AutoNation Inc (AN) 2015 Q3 法說會逐字稿

Welcome to AutoNation's third-quarter 2015 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 Mr. Andrew Wamser, Treasurer and Vice President of Investor Relations for AutoNation. Sir, you may begin.

Thank you, operator, and good morning everyone and welcome to AutoNation's third-quarter 2015 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, CEO and President, Cheryl Miller, our Chief Financial Officer, Bill Berman, our Chief Operating Officer, and Jon Ferrando, our Executive Vice President responsible for M&A. Following their remarks, we will open of our 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 a brief statement regarding forward-looking comments. Certain statements and information on this call may 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 and on our website located at investors.autonation.com.

And now I will turn the call over to AutoNation's Chairman, CEO and President, Mike Jackson.

Good morning and thank you for joining us. Today, we reported an all-time record earnings per share from continuing operations of $1.05, a 17% increase as compared to EPS from continuing operations of $0.90 for the same period in the prior year. This is our 20th consecutive quarter of double-digit year-over-year growth in EPS from continuing operations.

Third-quarter 2015 revenue totaled $5.4 billion, compared to $4.9 billion in the year-ago period, an increase of 9% driven by stronger performance in all of our business sectors. Total gross profit was $830 million compared to $753 million in the year-ago period, an increase of 10%. Operating income was $236 million compared to $207 million in the year-ago period, an increase of 14%. In the third quarter, AutoNation's retail new vehicle unit sales increased by 7% or 5% on a same-store basis.

Today, AutoNation also announced the acquisition of Allen Samuels Auto Group, 12 stores with approximately $800 million in annual revenue spanning across six Texas markets. Since the beginning of 2015, we have announced acquisitions with roughly $1.7 billion in annual revenue, of which $1 billion is Chrysler, Jeep, Ram, Dodge related. We will continue to pursue acquisitions that leverage our scale, expand the AutoNation brand and provide strong returns for our shareholders.

The third quarter was also pivotal for AutoNation. We continue to build the AutoNation brand, execute our digital strategy, showing our websites currently represent over 25% of our unit sales, and third-party leads now represent less than 9% of our unit sales. We did all of this and delivered an all-time record EPS from continuing operations.

In the third quarter, we announced an unprecedented industry-leading recall policy. It's simple. We will not sell, lease, wholesale or dealer trade any new or used vehicle that has an open recall. We have made it our responsibility to identify and remove these vehicles from our inventory until their recall issues have been addressed. This will require us to build used inventory levels through the fourth quarter. We expect our used business to normalize in the first half of 2016 once our used inventory levels are ramped up. This is a significant brand attribute that differentiates AutoNation from -- that no competitor has matched, not even Carmax.

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

Thank you Mike and good morning everyone. For the third quarter, we reported net income from continuing operations of $119 million, or $1.05 per share, versus net income of $107 million, or $0.90 per share, during the third quarter of 2014, a 17% improvement on a per-share basis. There were no adjustments to net income in either period.

In the third quarter, revenue increased $445 million, or 9%, compared to the prior year and gross profit improved $77 million, or 10%. SG&A as a percentage of gross profit was 68.5% for the quarter, which represents a 90 basis point decrease compared to the year-ago period. The provision for income tax in the quarter was $76.3 million, or 39.1%.

On September 21, we issued $750 million of senior unsecured notes consisting of $300 million of notes at 3.35% which are scheduled to mature in 2021 as well as $450 million of notes at 4.5% which are scheduled to mature in 2025. The transaction represented our debut investment-grade bond financing and was extremely well received by investors. The note proceeds were primarily used to reduce borrowings under our existing revolving credit facility. This resulted in an increase in our percentage of fixed rate non-vehicle debt to 80% at the end of the quarter from 48% at June 30, 2015.

Returning to third-quarter results, net new vehicle floor plan was a benefit of $17 million, an increase of $2 million from the third quarter of 2014 primarily due to increased new vehicle unit sales as well as higher floor plan assistance rate per unit. Floor plan debt decreased sequentially, approximately $118 million, during the third quarter to $3.2 billion at quarter end, primarily due to reduced borrowings under our used vehicle floor plan facilities.

Non-vehicle interest expense decreased slightly to $21.4 million compared to $21.7 million in the third quarter of 2014. The decrease in interest expense was driven by lower interest rates associated with the refinancing of our credit facility in December of 2014 and the establishment of our commercial paper program in May of this year.

At the end of September, we had $2.2 billion of non-vehicle debt, an increase of $77 million compared to June 30, 2015. Non-vehicle debt includes $435 million of outstanding commercial paper borrowings. At the end of September, we have no amounts drawn under our revolving credit facility. I'll also note that we have no material debt maturities until late 2017.

During the third quarter 2015, we repurchased 2.5 million shares for $150 million at an average price of $59.83 per share. As of October 26, we had approximately $297 million of board authorization remaining for share repurchase, and there are approximately 111 million 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 was 2.0 times on a net debt basis, including used floor plan availability, and our covenant limit is 3.75 times.

Capital expenditures were $27.9 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 is $64 million, which, combined with our additional borrowing capacity, resulted in total liquidity of $1.8 billion at the end of September. We continue to use the revolving credit facility as a liquidity back stop for borrowings under our commercial paper program. As I mentioned a moment ago, we had $435 million of commercial paper outstanding at year-end, which in effect -- at quarter end, which in effect reduces available liquidity to $1.3 billion. We continue to leverage our strong operating results and cash flow generation in order to make strategic investments in our business in addition to opportunistic acquisitions and share repurchase.

Now let me turn you over to our Chief Operating Officer, Bill Berman.

Thank you, Cheryl, and good morning everyone. AutoNation posted record results in the third quarter. We set an all-time record in EPS from continuing operations. This was our 20th consecutive quarter of double-digit EPS growth.

Going forward, my comments will be on a same-store basis and compared to the period a year ago unless noted otherwise.

Gross profit for variable operations was $467 million, up 6%. Variable growth was $3,282 on a per-vehicle retail basis, an increase of $103, or 3%. New and used same-store unit volume was up 3%. New vehicle revenue for the quarter was $3 billion, an increase of $201 million, or 7%. We retailed 87,400 units, an increase of 5%. New vehicle gross profit was $1,877 on a per vehicle retail basis, which was relatively flat compared to the same period a year ago. We are pleased with our new vehicle PVR performance for the quarter. In the fourth quarter, we expect a sequential increase in PVRs in the $200 range due to the seasonal mix shift towards premium luxury.

Our pivot away from less profitable third-party lead providers helped offset new PVR competitive pressures. New vehicle PVRs from our self generated sales, including customer financial services, are approximately $800 higher than new vehicle PVs from third-party sales.

Regarding our digital strategies, AutoNation websites currently generate over 25% of our unit sales. Sales from third-party leads now represent under 9% of our unit sales.

Used vehicle retail revenue for the quarter was $1.1 billion, an increase of $24 million, or 2%, compared to the period a year ago. Used vehicles retailed were relatively flat year-over-year at 55,900. Used vehicle gross profit was $1,509 on a vehicle retail basis, a decrease of $112 or 7%.

As Mike mentioned, in the third quarter, we set an auto retail industry standard and decided not to sell, lease or wholesale any new or used vehicle that has an open recall. As of September 30, 6% of our inventory, which represent less than 2% of our new vehicle inventory and approximately 16% of our used vehicle inventory, was not available for sale due to open recalls. We will continue to build our used vehicle inventory levels to ensure we have adequate supply to meet customer demand.

In the third quarter, our used vehicle sales were slowed by our recall policy, and we expect to see an impact in the fourth quarter as well. Putting our customers first is the right thing to do. We believe these short-term investments are outweighed by the long-term safety benefits for our customers and support the AutoNation brand promise.

Customer financial services gross profit was $1,549 on a per vehicle retail basis, an increase of $146, or 10%. Total gross profit for customer financial services of $222 million was up $26 million, or 14%, compared to the period a year ago.

In the quarter, customer care revenue was an all-time record at $757 million, an increase of $44 million or 6%. We set another all-time record in customer care gross profit of $330 million, an increase of $28 million, or 9%.

Customer pay gross was $129 million, up 7%, our 21st consecutive quarterly increase in customer pay gross profit. Warranty gross was $67 million, up 15%. Collision gross was $30 million, up 13%.

In the third quarter, we announced the Drive Pink campaign from coast-to-coast. Our Drive Pink campaign ties into the first ever AutoNation Cure Bowl, which will be held at the Orlando Citrus Bowl on December 19 to benefit the Breast Cancer Research Foundation. AutoNation has pledged to donate $1 million to support the BCRF. I would like to thank our 25,000 associates and our customers for partnering with AutoNation to raise $1 million for breast cancer research.

Finally, I would like to welcome Value Motors Auto Group Associates to the AutoNation family.

I will now turn the call over to Jon Ferrando, Executive Vice President responsible for M&A.

Thank you, Bill, and good morning everyone. We are very excited today to announce the acquisition of the Allen Samuels Auto Group in Texas. In connection with the transaction, we will acquire 12 stores to generate approximately (technical difficulty) million dollars in annual revenue, and retail 19,500 new and used vehicles annually. Stores are located in the Dallas-Fort Worth, Houston, Corpus Christi, Tyler, (technical difficulty) and Waco markets. The franchise represented include Chrysler, Dodge, Jeep, Ram, Chevrolet, Hyundai, Mercedes-Benz and Sprenger. The acquisition is consistent with our strategy of enhancing brand representation and scale in our markets and the strong truck product offering of Allen Samuels makes it a great fit in Texas.

The closing of the transaction is subject to customary closing conditions, including manufacturer approval. We expect the transaction to close in Q1 2016. Upon completing the Allen Samuels acquisition, AutoNation will have 53 stores in the state of Texas. We look forward to welcoming the more than 1,000 Allen Samuels associates and tens of thousands of new customers to the AutoNation family.

Also in September, we completed the previously announced acquisition of Valley Motors in the Baltimore market, and we are on track to complete in Q4 the acquisition of 13 stores in Georgia, Alabama and Tennessee from Carl Gregory.

In 2015, AutoNation has announced the acquisition of 33 stores generating approximately $1.7 billion in annual revenue, and since Q4 2012, AutoNation has announced acquisitions and new franchises awarded by the manufacturers that will generate $3.3 billion in annual revenue once fully operational.

As of today, our store portfolio numbers 307 franchises and 240 stores in 15 states representing 35 manufactured brands. These numbers will grow to 372 franchises and 265 stores upon completion of the Carl Gregory and Allen Samuels acquisition.

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 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.

Thank you Jon. I'd like to thank all our associates for their efforts with our Drive Pink campaign, which has been a tremendous success. And I look forward to seeing all of you at the AutoNation Cure Bowl in December.

Now I'd be delighted to take your questions.

(Operator Instructions). Jamie Albertine, Stifel.

Thank you and good morning. I was hoping to ask, on the used retail side -- thank you for the additional color with respect to the recall campaign -- if you could maybe tell us a little bit more or shed some more light on what the cadence of used vehicle sales would have looked like ex-that campaign? Is there any granularity you can provide?

This is Mike Jackson. It's very difficult to say what the missed opportunity was, so I am very -- I'm not enthusiastic about putting an actual number on there other than to say there was an opportunity impact. Obviously, our used vehicle sales were stable. We had some impact on the gross as it took longer to prepare vehicles to have them frontline ready. And there is some disruption. But we think we're going to work through all of those issues over the next quarter and starting sometime in the first half of next year, go back to growing the used vehicle business and improving the grosses.

There are -- there will be some permanent hard cost in that we're going to increase inventory to allow for, on the used side, 10% to 15% of it to be tied up at all times with open recall. But I think that cost is very manageable. You can do the math on that.

Building the technology systems to manage it all, both to identify the open recalls every day and to manage the process of getting them all repaired, that's all underway. That's, again, a manageable cost and it's a one-time cost. But clearly there's some opportunity that we missed in the quarter, because of the steps that we've taken. In my view, it's hard to put a number on that, but if you weigh the cost-benefit, both for what it means for the industry that we are taking a leadership position in something that's clearly a black eye for the industry at the moment, namely the recall situation, that AutoNation is going to be part of the solution, not part of the problem, that we put our customers first. The safety of our customers first is a clear brand statement. And we see that the strength of our brand is every year more evident, and all you have to do look at on the new vehicle side where we pivoted away from dependence on traffic bought from third parties to relying on our brand and our own sites, and investing in those, the strength that that gave us to a unique brand attribute like the recall policy to positioning in the marketplace that the Company really cares about big issues such as the fight against cancer. And right now the Drive Pink is focused on breast cancer awareness and raising funds to find a cure. I think all of this is very compelling.

And so yes, in used cars, we have some lost opportunity for a few quarters, but in the grand scheme of things, I think we are on a convincing and compelling road because, you know, the hardest thing to do in business is to open a sustainable competitive advantage. And I think the evidence is becoming clearer and clearer that AutoNation is doing something special.

Thank you Mike. I appreciate the color and we would agree with a long-term outlook as well. If I may, along those same lines, just a quick follow-up. You've talked about these in the last couple of years, some spending around your digital initiatives, some coast-to-coast branding. It seems to us, just based on the data that you are providing as it relates to lead generation and so forth, that those investments are starting to leverage themselves. Just some additional color there would be great in terms of the returns you are seeing on those investments. And then if at all there are sort of further supplementary reinvestment that you're going to look to make in the near term that we should consider for our modeling.

Yes. The third quarter is the proof in the pudding, that exactly what you described is happening on the digital side, and the fact that, if I just look at the new car business, which was primarily where Costco and TrueCar was, though I think it was around 7% of our business. Something like 7% of our new car business we walked away from, and yet we had an outstanding performance. So if you want clear evidence that the power of the brand is taking hold and that our digital -- the enhancement of our digital sites, making it a better customer experience, is worthwhile, and if you want -- to me, the biggest proof is look at our front end gross new vehicles, up $33.

So we walked -- the business we walked away from with TrueCar and Costco had an average -- their front end gross on average was $900 less than the business coming through AutoNation channels. So we left our most unprofitable business behind us, our most expensive business to acquire, that weakened our brand and did not strengthen our brand. And that's why we think the third quarter is uncontestable proof that the strategy we have been talking about investing in has been validated, and that we are getting tremendous benefit from it. We have probably, on the pure technology side, passed the peak investment periods, but substantial investment is yet to come.

I appreciate that. Again, thanks and best of luck in the fourth quarter.

John Murphy, Bank of America Merrill Lynch.

Good morning guys. Just a first question on the recall policy. The flipside of this is that you're going to have potentially a greater capture of warranty here. I'm just curious. Have you thought about that, sort of the offset, and how big an offset would that be to the cost of carrying that inventory?

I think the fact that we will do all of that work is true, but I really don't think it begins to offset the length of time, additional length of time it takes to get used vehicles front-line ready. It's more about the brand and more about being part of the solution for an industry black eye than the fact that we will actually do more recall work.

There is an issue out there floating that the new vehicle dealers in the United States are authorized and have the technical skills to make these repairs. And completion rates are not acceptable, and you hear regulators talking about the fact, well, if the new vehicle dealers in the manufacturers can't figure out how to get these repairs done faster and at a higher level, we're going to open it up to everyone else. And I think that would be not a good development on any side. And I for one believe, when you have an issue in the industry, be part of the solution. It's a genuine issue for our customers.

You know, the irony is I think most customers think the repairs are already done. So that's what's behind it. Yes, we will do additional recall work, but it really doesn't offset the disruption and the speed to market of our used vehicles.

Okay. That's helpful. And a second question, obviously you are on a large acquisition tear here, but you're also being reasonably aggressive with buying back shares. And it seems like as, Cheryl, as you kind of outlined, you do have a fair amount of capacity given your current companies to do a lot more. I'm just curious how you think about this capital allocation either going forward with that much room and really that much opportunity. It just seems like you're pressing the pedal a lot harder than you have in the past, and you've done a very good job in the past as well. But how much more opportunity do you think there is in the future? Are we going to be looking at another $1.7 billion in acquired revenue over the next 12 months and another big share buyback in place? How far can you push this?

I'll take it first and then I'll turn it over to Cheryl. The one thing that's not changed in all of this is our threshold on returns. That remains the same. We look for acquisitions that are a strategic fit for us, hitting our model where we want be one-third domestic, one-third Asia, one-third German, and our cultural fit with our company. And certainly these acquisitions are a cultural fit.

Sometimes there is a difference in point of view about the future of a certain company. I for one am very optimistic and confident about the team that's at Chrysler, so I have no hesitation buying big on Chrysler. I'm all in. And so you'll see sometimes a streak like that come along.

Now, as I said before, when we look at 100 deals, we maybe do 10. So there's a lot of discussions, a lot of conversations going on, and it has to meet all of those thresholds to meet that. We have a level of conversation we could do a lot of deals next year. Whether they will meet all of that criteria or not, I don't know. And what I very much like is keeping the flexibility that I can do zero next year or I can do $2 billion next year. I'm not going to get -- I'm not going to nail myself to a cross on that. It really is dependent.

And the same thing on share repurchase, it's opportunistic. If the opportunity is there on both share repurchase and acquisitions, am I comfortable with a higher level of leverage? Absolutely. Cheryl, why don't you talk about that?

John, one of the things I would point out, acquisitions come with EBITDA. So when we think about, just as we've said over the years, we look at a balanced approach, so if the stock or the market is out-of-favor, we will buy opportunistically. If the acquisition market is strong, we will buy. We won't chase acquisitions, so I think if you roll back two years ago, we were patient. We were looking primarily for good dealerships that fit our existing footprint or platforms in other areas that might be a good fit for us. So we've stayed discipline. We haven't chased things internationally. We have continued (technical difficulty).

The nice thing now is we are starting to see some of these deals hit and we've been positioned for this. So with the strength in our base cash flows in the operate business combined with the EBITDA we get with the acquisitions, knowing that we will in an acquisition increase EBITDA, it gives us a lot of flexibility to do both. I think we are in a great situation from a liquidity standpoint and from a leverage standpoint. This balanced approach gives you an opportunity where some of the capital allocation actually comes with accretive EBITDA as well.

One more factor that you have to put in there today versus the past is the strength of brand AutoNation. So think about it. So, we buy the Allen Samuels Group in Texas, great name, fine, everything. We're going to rebrand those stores AutoNation. And as good as the legacy names are, they are not as good as the brand-name AutoNation and all the attributes that come with it. Also, we take all of the marketing communication money that's being spent by the Allen Samuels Group not to save, but to put behind the AutoNation name. So then our whole presence in the state of Texas goes up by another factor and it begins to feed on itself. And therefore, our confidence that we can execute on our plan to hit our return and the amount of risk involved, the risk goes down and the confidence goes up, all because of the brand AutoNation. That's what the brand is doing for us at this point.

Also, sellers really like to talk to AutoNation. They've seen the way we've done deals over the years. They know we're a straightforward cards on the table. We identify all the issues upfront, and if we sign a deal, there's no drama. We get to the finish line and we pay what we said we're going to pay. You put it all together and I like our position.

It's a great opportunity and low cost capital makes for a really good situation for you. It's really (multiple speakers)

Absolutely.

Just one last question. As you look at this, acquisitions obviously in the last couple of years have ramped up dramatically. I'm just curious. Have you done anything with on boarding process here? And obviously the industry, as well as yourselves, has a good track record of integration. But just as far as the integration process, if you could just talk about that, maybe John, on how you're approaching that now and how you're on-boarding all these dealers and really what the opportunity is.

If I could, I would like to give that over to Bill first, in that Bill pioneered our integration strategy and how we execute integration and led the teams and did it very well, and now he's our Chief Operating Officer, so he is not doing just the West Coast but everywhere. But Bill really built the template that we use today. So, Bill, why don't you talk about it?

Thank you Mike. What we do is we take a very patient and balanced approach to our integration. John and I go in and set the stage initially going into the acquisition stores, laying the groundwork and foundational component of how the transition is going to take place. When I talk about patience, we don't try to sit here and flip a switch and from one day to the next go from being a legacy store into an AutoNation store. But over several months, we've perfected a process of being able to integrate them into our systems, our processes and our pay plans.

And then one unique thing that we are able to do because of our size and our scale is we call it a buddy system, probably could think of a better name, but we actually get current AutoNation associates from the general manager all the way down to individual department heads to partner in the stores during that transition period so they actually have a peer, a mentor, on an equal basis to help guide them through the transaction and the transition. The last -- I think we're up to 10 to 12 stores that we put on that way. We've had a very, very low turnover rate, a high adoption rate and have been able to hit our performance target.

That's incredibly helpful. Good job. Thank you.

Jon, would you like to add anything to that?

Mike, thanks. No, I think the team has executed extraordinarily well, and as we track our returns on transactions, being able to integrate smoothly and have that skill set is just one of the many advantages of AutoNation as a buyer.

Thank you very much.

Pat Archambault, Goldman Sachs.

Good morning. I guess just let's build on the M&A. You guys have covered it pretty thoroughly here, but maybe just on the environment. One of the things we've heard from others is that it's getting harder to make deals just when people are looking forward to a $17 million SAR using a 12-month looking historical multiple. So obviously you've managed to put together some pretty large transactions. That doesn't seem to be a barrier for you, but just wanted your comments on that.

I think that's a fair comment, that we very much negotiate. In addition to all the criteria I called out, the most important one is with sellers who made up their mind to sell. Now, people are checking the market to see if they can get the sun, the moon, the sky, and everything else, but it's not really for sale. It's just for sale if they can get a too good to be true price, and those discussions are out there. We identify those rather quickly, move on. We observe most of the time those businesses don't actually sell. Occasionally, someone will actually step up and pay the price and buy it, and that's fine. Can't do every deal, that's for sure. If someone else has a different point of view, okay. That's going to happen and you have to be willing to do that if you're going to stay disciplined on price.

So I think that's the key point you mentioned is obviously, at a $17 million SAR, some people who are maybe sellers, not really concluded to sell, will check the market. And you will hear stories about what they are asking, and occasionally somebody will pay the price.

Understood. I just wanted to go back to the third-party lead discussion, again, taking some of the feedback from a couple of competitors here. What they have tended to cite was they needed them just because they have the perception of objectivity. People want to go to something that's not affiliated with one particular dealer because they feel it will do a better job of comparing competitors and give them an output that they can use that's better some way. And yet again, you've done a really good job of managing to lower your lead providers in spite of that. And I guess I just wanted to get your thoughts. What are you guys doing differently sort of combat that perception? Maybe it's brand; maybe it's technology. Just curious on that.

No question we are a company that zigs when everybody else is zagging. That's indisputable. Here's the way I think about it. I came to the conclusion several years ago that building a brand with genuine attributes was the only way to compete and win in this marketplace, and not be disrupted and become a warehouse fulfillment center for others. It's really where I didn't want to end up.

So then when you say you have a brand, the brand has to stand for something, and you see what we are doing, everything from our recall policy to Drive Pink to our fair pricing, and the capabilities on our digital sites -- so they are not informational. They are transactional. It took a lot of money and a lot of effort to make that happen.

So here's my point. There is a place in the marketplace -- in the market for third-party lead providers. There are dealers where it's appropriate that they do business with them. But here's the way I think about it. Every dollar I spend on marketing today sells a car today and sells a car tomorrow because I'm building a brand. And if I am diverting 30%, 40%, ultimately 50% of my marketing budget to build somebody else's brand, we'll play out where that ends. So that's why the third quarter is so important. We were leading up to it. It was our pivot, and clearly it works. And in my view, every year, AutoNation is going to be stronger than the year before and all the benefits that come from that. So that gives us a relevancy, an approachability and an attractiveness in the marketplace that can cut through all the other choices that consumers have and give us a very interesting and compelling business. But it has to be genuine. And you have to take risks. You have to take short-term disruption in order to get that differentiation. And we are doing that.

Yes. It's clear that looks like it is certainly paying off at this point. Is there -- I guess you said you are down to 9% of sales with traditional lead providers.

Yes.

Is there a point where that can get to zero, or is there always going to be a role for them with you guys?

Here's the next discussion with the 9%. If they provide a role for the AutoNation brand on their site, we can have a good partnership. As long as I can raise the flag of my brand on their site in a compelling way, we can have a partnership because I'm building my brand. If the rules of the game are that hey, listen, you pay me for traffic and we are not talking about AutoNation and what you are, then that's going to be a more difficult conversation. So those negotiations will probably take the next quarter or so, and when I see how all of that goes, I can probably give you a pretty good idea of where it's going to settle down, settle in. And if I have an appropriate positioning for my brand, then I am really going to view them not as a third-party lead provider; I'm going to view them as a partner with AutoNation. I'm looking for a win-win partnership, and if I find that, we can have a long-term relationship.

Understood. Appreciate the color. Thank you.

Paresh Jain, Morgan Stanley.

Good morning everyone. Going back to acquisitions, it seems like you're seeing deals come to you a bit more. Do you feel a flat year-on-year stock can actually bring more deals to you and more than offset any organic growth slowdown in you?

Predicting forward deals is, again, not a road I want to go down. I really want to have the flexibility that when the opportunity -- and I've said it in the past. When the opportunity is there, we would want to move. We're not afraid to increase leverage on the Company to move. We will move. If they are not attractive deals, they don't strategically fit, it's not a cultural fit, the price is too high, then we are not going to do the deal. And it's very difficult to predict what's even going to happen next quarter or next year. We have a lot of interesting discussions ongoing. I hope to have additional deals to do, but you never know.

Got it. Just a quick follow-up for Jon. Why gain more exposure to Texas at this point, given there could be some concerns around the retail environment or the consumer sentiment there?

Texas is an excellent long-term market for us, so we are very comfortable operating in Texas. We've been there for a long time. Our stores perform very well in those markets, and the fit was just outstanding in terms of the markets and the store locations and the brands, in particular with Chrysler, Dodge, Jeep, Ram, and Chevrolet. Allen Samuels offers a strong truck portfolio that fits very well into Texas. And then from a cultural fit standpoint that Mike talked about and Bill as well, on-boarding was just an ideal fit for us. So there were a lot of factors that came together and we're very optimistic about operating in Texas long-term.

Got it. Thank you.

Michael Montani, Evercore ISI.

Good morning. I just wanted to follow up on the M&A vein and ask about why the deals are kind of coming to fruition now. Is there perhaps some softening on seller expectations, or do you see incremental synergies that you can get, given the progress on the brand, Mike, or is it a combination of the two? Just some added color there would be helpful.

I think it's a combination of the two, and I would also observe, of the $1.7 billion of deals we've announced for this year, fully $1 billion is Chrysler, Dodge, Jeep and Ram. And I think there may be a difference in point of view about the long-term outlook. Can't say for sure, but it is $1 billion out of the $1.7 billion. And it's a clear expression of my confidence and optimism about those brands in the US. I love the fact that it's all four brands under one roof and that Chrysler Corporation continues to differentiate and make genuine differences in those brands. I've seen the product portfolio for the next several years. It's very compelling.

But there are those who observe that Chrysler Corporation has been a boom and bust. And if you're thinking about doing something maybe while everything is fine, it's a good time to do it. So I think that's a factor of $1 billion out of $1.7 billion.

Great, thanks. And then traffic to your website, there was some concern that maybe ending the TrueCar partnership could dampen that. But perhaps Mike, if you or Bill could just discuss are you actually getting increased share of voice in advertising as your brand grows, and how are you actually seeing kind of visibility to the brand evolving?

To be clear, the TrueCar traffic had nothing to do with our website. That's traffic -- those leads go directly to our dealerships, and we basically are paying for the traffic. It has nothing to do with AutoNation brand, and nothing to do with AutoNation sites. And that was my issue. And at the end of the day, as you heard me say, in order to actually close transactions for that traffic, you were really into a reverse auction process with competitors that generally led to an unsatisfactory result for us.

So, it's two completely different things. So I assure you the fact that we've gone from years ago at the AutoNation sites generated less than 10% of the business to over 25% of the business, there is a dramatic increase in traffic through AutoNation sites. That's a better experience for the customers and a higher close rate and a better financial result for the Company. So it's a win-win-win strategy.

Got it. Just lastly, on service, which was up 9% on the gross profit side, can you give any detail there about what you're seeing in terms of transaction size driving that versus transaction count actually driving the gross profit dollars?

Bill, do you have any observations there?

Could you repeat it one more time? I could barely hear you.

I guess the question was just the gross profit dollar comp being up 9% and service was quite strong. So I guess I'm wondering are you seeing increased gross profit dollars per repair job, or are you seeing an increase in the number of jobs that's driving it, and maybe how that plays into actually retention rates.

I get the question I think. It's basically on three different levels. Our traffic on volume of RO counts coming into all of our stores is increasing, our gross per RO, our gross per transaction, is increasing, as well as being able to leverage our margin a little bit as well. All three of those have contributed to the growth.

Great. Thank you.

Michael Ward, Sterne Agee.

Thank you very much. Good morning everyone. Just a couple of things. First of all, do you guys have any regional feedback on sales that we've seen?

Bill, do want to talk about regional performance?

All three of our regions are performing at an exceptionally high level. I would call out standout performance out of our eastern region, primarily driven by Florida, but all three regions are performing at pretty close to an equal level and at a very high level as well.

Thank you. When you -- I think you called it your fast lane, the beta test you're doing in Florida I guess enhances or it's an extension of your digital marketing program. Is that correct and do you have any feedback on how that's going?

Bill, do you have anything on that?

Once again, I can barely hear you, Michael. So was that on service or on (multiple speakers)

I'm sorry. Your fast lane, the extension of the digital marketing, I think you are doing a beta test down in Florida.

We're doing two different tests. We have AutoNation Express, which is primarily driven on the sales side of the business. We've expanded the test to parts of Southern California as well as South Florida, and the initial results have been very strong. Mike talked earlier about building our brand, having transactional websites, and being able to drive traffic to it. So far, all of the results have been positive.

Okay. And just as it relates to some of the digital marketing national branding, is that a key factor as you're looking at M&A? Is that one of the things? Because it seems a lot of us our focus on there's a spike up in M&A activity. And I think there are probably a lot of reasons for it, but is one of them the strength of the national branding and the digital marketing that you offer, and does that mean the transaction is easier?

Yes, I sort of alluded to that earlier. I don't think there's any question about it. And I think that's on both sides. Sellers of course are concerned about price, but they are very concerned about what happens to the business that they built and to their associates that have been very loyal to them in building this enterprise. And there is -- they have a great -- they have a feeling that, with AutoNation acquiring and putting the AutoNation brand on it and all of the capabilities we bring to the table and the career opportunities we offer their associates, they really feel that not only are they getting a fair price, but they're really doing the right thing for their associates. And they see and feel the complexity of both from the third party, which in many ways is like competition in how disruptive they are, the demands of the manufacturers, the amount of capital required, the amount of expertise required, and they see that we provide all that. So, we are really a safe home for the business they've built and the associates they care about that we are giving them a bright future. And that is part of the equation, no question.

It seems like you're getting choice properties as well. Just when you look at where they are located and the size of the transaction, it looks like they are probably sought after.

We are not doing transactions for transactions' sake.

That's where the wins are.

We are very patient, have been very patient for a very long time. But I've always said, when the opportunity is there, we will move, and we are in one of those periods. And if you're asking me what is different, I think your question is on the point. If you really look at this --

I don't disagree with that, Mike, that's for sure. (multiple speakers)

The AutoNation brand that we are building coast-to-coast, no competitor is even trying to match it, and it really differentiates us in a way that's never been done before. And a lot of benefit comes through that. Dealing with the third parties, setting the table for acquisitions, winning in the marketplace, building relationships with customers does not -- that could be long-term.

Thank you very much for your feedback and time.

David Lim, Wells Fargo Securities.

Great. Good morning. First, I want to applaud AutoNation on the recall policy, great to see a dealer group doing that. The question that I have this morning is when it comes to the differential of your in-house, the website and I think you mentioned it was maybe a $800 or $900 difference, can you sort of box where you're getting the advantage versus a third party? Obviously, there is, as you said, maintenance fees and commission fees, but I just want to get an idea of what are the other categories that are out there?

Cheryl I'm sure can answer the question.

Yes. One of the other things I would say too is not only is it on the front-end margins, so as Mike mentioned on new vehicle margins, they are stronger when we generate those directly, but also we get benefits from customer financial services. But when you blend those two together, on average it's $800 or higher. On a PVR basis combined, direct versus using third parties, we tend to have different customers that are targeting the business.

Got you. Got you. And then on these -- I wanted to sort of dive a little bit into M&A in general for you guys. What's the balancing act between if it's a good fit price or if it's even might I say a turnaround story? How does that all sort of fit into the overall equation? If it's a really, really good deal, and yet let's say culturally it's not a 100% good fit, how do you guys balance all of that out?

We are very reluctant to do transactions that are not a cultural fit. To buy a business, to shut it down and rebuild it from the ground up is not something that we are enthusiastic to do. So we passed on a lot of deals that we just didn't think we could integrate without tremendous disruption.

So Jon, why don't you talk about our criteria.

We've got brand market and return criteria, so we are looking for excellent retail locations. As Mike said, we are looking for a good cultural fit so that we can successfully on-board employees and transition the business profitably and successfully. We've certainly got our return criteria, so it's got to meet our financial return metrics. We are looking at the demographics in the market, and if it's a good brand fit for that market, so buying, again, Chrysler and Chevy in Texas with the pickup truck mix is ideal. Similarly, last year, in Bellevue, Washington, we bought a Mercedes-Benz, Audi, and Porsche store, so that brand mix and cultural fit was excellent. So we are balancing all of those factors and they all have to come together. And that feeds back into what Mike said earlier as well, that if you look at our batting average, if you want to look at it that way, it's about 100. We will look at 10 deals and pass on nine that don't meet our criteria, and we will do the one deal. And we feel like, the last three years, if you look at the mix of acquisitions that we have done, they fit very well across all of our screening criteria. And we are very happy with that. And we will continue to be disciplined in that way.

Last question for Mike Jackson. What are you thinking from an overall industry standpoint sales going to in 2016, and if I may sort of push you a little bit, maybe even 2017? Thank you.

As you will recall, I think it was after the second quarter of 2014 I forecasted 17 million vehicles for this year. And it's clear now we will break through 17 million, so I don't know whether it's going to be 17.2 million, 17.3 million, it doesn't matter. It's going to be great.

And I think next year we will definitely break through 17 million again. Whether it exceeds this year, comes out the same or is a little bit more, I can't say today. But I think, even with somewhat higher interest rates, if it's 100 basis points next year, and that's still an if at this point, but let's say all-in it's 100 basis points, that's 15 a month -- $15 a month for our customers. That can easily be dealt with. You combine that with still pent-up demand, the products and the manufacturers are absolutely sensational. I see no sign that gasoline is going back to $3.50 next year, so I'm very optimistic about 2016. I think it will be early 2017 rolling it again.

Great. Thank you.

Thank you, everyone, for your time today. I really enjoyed discussing our business. Thank you very much.

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