bellevue, Porsche Bellevue and AutoNation Volvo Bellevue.

The acquisition greatly enhances our brand mix in the market positioning us with excellent premium luxury offerings from outstanding facilities in Seattle-Bellevue including a new Porsche facility that will open in mid-December. We are very excited to welcome the more than 325 associates from Barrier Motors to the AutoNation family.

Including the Barrier transaction, AutoNation now owns and operates 22 franchises in the state of Washington including 13 franchises in the Seattle-Bellevue market. We also announced today the award of a Porsche franchise in Orange County, California, an excellent premium luxury market where we currently operate 10 franchises. We expect the new Porsche store to open in 2016 and generate annual revenue of approximately $100 million once fully operational.

Over the last 10 quarters, we have acquired 18 franchises and been awarded six new premium luxury franchises by the manufacturers. The 2013 revenue for the 18 acquired franchises together with the expected annual revenue of the six franchises awarded to us once they are fully operational is approximately $1.6 billion.

As of today, our store portfolio number is 277 franchises and 233 stores in 15 states representing 34 manufacturer brands.

Looking forward, we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our existing markets and also markets that can be supported by our existing management infrastructure.

We will continue to be selective and prudent with our capital with a focus on investing to produce strong returns and long-term shareholder value.

I will now turn it back to Mike Jackson.

Thanks, Jon. The auto recovery is continuing to build momentum with the third-quarter selling rate at the highest level since the recession. The auto credit environment remains strong and consumers continue to embrace innovative products from the manufacturers.

As we look forward towards 2015, we believe improvement in new vehicle sales will continue and expect industry new vehicle sales to be above $17 million.

Thank you. We will now take your questions.

(Operator Instructions). Gary Balter, Credit Suisse.

It is actually Andrew on for Gary. Last quarter you mentioned increasing technicians to drive the customer pay portion of the P&S business. Obviously the P&S comp accelerated this quarter in part due to recalls but how is that initiative going and what do you think the tailwind or the impact of that initiative could be?

Andrew, it is Mike Maroone. Our target was to add 400 technicians. We are currently at 372 so I think we have made great progress. I think there is still a lot more opportunity in the business. As we called out, we are still looking at mid single-digit growth absent any elevated recall activity. As you know, the recall activity is not in our control but certainly the business is and we want to continue to grow the business by adding productivity and adding more technicians.

So would you say the technicians have already had an impact on your P&S business or is it more an elongated benefit?

I definitely think they have had an impact and we think there is even more opportunity so we could not have achieved the results we did without adding those 372 techs.

Understood. Good luck in Q4.

Rick Nelson, Stephens.

Thanks. Good morning. I am interested to know if there was incremental digital marketing spend this quarter? And the gross profit flow through as we calculated 34% including rent, if you think those levels are sustainable?

Rick, this is Mike Jackson. The investment in digital continues both from a marketing point of view and from an investment point of view and capabilities. Cheryl, did you hear the second part of the question?

Yes. Rick, with respect to your question, we continue to target below 70% SG&A as a percentage of growth even with the investment in digital. So for the quarter we maintained a focus on disciplined cost controls across the board and we also did realize some leverage from improvements in gross particularly in used and customer care but 70% still remains our target even with digital.

Thanks for that. I also wanted to follow-up on your comments about the used car business. There has been concerns out there about falling prices. Do you view this as an opportunity?

Rick, I have a contrarian view as often happens. If I look -- we go back to the great crash of 2008, 2009 and 2010 when sales collapsed. Then for the last few years there has been an extreme shortage of used cars which has inflated used cars values to record levels which has pushed pricing for used cars right up against new cars. And on the showroom floor, there is a considerable debate between the price of the used car and the price of new car and in many cases we have had to discount the used car in order to keep it away from the new car and that is an unusual circumstance to have acquisition costs that high.

Now the table is turning. Used car availability is going to be significantly higher over the next several years. I expect valuations to fall so I am sitting here saying I am going to have greater supply and lower acquisition costs moving away from the new vehicle market back to a more normal traditional gap, we should be able to have higher volumes and higher margins.

Now there could be a tactical adjustment in any given quarter with inventories moving. You know me, I'm not that concerned about what you have to do in a given quarter on adjustments. I think all that is manageable. But if I look over the next several years, it makes me more optimistic about the used car business.

Thanks for that commentary and good luck.

John Murphy, Bank of America.

Good morning. Just a follow-up on the used car pricing topic, Mike. We are seeing pricing still trend higher in your results and every other dealer that has reported so far yet supply does seem like it is increasing. So it just seems like the demand function is incredibly strong for travel utility and I'm just trying to understand when you think pricing will actually decline because we haven't even seen an increase in the demand function being miles driven yet and as gas prices drop, miles driven should increase. It just seems like this strong used vehicle pricing might be something we are dealing with for a while which is a good thing but in some ways it is a bad thing. I'm just curious, you are not seeing it yet.

Let's put a number on it. The index is at 125 if you go back toward the beginning of the year and it is now right around 120 on a downward trend line so it is a very manageable transition. We look at the lease rates of years ago and can calculate the return rate that is coming in the next year or two and it is a substantial increase in availability over the next several years and I expect this inflated index which now is at 120 to continue on a gradual downward decline.

Okay, so the increase that you saw in used vehicle pricing in the quarter of 4.4% despite the index coming down was a result of mix or -- because the index is one thing but the actual numbers are showing increases so it is just a little bit confounding.

That is most likely a CPO mix or something.

Yes, John, our CPO business was up 16% against the total business being up 6% so it is definitely mix driven. The one thing I will point out about our used car business is we consciously moved our inventories up. Mike Jackson asked us to be more aggressive. We moved our inventory up by 4400 units and we sold 3400 more and still ended the quarter with a days supply of 32. So we are really pleased with the effort and we expanded margin. Our retail use vehicle gross on a same-store basis was up 13% but I think the aggressive move to stock more worked out well and the CPO market continues to be a strong part of the business.

Okay. That is incredibly helpful. And then Cheryl, on the 3.7 times net debt covenant, is that the only covenant that you have right now that would be restrictive or is there any RP basket that exists?

There is no RP basket anymore, John. We do have a debt to cap which is at 65% test and we are at 57% on that.

So there's lots of room on both covenants then is the point?

Yes, we have plenty of room and a lot of liquidity.

Great. Thank you very much. Thank you, guys. Good quarter.

Brett Hoselton, KeyBanc.

Good morning. I was hoping you could comment on capital deployment in general. You just announced an additional share repurchase authorization. You've got $281 million remaining but you repurchased $236 million in the third quarter and that kind of suggests that you are either going to reauthorize very soon or you may be slowing down the pace of repurchase. And I am wondering if maybe you are shifting your focus away from share repurchase and possibly towards acquisitions. How should we think about that?

You are over thinking it. We always move in increments of $250 million so that is just our standard and sometimes that $250 million can be in place for a year and sometimes it could be in place in a month. So it is no indication of future behavior and as I have said often, we act very opportunistically when we look at the balance between -- well we always invest in the stores and our initiatives first and then we look at the pipeline on acquisition where the stock price is at, where we think the market is going overall as far as new vehicle, used vehicle sales and then we make a decision.

So you can look at our track record and say wow, these guys know how to allocate capital. I don't think we will forget how to do that but as far as looking at tea leaves to figure out what we are going to do next, you can't look at the size of the authorization to say it is indicative of anything.

Fair enough. And then on the acquisition front, can you comment just about what you are seeing in terms of maybe the number of deals that you are possibly looking at, multiples and so forth?

And then a second question along those lines is just simply there are some investors that are concerned that there are maybe some limitations on your ability to buy additional franchises based on some of the OEMs potentially saying you can only have so many franchises and I was hoping you could comment on that as well.

Brett, it is Jon Ferrando so in terms of the pipeline of acquisition opportunities, we are of evaluating plenty of opportunities today and we expect a solid pipeline of opportunities over the next few years. We get looks at a lot of deals and we are well-positioned to be selective in what we acquire.

As far as the pricing out there, I think it is difficult to generalize pricing and multiples as every deal is very different and there is a number of factors that drive pricing. We certainly get a look at a lot of potential deals where the seller has unrealistic price expectations and we will simply pass on those deals if they don't meet our financial return criteria but you can see we have had a pretty good track record over the last couple of years of reaching agreement on price to acquire 18 excellent franchises in our core markets with attractive return prospects and we expect that that will continue over the next few years.

Thank you very much, gentlemen.

Colin Langan, UBS.

Thanks for taking my questions. I'm sorry if I missed it, any color on the weakness in the new vehicle gross margin in the quarter?

Colin, it is Mike Maroone. First, our view of the business is we look at the total variable gross on a per vehicle retail basis. We are now at four consecutive quarters of improvement though sometimes we get in on the used side, sometimes we get it on the customer financial services side, sometimes we get it on the new vehicle side. The new vehicle side certainly has some pressure primarily in the import segment but as we look forward, we are looking forward to Q4 of picking up on a sequential basis about another $200 due to two factors which is seasonality with a strong premium luxury performance and also operational improvement.

So yes, it is a competitive market in part driven by volume-based incentive but we think we are managing it very well and very pleased with our fourth consecutive quarter of improvement.

And then on the parts and services growth of 9%, is it about 4%? I am not sure if I got that right. Is the benefit from the recall work? When you talk about going forward being in the mid-single range, I assume the recalls don't drop off so is it mid-single plus recall help as well in the near term?

So the recalls are about 4% of the business. In this particular quarter, they were 27% of the customer care gross profit improvement but when we look at the business, we do not try and forecast what recall activity is going to do so when we say mid single-digit, that excludes that elevated recall activity. A moderate recall activity I think is built in but when it elevates the way it did in this last quarter, certainly we would forecast a little bit higher.

And do you think though that most of the major recalls have been brought back already or should we still see some elevated level in Q4?

I think the GM recalls are pretty much under control. I don't see a big spike there. Certainly with all the airbag activity, I think that is the wildcard out there and how deep and far that goes is yet to be seen.

Okay and just one last question. Any updated thoughts on the potential for CFPB regulation? Do you think lenders are going to switch to flat fees? Any sense there from the lenders you work with?

No new news since the last call.

Thank you very much.

Irina Hodakovsky, KeyBanc.

Most of the questions were asked. If I can follow-up here, F&I gross profit per unit hit a record high 1401. How can we -- this continues to happen every quarter and if you can again tell us what is driving that product penetration or financing and do you believe you can continue to grow this?

It is Mike Maroone. It is almost totally driven by product penetration. Our finance reserve is less than $500 of the $1400 and we continue to make really good progress in really presenting customers with value-added products. We have narrowed down our product lineup and I think are doing a real good job of executing.

Is there more opportunity going forward? We believe there is. We break our stores into quartiles and really have an intense focus on the third and fourth quartile driving improvement there so we think there is opportunity. We are also just as diligent on the compliance side because we want to make sure it is done right and are really pleased with our total efforts in customer financial services.

Thank you very much. Good luck.

David Tamberrino, Goldman Sachs.

Thank you. Mike, for 2015 wondering what kind of gives you the confidence in growth from the year-to-date trend of $16.4 million to above $17 million?

Then along those lines, does that have a potential for increased regulation from the CFPB on subprime auto lending? Could that retard the growth or do you think that there is as much pent-up demand and the industry can kind of growth that fast in spite of that incremental regulation?

So I have been clear that the rate of growth is slowing and I expect this year to end up around 16,500,000. I mean think about it, we had a selling rate of 16.8 in the third quarter so we are going to be mid to high 16s for the fourth quarter so you are carrying a very good selling rate into next year.

When you talk about the new car business, there is not an overdependence upon subprime whatsoever. People are paying off their car loans at record levels of reliability. Even though the average loan is 63 months, they are being paid off in less than 40 months so the car payment remains their first payment made in the household.

We still have exciting new products from the manufacturer and we still have an average age of 11.4. So to forecast the 3% increase for next year is not that far out there as a bold statement. Of course anything that begins with a 17 has only happened twice before. I recognize that but I think indeed the market will break through 17 million and then I think even as rates normalize in the Federal Reserve and therefore through lenders, I see no reason the industry can't continue to run in the high 16s to around 17 for several years.

Okay. Interesting. Along the lines and just in terms of subprime customers, do you have the current percentage breakout of AutoNation sales for new that it subprime and then how that has trended over the past couple of years?

I don't think we have it split. I think we have it for total but we can get that for you and send it to you.

Okay, great. Thank you very much.

David Lim, Wells Fargo.

So Mike Jackson, I like your synopsis there on the 17 million and then obviously with the rates going up, it could probably trend a little bit down. But given that backdrop, I want to understand how can AutoNation grow on the topline and bottom line under that economic backdrop or the SAAR backdrop if you will?

Well, I think this year we have demonstrated that we are significantly improving our operating results even with this significant investment that we have undergoing in digital and I see no reason that will change next year. Yes, we have a slower growth in new vehicles. I think the used vehicle opportunity remains clear in our view, we are going to grow mid-single digits in customer care, not including any surge activity in recall. And as Mr. Maroone described in customer financial services, we still see opportunity so there you go.

And then my second question is I know that I asked this last quarter and maybe the quarter before, on the SG&A to gross profit again an impressive result. I know that Cheryl has mentioned the low 70% level but are there maybe inklings inside within your organization where you could achieve maybe 69% or 68% level when it comes to SG&A to gross?

Yes, we have certainly been -- the target is below 70%. We have certainly been in those ranges before and I think at some point getting back there, there is seasonality, there is some variability in it and certainly there is a different cadence of digital. But I still think it is a target and I think certainly those types of ranges are very much on the table particularly as we enter into a 17 million SAAR environment.

Is that more driven by a step function and maybe your internal IT or systems automation or how do you get there?

It is across the board and we have a number of procurement initiatives we put in place. Certainly we continue to automate and we continue to optimize process and staffing and certainly there is different flow-through relative to business segments so when you have a segment like customer care growing, you are going to expect to see a higher flow-through. When you see customer financial services growing, you are going to see a higher flow-through in that area as well.

So I would say it is not just one thing we are relying on, it is just a culture of continued discipline on cost control.

Great. Excellent. Thank you so much.

James Albertine, Stifel.

Great. Thanks and good morning, everyone. Let me add my congratulations in particular on your strength in used both on units and profit which was a surprise to us certainly versus our model. So congratulations there.

If I may just ask one housekeeping item as it relates to your dollar value used gross profit per unit, just remind us, is there an accounting convention with respect to reconditioning that would limit that relative to your peers or is it something with respect to your mix historically that has driven that number to sort of the lower ends of the public dealership range? And I guess my point is does that indicate that you have more opportunity to grow from here?

I don't think there's anything particularly I would call out. Just as a reminder, we do account for our internal reconditioning within parts and service. We do that not at a 100% gross basis similar to what some of our peers do but there is nothing that particularly impacts used that I think is unusual to call out versus peer performance.

Okay, great. Thanks for that clarification. And then I wanted to ask now that you have -- it seems in the last year, year and a half become more focused on an M&A driven sort of growth strategy, understanding your comments around share repurchases but just want to focus on M&A for a moment. As you are looking at these potential targets and some of the dealers that you have already acquired and integrated, where do you see the biggest early stage opportunities? Is there a deviation as it relates to used retail to new retail or what are some of the lower hanging fruit opportunities as you see it from that perspective?

James, this is Jon. That differs by deal so in certain dealership acquisitions, it could be on the cost side where we may have a significant advantage that we can execute on early. In other deals it may be a used opportunity in terms of retail volume and in other deals, it may be F&I. So the answer really is on a transaction by transaction basis.

We certainly have tremendous operating experience and we really use that to diagnose and evaluate the business and see where the opportunities are.

Thanks again for the detail and good luck in the fourth quarter.

Brian Sponheimer, Gabelli & Co.

Good morning. Congratulations on a great quarter. Regarding M&A, there have been some high profile acquisitions currently in process and that have been made over the last year. I guess one, just kind of looking back, what kept you from being involved in a DCH or a Van Tuyl and would you have the appetite if something came along that one, would fit within your OEM regulations and two, kind of fit your M&A model?

Well, on the DCH deal, it is just not for us. It is high Asian concentration in the LA New York markets and we already have a big Asian presence on the West Coast and we are not prepared to go into the New York market. So strategically, it just didn't fit and on the Van Tuyl deal, again the overlap was considerable with our footprint and just didn't fit.

Okay. And if I am thinking about repurchases and I echo the comments you made this morning on TV that you have been a plus 6 with capital allocation, what is it about the stock right now that has you excited versus maybe a slower pace earlier in the year?

Well, again, I don't like to give too much insight into exactly how we do it because everybody is trying to extrapolate what we are going to do in the future and sometimes we do things in an unpredictable way just so people can't pin down the pattern. So I sort of just stand on the whole track record of having bought in 80% of our shares over my tenure here at an average price of $18 and the basic idea is that I am a contrarian. When I see the market going one way but I see it very different then we move very aggressively.

So for instance when everybody says the used cars is going to be a headwind because valuations are going down and I am looking at it and saying I think used cars is going to be an opportunity because we have a greater supply at lower cost and I see it reflected in the stock price then I say now is a good time to buy. And so everyone comes around to the conclusion.

Now the point of all of that is ultimately you have to be right rather than wrong in that point of view for it to all work but we are very focused on building the Company, growing the business and buying shares back on an opportunistic basis when I see -- when we see a dislocation between the conventional view and a contrarian view and we are willing to act aggressively on that point of view.

You have been outstanding so far. Congratulations and best wishes.

Thank you.

Paresh Jain, Morgan Stanley.

Good morning, everyone. I believe many of my questions related to the quarter have been answered so let me ask a few strategic ones. First on no haggle pricing strategy, we recently saw an article on how Edmonds has already got 8000 dealers to sign up for their version of no haggle pricing and we already know that one of your peers has already moved to no haggle and another one is testing it in at least one of the stores with favorable results so far.

So wanted to get your sense of how you are thinking about no haggle and whether AutoNation is testing it in any of its stores?

So we think a lower intensity of negotiation is absolutely what the consumer desires and wants something more transparent, easier with as little negotiation as possible. I am not saying one price but dramatically reduced negotiation. A barrier to get there is the manufacturers with their crazy incentive programs that create a system of three-card Monte that really multiple peer pricing changing from day to day that is a complexity that is hard to deal with.

We are in our digital effort, not under the flag of the AutoNation brand, we will launch smart choice pricing starting in the South Florida market in December when we go transactional. That will be very close to a no haggle pricing as you can get so very little negotiation. We think that is where you need to be in the marketplace and we think have a tremendous advantage over a third party such as Edmonds in that they attract traffic to their sites but basically then they sell that customer to multiple dealers which then results in quite a bit of negotiation and haggling.

So we think where we don't have to have that handoff that it can be seamless between our sites in the stores is going to be a competitive advantage and we are very excited about the launch coming up in December.

Understood. Talking about in-house capabilities, you are also developing your lead gen business. Can you give us an update on how far along are you in that process?

It is Mike Maroone. We have started trimming our third-party leads and doing it opportunistically and continue to invest in our own brand. Our whole intention is to invest in the AutoNation brand, drive traffic to our sites and we are doing that today and each quarter you will see us continue to trim the third-party spending and we are really trying to gauge the results measuring everything we do and are very pleased thus far.

Understood. So it is still in the early stages then. Finally, given where we are in the month and I have to ask in context to your expectations of high 16 million SAAR for 4Q, how do you see October SAAR shaping up so far?

I have been very clear that I think the year is going to end at 16.5 and we've only have three months to go so you can do the math and see what I think is going to happen over the three months and if there were problems in October, I wouldn't have said it.

So business is fine and we expect there to be good momentum going into next year that makes my plus 3% forecast to hit 17 million -- when you first say 17 million, people go back and say oh my God, how are you going to get there? Well, it is the second half of the year you in 2014, you already have a selling rate in the high 16s, it is not going to take much to get to 17 million units next year.

That is very helpful. Thank you, guys.

David Whiston, Morningstar.

Thanks. Good morning. I was curious what percent of your technicians will be trained to prepare the aluminum F150 by early next year?

It is Mike Maroone. We have got the bulk of our collision technicians at this point trained. We actually are working on a shop by shop basis and are really pleased with our progress. It is really a great opportunity for us and I don't have an exact percentage of technicians but I think as of Q3, more than half of our shops were already trained for aluminum repair capability.

Okay, so it sounds like you are not expecting any headwinds with that issue next year, right?

No, I think it is an opportunity for us. I see the bigger players having the training capability and the ability to invest in equipment as necessary so I think it is an opportunity. We are really pleased with our collision business. It is growing at nearly a double-digit pace and we think this is a real good opportunity.

Okay, thanks. And in light of the dealer industries, it seems to the more and more moving to the advantage of the big dealer groups and now with Berkshire entering, do you see a possibility that one of the larger private groups might become a public player soon?

I would have no idea.

Okay. That is all I had. Thank you.

Great. Thank you everyone for joining us today.

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