AutoNation Inc (AN) 2016 Q2 法說會逐字稿

Welcome to AutoNation's second-quarter 2016 earnings conference call. (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 Andrew Wamser, Treasurer and Vice President of Finance for AutoNation. Sir, you may begin.

Thank you, operator, and good morning, everyone, and welcome to AutoNation's second-quarter 2016 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 John Ferrando, our EVP responsible for M&A.

Following their remarks we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have. Before we begin let me read our brief statement regarding forward-looking comments.

Certain statements and information on this call 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 $1.08, an 8% increase as compared to EPS from continuing operations of $1 for the same period in the prior year.

We achieved record EPS from continuing operations as we began to see the results of adjusting our cost structure and inventory levels to a plateauing industry sales environment. We also saw a benefit from our opportunistic capital allocation strategy which included acquisitions and share repurchases.

Revenue for the quarter totaled $5.4 billion compared to $5.2 billion in the same period a year ago, an increase of 4%. AutoNation's total retail new vehicle unit sales for the quarter were flat and on a same-store basis retail new vehicle unit sales were down 5%.

During the quarter we continued to see disruption from the Takata airbag recall which impacted our use vehicle business. Approximately 20% of our used vehicle inventory is currently on hold due to open recalls and approximately 75% of those vehicles are related to Takata airbags.

Second quarter was a transitional quarter for certain brands as replacement parts for the Takata airbags became available. We anticipate that our used vehicle inventory on hold will peak towards the end of 2016.

Also in the second half of the year, once the vehicles that have been on hold are repaired and sold, we will recognize compensation related to certain brands paid by the manufacturer which will partially offset our cost for having carried these vehicles.

Despite the very disruptive Takata airbag recall on our business, our industry leading recall policy is unchanged. Our customer safety still remains a top priority and we will not retail any vehicle that has an open recall.

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

Thank you, Mike, and good morning, ladies and gentlemen. For the second quarter we reported net income from continuing operations of $112 million or $1.08 per share versus net income of $115 million or $1 per share during the second quarter of 2015, an 8% increase on a per share basis. There were no adjustments to net income in either period.

In the second quarter revenue increased $217 million or 4% compared to the prior year and gross profit improved $23 million or 3%. SG&A as a percentage of gross profit was 69.5% for the quarter which was relatively flat compared to the year ago period. We continue to focus on the expense discipline and have aligned our cost structure to the plateauing industry environment.

The provision for income tax in the quarter was $71 million or 38.8%. Net new vehicle floor plan was a benefit of $13.2 million, a decrease of $2.8 million from the second quarter of 2015. The decrease was primarily due to increased floor plan balances and higher interest rates partially offset by higher floor plan assistance per unit.

Floor plan debt decreased sequentially approximately $237 million during the second quarter to $3.8 million at quarter end primarily due to lower inventory balances, partially offset by increased borrowings on our used vehicle floor plan facilities.

Non-vehicle interest expense increased to $28.7 million compared to $21.6 million in the second quarter of 2015. The $7.1 million increase in interest expense was driven by higher average debt balances resulting primarily from share repurchase and acquisitions.

At the end of June we had $2.7 billion of non-vehicle debt, an increase of $28 million compared to March 31, 2016. Non-vehicle debt includes $958 million of outstanding commercial paper borrowing.

At the end of June we had no amounts drawn under our revolving credit facility. As a consequence our non-vehicle debt fixed to floating mix was approximately 65% fixed and 35% floating.

During the second quarter we repurchased 1 million shares for $50 million at an average price of $48.51 per share. AutoNation has approximately $116 million of remaining Board authorization for share repurchase.

As of July 28, there were approximately 102 million shares outstanding and again this does not include the dilutive impact of stock options.

Our leverage ratio increased slightly to 2.7 times at the end of Q2 as compared to 2.6 times at the end of Q1. The leverage ratio was 2.6 times on a net debt basis including used floor plan availability and our covenant limit, as a reminder, is 3.75 times.

Capital expenditures were $62 million for the quarter. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales.

Our quarter end cash balance was $55 million which, combined with our additional borrowing capacity, resulted in total liquidity of $853 million at the end of June.

We remain committed to disciplined expense management while also opportunistically deploying capital to drive long-term shareholder value. Now let me turn you over to our Chief Operating Officer, Bill Berman.

Thanks, Cheryl, and good morning. Before discussing our results I would like to comment on the new vehicle industry selling environment for the quarter. Industry retail sales were down 2% while incentives were up 13% and new vehicle leasing penetration again was over 30%.

Turning to our results, my comments will be on a same-store basis as compared to the prior year unless noted otherwise. Gross profit for variable operations was $442 million, down 5%. Variable gross was $3,376 on a per vehicle retail basis, a decrease of $18 or 1%. New and used same-store unit volume was down 5% compared to the second quarter last year.

As we stated in the first quarter, we took steps to reduce our inventory levels and we made progress in the second quarter. We decreased our same-store new unit day supply from 76 days to 70 days or 6,000 units on a sequential basis. Our DSO target is in the low to mid 60s and we expect our inventory levels to normalize by the end of the third quarter.

New vehicle revenue for the quarter was $2.9 billion, a decrease of $49 million or 2%. We retailed 79,400 units, a decrease of 5%. New vehicle gross profit was $1,923 on a per vehicle retail basis, down 2%.

Manufacturer volume-based incentive programs with high sale targets should continue to create irrational behavior in the marketplace. Despite industry retail sales being down in the second quarter, certain manufacturers, in particular Ford, Chrysler and Nissan, set double-digit growth targets that were unattainable. Where we felt these targets were unreasonable we did not pursue them.

For the quarter used vehicle retail revenue was $1 billion, a decrease of $38 million or 3%. Used vehicles retailed were [52,300], down 6%. Used vehicle gross profit was $1,548 on a per retail basis, a decrease of $150 or 9%.

As of June 30, 6,900 units, or roughly 20%, of our total used vehicle inventory was on hold. 4,300 units, or 60%, of those units were eligible for manufacturer compensation. We anticipate over $3 million of manufacturer compensation which will partially offset our cost. We will recognize this compensation as each of these vehicles are sold.

Also at the end of the second quarter approximately 75% or 5,200 of our used units on hold were related to Takata airbag recall. We started to receive limited Takata airbag replacement parts for certain brands and we expect our used vehicle inventory on hold to peak towards the end of 2016, assuming parts become more readily available and no additional major recalls are issued.

Customer financial services total gross profit was $211 million. Customer financial services gross profit on a per vehicle retail basis was $1,602, an increase of $66 or 4%. We set an all-time record in customer care gross profit of $337 million, an increase of $9 million or 3%.

Also in the quarter customer care revenue was $773 million, an increase of $17 million or 2%. Customer pay gross was $140 million, up 6% year-over-year. Warranty gross was $[68] million, up 9%. Collision gross was $30 million, up 1%. We are continuing to work on adding additional capacity for our collision business to meet the higher demand.

Finally, I would like to welcome our new Denver, Colorado and Westchester, New York Associates to AutoNation and I would like to thank AutoNation's 25,000 plus associates for their hard work and dedication. I will now turn the call over to John Ferrando, Executive Vice President responsible for M&A.

Thank you, Bill, and good morning, everyone. In July we completed the previously announced acquisition of Centennial Chrysler Jeep in Denver, Colorado, a great brand fit for that market. Including this acquisition we have 17 stores in the Denver market area.

Also in July we completed the previously announced acquisition of four premium luxury stores in Westchester County, New York. These stores consist of the BMW, Land Rover and Jaguar brands and collectively represent approximately $100 million in annual revenue.

As part of the acquisition we will be awarded a Land Rover franchise in White Plains and a Jaguar franchise in Mount Kisco. Once our facility plan is complete we will have three Jaguar Land Rover stores and new state-of-the-art facilities in Westchester County, one in White Plains, one in Mount Kisco and one in Larchmont/New Rochelle. We expect to generate an additional $100 million in revenue from these facilities once fully operational.

We are excited about entering Westchester County, New York, an excellent premium luxury market with an outstanding platform of luxury franchises and attractive growth prospects. The business will be supported by our existing market team based in the Baltimore/Washington DC area and provides an opportunity to further leverage our existing management infrastructure.

In 2016 we have closed on the acquisition of 18 stores generating $1.1 billion in annual revenue. As of today our store portfolio numbers 373 franchises and 263 stores in 16 states representing 35 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 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, John. We continue to expect the total industry vehicle sales including fleet to be above 17 million units. In this current selling environment we remain committed to managing cost and appropriate inventory levels as well as taking advantage of capital allocation opportunities. We would now be delighted to take any of your questions.

(Operator Instructions). Mike Montani, Evercore ISI.

Good morning and thanks for taking the question. First thing I wanted to ask about, Mike, was if you could provide any updates on potential partnership activities with TrueCar following up on the pilot that you all had begun a few months back.

Yes, Mike, thank you. I recently met with Chip Perry sometime in the last couple weeks to do a review of the pilot that we had kicked off in the middle of the second quarter and benchmark all the results against our hopes and expectations and it was a complete success. TrueCar has transformed itself into being really a win-win partner and all the commitments and promises they had made to us were kept 100%.

We also discussed the learnings from the pilot and further steps we could make and Chip agreed to go forward with that. And we will expand the pilot during the third quarter, do another review meeting which I am very optimistic about. And my expectation now is by the end of the year TrueCar will have been implemented in all AutoNation stores.

Okay, great. And I guess on a related note, maybe Mike, can you just touch a little bit on the digital initiative with AutoNation express omni-channel selling work you guys are doing, and also third-party lead providers versus internally sourced leads at this stage?

Well, AutoNation Express and the enhancement of the digital capabilities and marketing communication to take traffic to AutoNation branded sites all has gone extremely well. We now generate -- I think it's somewhere in the high 20s -- our business from AutoNation sites. So it has really been a complete success now. And we have really enhanced our mobile capabilities, so all that is going extremely well.

And third parties, we have really achieved our objectives that they are in balance with where we are with our own investment in AutoNation Express. And they are compatible in how they do business in that the AutoNation Express is the best price, the price on our site is the best price you can have. It can be the same somewhere else but it can't be less and that it has to be about the brand AutoNation.

So, compared to where -- the fork in the road we were at a year and a half ago, I couldn't be more pleased and delighted with where we are.

That is great. And just last if I could squeeze one more in was in light of Ford's recent commentary, and I heard some remarks from you earlier on Good morning -- can you just update us, Mike, on what you are hearing from the OEMs in terms of production and how you guys are thinking strategically moving ahead in terms of balanced production versus demand?

If I go back to my keynote speech at the Automotive World Congress in early January, I said this market has plateaued. That the auto industry is in three phases and the most misunderstood and mismanaged phase is plateau. Running at high 16 million, 17 million units this industry can -- if it runs it rationally, you can still be quite successful and very profitable.

So, if I look at how the first half of the year has developed, well from a market point of view that is exactly where it is, with retail in the second quarter down let's say 2% at retail, but it took considerably higher incentives for that to happen.

There is a divergence in manufacturer behavior. I would give -- for instance I would complement General Motors and you certainly look at their results. And you see if you find the right balance between supply and demand with a good disciplined approach and really marketing that is focused on the long-term. You can be quite successful and be -- on the margin business that is going to be very expensive from an incentive point of view you don't take.

On the other hand we have other manufacturers who are still very aggressive in their plans and if you want to -- Bill already mentioned it. If you want to look at Ford Motor Company where we have targets for the third quarter that -- a significant number of our stores have targets that are 15%, 20%, 25%, up to 40% higher than prior year.

Well, that is just not going to happen, it is totally unrealistic and we are not going to chase it. And -- but it is disruptive in the marketplace and causes irrational behavior and there is a price tag for that. And if you look at Ford's total incentives being up 28% in the second quarter, I don't think they got a return on that approach.

So, there is a good contrast as to what I was talking about and how it can be managed differently. Now we will see what happens from this point, but the headline is progress is being made in principle and maybe we will make even more progress in the second half of the year.

Thank you.

Pat Archambault, Goldman Sachs.

Thanks for taking my question. I guess just building on that last point, I am sure you saw the details of the Ford results. But one of the things that they did is announced a pretty meaningful production cut for the third quarter.

And I was just wondering if your commentary is sort of reflective more of what was going on up to kind of the end of the second quarter and if there is evidence that the tone has changed. Because certainly one would -- at least given some of their actions one would expect that [would] have an impact?

That is a fair point. The programs that are out there right now that I just referred to, you may have in the third quarter a transition quarter where they still have these very aggressive targets to try to clear inventory, but on the other hand they are cutting production so as to be in a better place in the fourth quarter. That could be.

I still think where you take a significant percentage of your retail muscle and put it on the sidelines by putting out unrealistic targets is not the best way to get there. But your point is very fair. We could be in a better place three months from now.

Got it. And just on the stop sale inventory, I guess you said that it would peak towards the end of the year. And I guess just so I better understand why that is, because have they -- are they still in the process of identifying VIN numbers and you don't have all of those, so that is why you are repairing some but you are kind of identifying more inventory faster? Is that kind of the way it is working?

That is very insightful again, exactly what is happening. So let's do the good news first -- is that devices are beginning to arrive and we are at the point in certain manufacturers where we can batch order devices and not go VIN by VIN.

And we will begin to repair those vehicles, we will begin to sell those vehicles and we will begin to recognize the compensation that is due on those vehicles from the manufacturers. So that is the good news. That would tend to say the worst is over.

On the other hand, in the second quarter they announced another $10 million to $20 million of Takata airbag recalls for which we don't have the VIN numbers yet. But those VIN numbers will come in the second half of the year and those parts will not come until the first half of next year because they are on the passenger side and they have to go through a whole design certification process to get the replacement parts to us.

So, it is a little difficult and a little risky to say we are out of the woods yet on Takata if I look at all the moving factors. That is why we have good news, but I have a responsibility to tell you we still have all lot of VIN numbers that we are due for which there are not parts.

Got it. Got it. Okay, well thanks for talking us through that, that is very helpful.

Rick Nelson, Stephens.

I would like to follow up on M&A opportunities. The conversations, given the retail market pulling back a bit, if those are changing from maybe six months ago?

John, could you take that for me, please?

Yes, sure, Mike. Rick, we continue to see good opportunities out in the marketplace. I think the auto stock sector revaluation is working its way through. We have a number of conversations ongoing.

That being said, given our position we do get a look at a lot of opportunities and pass on the vast majority. We can be very selective in what we do and you will see us continuing to operate that way and looking for great brands, good cultural fit, excellent locations in markets where we have management infrastructure.

So, we are pleased with what we have done year to date. And I think over the next few years there will be a lot of opportunities that we will be able to take advantage of.

Thank you for that color. Also interested -- your strategy to not chase some of these volume-based incentives, what about risk there in terms of allocations and the implications for market share and maybe acquisition approvals?

This is Mike Jackson. I think it is a major source of irritation and friction between retailers and manufacturers. In one way though it is not a difficult decision because the targets are so irrational or so [unreachable] that you have no choice but to pull back volume in trying to manage for growth.

The capriciousness and how arbitrary the targets are is a problem because you will have neighboring stores of competitors that got a completely different target that is very reachable and therefore they are on a different price basis. And then you have others who think they can just make it that when they get close and are not going to make it they do extremely irrational things.

So, it really is a difficult situation to manage. But you are right, it will be a source of friction. But the extreme practitioners of volume-based incentives are really at this point, based on Chrysler and Ford, I would say the intensity of the discussion between dealers, retailers and those companies is going up.

Some are even questioning the legality of how those programs are run and the fairness of those program. So, I think we are approaching a moment where I would hope that these extreme stair steps -- which again I called out in my keynote speech in January would be the issue in 2016, because you take away a growing market place these stair steps really don't work because they are entirely based on growth.

Hopefully the industry over the second half of the year will come to a better place on understanding how these programs can work and can't work. But at the moment it is a source of real friction.

And Mike, do you see some of your peers also backing away from chasing those incentives?

Well, it is just because of where the calendar, I would observe, everybody else has reported and I see certain similarities. So all the publicly traded groups are behaving in a very rational way. They've all said hey, this market has plateaued; we need to address cost and we need to bring inventories into line.

I think it is very beneficial to the industry to see the big companies behave in a rational way. And then to call out one, if you look at Group 1, they did a fantastic job of saying, you know what, these targets are irrational, not attainable. We are going to manage for gross because we can't get the volume numbers. And they actually increased their new vehicle front end gross and gave up the volume.

So, finding that line is difficult and ongoing, but it is a point of contention. I don't in principle have a problem with volume targets if they are realistic and attainable, but when you have misjudged the market and you put out targets that are just not attainable and then you sprinkle it out there in a capricious arbitrary way it really is disruptive in the marketplace and very difficult to manage and you're going to have a lot of controversy with dealers.

Yes, you can go out and find dealers who say they like it. Well, I can tell you something, they got an easy target. If you get an easy target you love it. And since we have such a big footprint in so many stores we see that without rhyme and reason you end up with stores that get huge targets, plus 25%. We have other stores that got lower targets than prior-year. Go figure. So that is about as much color as I can give you.

That is very helpful. Thanks a lot and good luck.

Paresh Jain, Morgan Stanley.

Good morning, everyone. Mike, you talked about the industry plateauing at a higher level now, but in a scenario with soft declines 10%, 15% do you see yourself getting more aggressive with acquisitions or wait for signs of another upturn after such a decline?

So, I think a decline of 10% to 15% in auto sales would require a significant recession and a significant increase in interest rates above normal. Let's do interest rates first.

They are so far from even being normal let alone above normal, we are not going to have a decline in sales because there has been some dramatic significant increase in interest rates. I think we are looking at an environment where we have very low or reasonable interest rates and very low and reasonable gas prices thereby keeping the mix towards trucks for years.

Now can something else happen in the world that hammers the US with a recession? I suppose that could happen, but I don't see a significant recession that would decline sales by 10% to 15%. So my outlook is industry sales, high $16 million, just over $17 million for the next several years.

Understood. So, then a broader question on the future of parts and services business here which is more defensible, of course. Obviously, there is this rise of active safety and over the air update which is a potential headwind for this business, but are there any other offsets to it? Are there any new revenue streams dealers can capture especially related to fleet management?

I think if you look at the safety devices that are coming around (inaudible), and we are all for them. But if you really look at their realistic ability to become a significant percentage of the 250 million vehicles that are out there operating on the road, how long it takes them to turn over it is a very, very gradual process.

At the same time the cost of these systems and devices in vehicles is going up exponentially and the expertise to be able to deal with it is consolidating into fewer and fewer hands. So I think they offset each other for the next decade plus and ask me in 10 years for an update. I think we can really grow our customer care business open ended including collision.

Understood. Thanks for the color, Mike.

John Murphy, Bank of America.

Mike, maybe just to stay on the parking service for the first question, I mean 2.2% on same-store sales basis a little bit on the light side. But it sounds like you are customer and warranty were up I think 6% and 9% respectively and the slight weakness came in collision which was up only 1%.

And the way you discussed it, it sounded like you were alluding to some capacity constraints there and the need to maybe add capacity for collision. So I'm just curious what the story is there and what you have in the plans to really increase capacity there?

The good news -- and Bill will give you the exact figures in a second -- is that our customer pay business is up exactly where we want it to be, solid mid-single-digits. And what really has slowed is our internal business.

Now here is the way to think about internal. That's volume related to our new and used business, so as we have this backlog of vehicles on hold we are not repairing them until we get the parts from the manufacturer for the recall so that we can do the vehicle all at one time, make it front-line ready and then sell it. Upon sale, we'll recognize all that internal work that we did. So that has impacted our internal number.

Bill, why don't you talk about what internal was in the second quarter,and talk about our hopes to add capacity on collision.

Thanks, Mike. John, so like you said, we are up 6% in our CP which is strong and steady performance, so we continue to see that kind of growth available in the future. Warranty was up 9%, but to Mike's point we still have some pent-up demand there with cars that we have on hold that are waiting for warranty repairs from earlier related to Takata airbags.

On collision, you called that out right. We have record production levels and we definitely have capacity issues. Not so necessarily with people, it's more of a facility. Then on the internal piece quarter-over-quarter, year-over-year, we are down about 5%. But to Mike's point, that is 100% related to the number of new cars coming into inventory and the number of used cars that we're able to put through our system and put front line. So as less cars are on recall hold, we will be able to sit here and increase our internal gross.

And John, we will add capacity on the collision side. We like that business. As I said, when an accident happens there is a lot more work to do.

How fast can that capacity be added? Is that the kind of thing that is a couple months or is that a year or two?

Well, it takes quite some time but it is already underway. Bill, when would you say the capacity comes online that will be able to be reflected in our numbers?

We will see a little bit of an increase in capacity in the third quarter and then it will ramp up significantly in the fourth quarter through all of 2017.

Great, that is incredibly helpful. And then just to also follow up on the stop sale, I understand there sounds like there is a little bit of a surge in parts and service on the warranty side and used vehicle sales it will kind of clear here. Just curious when you think that will happen.

It sounds like it is probably first half of next year. And really in the interim how much of a weight is that on results? Is it really just the cost of carry of inventory that you won't get reimbursed for until you sell them? Or just really what's -- if you could quantify or even just give us some kind of magnitude of the weight that that is creating results?

The disruption, John, is significant. Literally, where do you put all these cars and we have had to go out and rent storage lots, but still disruptive to frontline ready inventory to go. I think for the vehicles that we have right this moment, right this moment I think the majority of the parts will come between now and year end and we will be able to retail them, recognize the compensation we are due and do the internal work and recognize that also.

However, for these additional Takata airbags announced in the first half of 2016 there are no parts and we will begin to get the VIN numbers very soon, which means we are going to repeat this whole maybe over again for this next wave and that wave then takes us into 2017 before we get parts. Bill, anything you would like to add there? Anything I missed?

No, Mike. I think you said it perfectly. We will be able to clear out of our existing inventory in Q3 and Q4. The real unknown is how extent the recalls in the future will be. There is more Takata airbags that will hit the recall over the coming months, but we have a plan and a process to deal with it and we are executing upon it at a high level.

And then just lastly, Mike, you alluded to, and we have seen this data where leasing has been surging as a percent of sales. And it looks like in the first half of the year it was north of 30% which is well above normal levels of 20%.

Just curious how that is impacting sales and profit here in the near-term and if you see that creating any disruption or how you might deal with it that we see this very large wave of vehicles coming back off lease in 2018, 2019 and 2020?

I think that is one of the distortions that I am concerned about. So, when I look at flat out incentives from the manufacturer, I really think they shouldn't break into double-digit as a percent of their average MSRP.

I think you hit a wall of diminishing return where the incentive is now at such a level that it is already depressing the resale value, so you haven't really delivered the net -- reduced the net difference in the cost of the vehicle. Does that make sense?

Where your next dollar of incentive doesn't have -- at 10% doesn't have the same impact as when you went from 5% to 6%. There is a point of diminishing return that is dramatic.

Second, I agree with you. Leasing is the same thing. You are sowing the seeds of a day of reckoning that you really don't want, namely that you have so many vehicles coming back that are based on a residual value that is going to be higher than what the marketplace can handle.

Now all those risks are at the OEM level, not at the retail level, but we all know if you are basically pulling business forward now, that means that when the day of reckoning comes the disruption is greater. And I would just rather see the business managed more rationally and with the ability now so this plateau period is more sustainable. That is what I am advocating.

That is very helpful and please keep speaking up. Thanks, Mike.

Bret Jordan, Jefferies.

Regionally could you talk if you have seen any directional trends? I mean obviously between the three big states Q1 to Q2, any improvement in Texas or any shifts in the Florida or southeastern markets?

Texas remains very difficult. Bill, why don't you give a regional report, please?

Absolutely, Mike. So we are seeing strong growth in Florida especially in the southern part of the state; California is also improving and continuing to grow. Texas faces -- and Colorado energy markets are facing extreme headwinds.

Operationally we have been able to sit here and adjust our business model and our cost structure to be able to combat that to the best of our ability. But as you see today, with oil in the $40 to $42 a barrel it definitely poses some headwinds for the southern part of Texas.

Bill, are we looking at double-digit declines in unit volume in the energy space?

Yes, we are almost 20%.

It's significant.

Okay, great. Thank you. And the question on collision, as you expand that business is that something that you could get involved in direct repair programs with the insurance companies and really drive outside volume to that business sort of like the caliber Service Kings are do you really sort of keep that as more of an in-house boutique business?

No, we see the way you described it the first time. Again, it is part of our investment in the brand AutoNation, why we did it. So we have extended the brand into our customer care products and protection products and have had amazing acceptance, satisfaction and improved results for us for that move. And we intend to extend the AutoNation brand to the collision business.

All our collision centers will be branded AutoNation and the ones we expand will be branded AutoNation. And so brand extension, one of the reasons we made significant effort into the AutoNation brand and digital is for brand extension.

So, the heavy lifting (technical difficulty) in the sense that risk and the investment that it took to establish the brand AutoNation has accomplished. The risk and the cost to build the digital muscle has been accomplished.

And the obvious benefit -- or the existing business is there, that's fine, but the brand extension possibility that exists from having those two pillars are what we intend to realize over the next several years.

If you looked out three to five years maybe as you invest in capacity how many collision sites you think you might get to?

Well, I'm not prepared to give you a number on that today, but that is actively being worked on. And I think certainly by the next earnings call I can give you an answer on that.

Great. Thank you.

James Albertine, Consumer Edge.

Thank you and good morning. I wanted to ask and I know, Mike, you have alluded to this in your prepared remarks and various times in the Q&A. I just sort of wanted to be very clear because it is a concern that has been voiced I think numerous times over the course of the last few months, at least to us among investor conversations.

Do you believe that SAR having grown to the point at which it was a record last year has effectively pulled forward demand from the used vehicle market? And if not, where do you think or what indications are you seeing to give you confidence that when supply does ramp there will be demand for those used vehicles?

So, I think I have been very outspoken and you are exactly on point that this is one of the reasons why I feel my stance at the beginning of the year was so important.

Because ultimately -- and I sort of alluded to it earlier -- if the OEMs overdo it and push incentives too far, overproduce, push leading too far, you are absolutely taking customers from the used vehicle market and converting them into the new vehicle market. And at the same time you are increasing the supply of used vehicle coming back to the market on a faster turn.

Well, you can see that that is unsustainable and there will be a day of reckoning. So I have been very clear that there is a risk there. I don't think we have gone over the cliff yet, I think there is still plenty of time to manage this rationally and disciplined.

And don't forget, the retail market for use vehicles is 40 million units. So if you put it all together we are looking at a market that is 55 million to 60 million units between new and used. It is very manageable. But can you screw it up? Yes, you can. That is why we are speaking up.

And by the way, I have to say if I look at all the other publicly traded groups that have reported, they have all talked about taking a disciplined approach on the cost side and on the inventory side. I haven't checked everybody's numbers but I have the sense that everybody's day supply has come down sequentially during the second quarter.

So, everybody said they would do it and they are out there doing that. And that is a very strong single back to the manufacturers, which they don't like but I think is healthy, that we can have a very profitable, sustainable, rational plateau period until we have very high interest rates or a major recession and then volumes will fall. Is that helpful?

It is extremely helpful. Thank you so much for that color and I will get back in queue.

David Lim, Wells Fargo.

Good morning, everyone. Mike, just curious, are you guys pushing back on orders? I don't know if you have talked about that. And then I have several follow-ups.

We are absolutely pushing back on orders, but that is a daily fight. Sometimes I feel like a Thanksgiving turkey just being stuffed, it's a daily --. Bill, you are in the firing line, do you want to talk about it?

Yes, I think you said it right, Mike. It is a day to date fight. We have reduced our day supply by six days from the end of Q1 to the end of Q2. We will be to our target area in the mid-60s by the end of Q3, but it is a store-by-store, model-by-model, brand-by-brand fight.

We are down 6,000 units sequentially and we are going to continue to get that down. But there is a tremendous amount of pressure coming from the OEMs to accept unneeded and unwanted inventory.

By the way, just to make an observation. I think ignore the day supply numbers in automotive news because they include fleet sales in the selling rate, also which is ridiculous. It should be tell me what retail sales were versus retail inventory, that is the real world on what is going on with days supply.

To order in the (multiple speakers) -- to add in the fleet sales into the selling rate, to divide into retail inventory gives you an unrecognizable number as to what is happening in the real world in my humble opinion.

Absolutely, absolutely. On the philosophical side, what is the rationale behind the irrational behavior by some of these OEMs? I mean, industry can't grow at 18 million, 19 million, 20 million. Maybe it could but it doesn't seem that way. You have cited several OEMs that are irrational. Do you have any examples of OEMs that are more rational in this environment currently?

Oh sure. I already called out General Motors. Honda has always been very rational and disciplined. The same with Toyota. By and large the Germans have been, they have a little divergence from their usual discipline carrying far too much inventory into 2016, which we are still trying to work our way through.

But that is sort of like an aberration and I'm optimistic and hopeful that will come into line. And as far as what the issue is, there is agreement -- seems to be agreement on -- within the industry now on plateau. But then I get the speech for the next 20 minutes asking why their company is going to be different. Not everybody can walk on water so that is an issue.

And as far as the pressure, I can tell you as having been at the table, you still have relatively high fixed cost or some cost where the marginal cost to produce another unit is -- the pressure is absolutely there and they recognize revenue on shipment to us.

They stuff us as a Thanksgiving turkey, they recognize their revenue and there it is. That is the third real for the industry and why this is a struggle. We are speaking up and I think we are making progress. We are not where we need to be but I am hopeful we are making progress.

My last question is on your aim to fix the cost structure or to adjust the cost structure. Can you sort of dimensionalize what are the major buckets where you can take out cost going forward and where have you already taken out cost if you look at the last quarter or two? Thank you.

Bill, could you take that, please?

Yeah, Mike. Obviously the opportunities come in compensation, making sure we have our store staffed right, we have the proper headcount and the proper compensation plan to drive behavior. In addition to that rightsizing our inventories, making sure our days supply is in line to lower our interest charge of floor plan, cost that goes along with that.

And then day-to-day operational charges that come into it, whether it is service loaners or other SG&A items and going store by store to right size those and make sure we are aligned to the volumes and to be able to service the customers the best way we can.

Great, thank you.

Irina Hodakovsky, KeyBanc.

Thank you. Good morning, everyone. Thank you for taking my question. My main question was about your acquisitions. You seem to be a lot more active than your competitors in the market on the public side.

Wondering what allows you to continue to acquire versus some of your competitors. The commentary overall seems to be that the Blue Sky multiples are still high, yet you seem to be finding deals. What is helping you and what is the outlook?

John, could you take that please?

Sure. The last three or four years we have been very active in our effort on the acquisition side. We think we bring a lot of advantages to the table including being able to execute with the manufacturers, to close transactions which is very important to sellers.

How we take care of employees going forward with our world-class training and development programs, that resonates with a lot of sellers. And our ability on the real estate and facility side to navigate potentially complex facility parts of a transaction.

So, we think we bring a lot to the table and we have been able to execute in the core markets that we have been in. So, we are very pleased with that and you will see us continuing to work hard at it.

Can you comment a little bit in terms of what you are seeing in the market in terms of sequential trends in multiples, availability of stores, seller expectations?

I would say in terms of the multiples and the revaluation in the auto sector earlier this year that is working its way through. It is hard to generalize because there are so many different sellers, so many different circumstances.

So, every deal is different but we are seeing less completely unrealistic sellers out there than we probably saw last year. So from that standpoint it is getting a little easier and there is still a good flow of potential sellers that will be ready to divest their business over the next few years and we are in dialogue with a lot of those folks.

In the last follow-up in terms of preference, share buybacks versus acquisitions, where does are preference like?

You want to take that, Mike?

Well, that is our classic answer that just look at our 15-year track record. Look at where our stock is trading and if it is attractive we move aggressively. We usually have the balance sheet to do both, really haven't had to make that trade-off. Existing business comes first on capital.

We've always invested in our stores, invested in the brand, we invested in our digital capability. That is first call and then when we look at the balance between what we can buy the stock at and acquisitions. Certainly the stock was extremely attractive in the first quarter and we bought a lot.

I would add too, Irina, if you take a look at the first two quarters of this year compared to last year, we spent between share repurchase and acquisitions over [$550 million] more this year than the prior year. So obviously we are bullish on the things that we have been putting money into first half of this year.

Great. Thank you very much.

Brian Sponheimer, Gabelli.

Good morning. Thank you. Most of my questions have been answered. I guess first of all, welcome to the neighborhood in Westchester here. But that leads me to just M&A and the move outside of mile states, what made Westchester the right time now?

So, I would say we are at a level of maturity where we are looking in the Northeast and we decided when we move into the Northeast we will move into premium luxury first.

Strategically, despite the difficulties we talked about with premium luxury in this year, strategically we are very optimistic and confident about premium luxury.

And it is the easiest way to extend our management into new markets without adding a lot of infrastructure and we don't have brand launch costs or other costs. So it is a very cost-effective way to move into new markets.

All right, terrific. And then just one more, just conceptually, Mike, I don't know if you are able to get this sort of granularity on your purchasers on volume foreign and domestic. But as far as average age have you seen any difference in buying habits from the millennial generation as far as average age ticking up at all?

We have taken a close look at millennials for the last five years and we have a tremendous insight into it. All of our (inaudible) capabilities that we have talked about, a big part of that was the millennial generation and designing it in a way that will appeal to millennial generation. And we have more updates in the pipeline that will even make it more effective.

My view is that millennials will buy cars. I think -- I have to check, but I think they could have bought more cars than any other generation. The millennials came of age with the Great Recession, they went back to school and doubled down on education and student debt, they are now entering the workforce, they have to pay down that student debt.

But their fundamental desires to marry, have children, have a home, have a car are there. You have to do business with them differently, you have to communicate with them differently, you have to know how to market to them differently, but those drivers are there. That is in principle of what we believe.

Okay, thank you for sneaking me in here.

Mike (inaudible), (inaudible).

Good morning, guys. Just maybe one quick one where you have been talking about the divergence and behavior amongst OEMs. Mike, just wondering how you see where the balance starts to tip one way or another, how many OEMs behaving like Ford, Fiat and Nissan does it take to kind of upset the apple cart? And when do we sort of become the frog in the slowly boiling water here?

I would say three is enough. So, I think we are at a crucial point because, if I look at the whole history, Chrysler was the first practitioner of aggressive stair steps. They were highly skilled, very professional and rational and they probably today are the most skilled practitioner of aggressive stair steps.

Then you had Nissan arrive which is just a loose cannon rolling back and forth across the deck wreaking havoc. And now you have Ford as of this year join in. So if more go down that road that is a real problem.

But I think it is going to go the other way. The price tag of irrational stair step incentives is beginning to be understood. The damage to the brand, the change in your customer base, the impact on customer loyalty, the dissatisfaction in the fairness of pricing due to the fact that you have introduced a casino three car monte system, you have unleashed that on your customers.

A manufacturer cannot talk about customer satisfaction in one breath and say on the other hand they are going to do aggressive stair steps because it is basically massively unfair to the customers. And finally, the relationship with your retailers that you really just wreak havoc.

So, I think the long term, yes, in the near-term it is like heroine, it feels nice, it feels pretty good, but then you look in the mirror one day and you look like Dorian Gray and you realize you can't go on like this. So we are at a crucial point, could go either way. I am saying it is hopefully going to go back more towards the rational. But yes, three is enough.

Awesome, thank you. Hopefully we don't see the picture in the attic. Thanks.

Great. Thank you, everyone, for joining us today. We very much appreciate your questions. We appreciate your time. All the best.

Thank you. This concludes today's conference. Thank you all for joining, you may now disconnect.