AutoNation Inc (AN) 2017 Q1 法說會逐字稿

Welcome to AutoNation's First Quarter 2017 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. You may now begin.

Thank you, operator, and good morning, and welcome to AutoNation's First Quarter 2017 Conference Call and Webcast.

Leading our call today will be Mike Jackson, our Chairman and CEO; Cheryl Miller, our Chief Financial Officer; and Bill Berman, our President and Chief Operating Officer.

Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available via 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 constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

And now I'll turn the call over to our Chairman and CEO, Mike Jackson.

Good morning, and thank you for joining us. Today, we reported EPS from continuing operations of $0.97, an 8% increase as compared to EPS from continuing operations of $0.90 for the same period in the prior year.

First quarter 2017 revenue totaled $5.1 billion, which was flat compared to the prior year.

In the first quarter, AutoNation's combined retail vehicle unit sales were flat on a total store and same-store basis.

The new vehicle market remains in a plateau phase with elevated inventories, rising incentives and leasing penetration near all-time high.

During the first quarter, we saw an increase in used unit volumes as we focused on our One Price strategy, which is now fully rolled out in all AutoNation stores.

Also during the quarter, we worked through the majority of the inventory that was previously on recall hold. Therefore, we expect to see a sequential increase in both used unit volumes and gross profit per vehicle retail in the second quarter.

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

Thank you, Mike, and good morning, ladies and gentlemen.

In the first quarter, revenue increased $20 million or 0.4% compared to the prior year and gross profit declined $6 million or 1%.

SG&A as a percentage of gross profit was 72.6% for the quarter, which represents 130 basis point increase compared to the year-ago period. We continue to expect SG&A as a percentage of gross profit to remain above 72% for 2017 due to pressure on gross profit from disruptive OEM marketing and sales incentives as well as investments related to our brand extension strategy. The provision for income tax in the quarter was $62 million or 38.5%.

At the end of March, we had $2.5 billion of non-vehicle debt, a decrease of $174 million compared to December 31, 2016. Our non-vehicle debt fixed to floating mix was approximately 70% fixed and 30% floating.

Non-vehicle interest expense increased slightly to $28.8 million compared to $28.3 million in the first quarter of 2016, driven by an increase in capital leases due to acquisitions and higher interest rates.

Other operating income was $19.5 million in the first quarter of 2017 compared to $5 million in the prior year. Other operating income included a year-over-year increase in gains of $3.7 million related to divestitures and payments of $9.8 million we received from manufacturers related to a legal settlement and for the waiver of certain franchise protest rights.

AutoNation has approximately $298 million of remaining board authorization per share repurchase. As of April 21, there were approximately 101 million shares outstanding and again, this does not include the dilutive impact of stock options.

Our leverage ratio decreased to 2.6x at the end of Q1 as compared to 2.7x at the end of Q4. The leverage ratio is 2.5x on a net debt basis, including used floorplan availability and our covenant limit is 3.75x.

Capital expenditures were $74 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 $56 million, which combined with our additional borrowing capacity, resulted in total liquidity of $1 billion at the end of March.

We remain focused on executing our brand extension strategy in addition to opportunistic capital allocation in order to drive long-term shareholder value.

I'll now turn the call over to our President and Chief Operating Officer, Bill Berman.

Thanks, Cheryl, and good morning, everyone. My comments today will be on a same-store basis as compared to the prior year unless noted otherwise.

Gross profit for variable operations was $431 million, down 5%. Variable gross was $3,233 on a per vehicle retail basis, a decrease of 6%. Combined retail unit volume was flat compared to the first quarter last year.

New vehicle revenue was flat compared to the prior year at $2.7 billion. We retailed 73,600 units, a decrease of 3%. New vehicle gross profit was $1,886 on a per vehicle retail basis, a decrease of $39 compared to the same period a year ago.

Used vehicles retail revenue for the quarter was $1.1 billion, an increase of $42 million or 4% compared to the period a year ago. Used vehicles retail were 59,100, up 6%. Used vehicle gross profit was $1,243 on a per vehicle retail basis, a decrease of $389.

During the quarter, we worked for the majority of the inventory that was previously on recall hold. We expect to see sequential improvement in used unit volumes and gross profit per vehicle retail in the second quarter.

Customer financial services gross profit was $1,634 on a per vehicle retail basis, in line with the prior year. Total gross profit per customer financial services was $217 million, which was flat compared to the same period a year ago.

In the quarter, customer care revenue was $820 million, an increase of $25 million or 3%. Customer care gross profit was $361 million, an increase of $17 million or 5%. Customer paid gross was $146 million, up 4%. Warranty gross was $78 million, up 14%.

Finally, I'd like to thank all 26,000 associates for their hard work and dedication. I'll now turn the call back to Mike Jackson, our Chairman and Chief Executive Officer.

Thank you, Bill. We continue to expect industry new vehicle sales to be above 17 million 2017 due to continued replacement need, ample credit availability and attractive new products.

Now we'd be delighted to take your questions.

Our first question is coming from Rick Nelson.

So I'd like to ask about the rollout plans for AutoNation USA, Houston, I believe, it's your first market, along with Corpus Christi, and (inaudible) have plans for Phoenix and Las Vegas and additional stores there?

Yes, Rick. Yes, we believe that we will grow our preowned sales much faster than the new vehicle sales. The outlook is very positive there with increased supply, with very reasonable acquisition cost, and we really view it as an opportunity. We think the brand is strong, and we think One Price is the correct marketing strategy. And therefore, we've One Price-ed the entire company. So we intend to grow our preowned business both in our existing stores and then also in the brand extension in the U.S.A. stores. We will open -- we're excited in the second quarter, we'll open 2 stores, both of those in Texas and then later in the year, we will have an additional 3 stores. We'll be very keen to see what the ramp is on sales volume and gross profit because we know we can manage the cost over time as technology comes on. We really want to see the customer reaction to the stores. So that's what we'll be benchmarking in the first 3 to 6 months to see how that goes. But if we look at the reaction we're having to One Price from our customers and the associates' positive reaction, if we look at our central buying capability, that is giving us inventory for the future, we're pretty excited what we're going to do in preowned through the balance of this year.

Also, I'm curious how -- what's your hearing from the OEMs as it relates to your newer strategies. I guess, I'm thinking about the private label parts, in particular?

Well, the conversation with the OEMs goes basically as follows: That they have developed the tools to manage the front-end gross for new vehicles in the marketplace, and they have taken them down to a level from which they're not going back up. So we are basically -- they're basically asking us to sell new vehicles just covering our cost to having sold them, not making any money on them and that -- then we need to make money everywhere else. So that's what we're doing. And if I look at our company -- in that situation, you can't just sit their [ path ], you have to say, "Well, what are my opportunities to grow the business?" I think there's a certain understanding on their part that, yes, it's not third parties, it's not digital transparency that's brought down front-end gross, it's tools that the manufacturers have developed and implemented. So I think there's a certain respectful understanding that we then have to grow our business and build our profitabilities elsewhere.

Okay, got you. Finally, if I could ask you about their income was pretty big this quarter were calculating $0.12. How should we think about that line item as we move forward? Obviously, the Audi settlement had -- having to go forward? (inaudible)

Yes, so Cheryl talked about it in the script and called it out and, obviously, it's nonrecurring, but -- Cheryl?

Yes, what I was saying -- and first of all, just keeping the perspective, we don't do adjusted EPS. Last year, we went exclusively to all GAAP and obviously, the others on the face of financials. The 2 factors tying into other I would say the first which we talked about was related to the emissions payment. So really, the way we think about that is recouping of lost value and profit that is maturely done so you saw some of that in Q4 and you saw some of that in Q1 as well. I don't expect any material amounts coming in from that in the future periods. The second is really related to asset sales and property dispositions. That's something we have done historically. You've seen that in our numbers. If you look at last year, for instance, we had $5 million related to that in the first quarter of last year. So the change year-over-year related to that was about $3.7 million. As we've talked about, with respect to investing in accelerate, we will continue to do some potential strategic dispositions to generate some additional cash flow to offset some of the outgoing CapEx numbers. You'll see some potential gains similar to what you've seen. In the past, it's very difficult to predict the cadence of this. So that's really the 2 drivers for the quarter.

Our next question is coming from Mike Montani of Evercore ISI.

Just wanted to ask, if I could. In terms of the guidance for improving used unit comp and grosses, I think, year-over-year, was that referencing the idea that the 6% used unit comp would actually strengthen in 2Q? Or were you just saying it would be positive and that the gross profit dollars per unit would be positive year-over-year?

Yes, the second one.

Okay, understood. And if I could...

It's a sequential improvement in volume and profit per vehicle retail.

So think number of units, not percentage change.

Got it. Okay, sorry, just wanted to clarify. And then if I could, the second part of it was, is there a certain used unit comp -- so you mentioned, obviously, flat if you were to add new and used. But is there a certain comp where we should start to see some leverage over SG&A? I don't know, Cheryl, if there's anything you can say to that?

Yes, I think what I could say from a new vehicle perspective, obviously, we've continue to talk about versus historically, you've got some pressure related to the plateauing in new and where new PVRs are, which is something Mike has touched on. From a used perspective, our goal is to continue to increase the gross profit, both by driving additional unit volume and then by improving PVRs now that we're through the recall phase and now that we've implemented the One Price strategy. So we think that there is opportunity there with respect to improving grosses overall within the used vehicle portfolio. But we do note that you're still going to have some pressure versus historical leverage opportunities on the new vehicle side.

Okay. Is there a certain point in time -- so if you look out over the next 12 months or the next 24, where we should start to anticipate SG&A gross would actually improve?

Yes. So what we've said again, we expect it to be above 72% for the remainder of 2017. We've also talked about the gross opportunities in 2018, particularly related to the customer care part of our business as we roll out the continued accelerate initiatives in that area. And as that kicks in, you would expect to see some good leverage in that area through 2018.

Great. And the last one I have was on the omnichannel selling and the work with AutoNation Express. I don't know, Mike or Bill, if you want to just add some color as to third party leads versus internal now, and then maybe the overall market reception to AutoNation Express as you get One Price selling out there?

We're very satisfied with how AutoNation Express has developed. I think we said on the last call, it now generates over 30% of the business. We still have excellent relationships with certain third parties that we've come to very good agreements with, that we're satisfied with the cost basis and the operating agreements, and they're around 10% of the business. Bill, what would you like to add?

AutoNation Express has been a huge success. It ties in perfectly with our One Price used car strategy and overall, it will build and help the strong component of our accelerate project going forward.

Our next question is coming from Jamie Albertine of Consumer Edge.

Mike, to go back to your comments on the OEM, I think one of the questions earlier with respect to profitability, just basically covering your costs -- imagine the pressure is equal if not worse on some of your smaller independent peers. And I'm wondering if we're starting to see sort of an opening up of the acquisition environment as it relates to that. And how should we think about acquisitions in terms of the list of sort of different initiatives you have, sort of on tap here with respect to investment in the near term?

So to me, manufacturers having developed the tools to keep front-end gross in a narrow corridor that just cover your cost. It is a fundamental strategic change in the business that has certainly, for the independent entrepreneur, taken a lot of the fun and excitement out of the business. And certainly, it limits them what can be done. So I think it has to be factored into what the business is worth and what you pay in goodwill for the business. And from what we've seen thus far, sellers have not really come to terms with that. So if I look at the capital returns for brand extension versus acquisition, brand extension is far more compelling in our view. And it will take some time for that to become obvious, but that's how we see it. Now if there's an adjustment in pricing on acquisition, that's another story. But so far, that hasn't happened.

Okay, that's very helpful, and thank you for delineating as well. If I may just to follow up on credit. There's a lot of consternation it seemed during the quarter. It ally out in the market, talking about residual value declines, NADA data on the used car pricing front, just lots of focus on the credit business. What update would you give to the markets at this point based on widespread credit availability, but also with the performance as you see it of outstanding auto loans? Is there anything to be concerned about incrementally since we last spoke?

Credit is very available and very affordable. You have some deep subprime that people are taking some medicine, but that's not really material to our business. It's only 6% of our revenue comes from subprime. Now there is some volatility in the preowned market. If you're looking for something that was built in '08, '09, '10, there's relatively small supply since there was little production in those years. And so those vehicles are worth the premium in the marketplace. However, there's a lot of late-model stuff coming off lease and the issue is, more than anything, is it's the wrong mix because the installed capacity 3, 4 years ago was heavily weighted towards cars, and that's where the marketplace was pushed even though there was already a strong migration towards trucks. So therefore, you have a mismatch between what the market wants to buy and what's coming back to market. So you'll have some residual value pressures there. So at the end of the day, it depends on what seat you're in. If I'm in a seat where I've made a bet on residual values 3, 4 years ago and now this -- there you have this wave coming back with a mismatch in mix, I better have set up enough reserves for that because it's going to be an issue. If you're a retailer like us, we're looking at it and saying, we had a greater supply coming and whatever the price is, we turn the inventory so fast that it's basically a difference between what we acquire it for them, what we sell it for. Obviously, if you have an aging issue with preowned like we did with all the hold on recall, that was a problem. But that's really totally behind us now. So from our vantage point, we view the preowned situation as an opportunity going forward depending on where you sit, if you're a finance company or, let's say, a lease company with a big lease portfolio, depending where you put those residuals and what the mix is, you could have issues.

Our next question is coming from Brian Sponheimer of Gabelli.

Just getting an idea on the gross per used and the difference that we could see going forward. Do you have separated the gross per used unit for vehicles that were subject to recall versus those that weren't?

No, we don't have that for you. And it's hard to give -- there's so much noise between having moved everything to One Price and the recall policy and the change in recall policy. It's very hard to separate. So my view is, we just take a deep breath, be patient. Second quarter, we're declaring as a clean start without noise from recall and with One Price fully implemented and all the challenges and difficulties that presented. So I think the second quarter will be a very good indication. I can tell you this, sequentially, the numbers will be better, both on a PVR basis and on a volume basis than the first quarter. I just am reluctant to quantify it until we know for sure. So I can give a directional statement, but I'm sorry, I can't untangle everything better than that.

No, understood. And then, I guess, my question is about -- my second question is about capital allocation. If I were to go back a year ago, your stock was at these levels and you're more aggressive in buying back shares. Now that we are where we are for good or bad, what are your thoughts on the stock price relative to some of your other capital allocation initiatives here?

Well, sure, I'll add some color, but I would make a statement. We remain opportunistic at the same time strategic, and sort of like as we were talking about acquisition. Brand extension looks like a very exciting opportunity to us. We've paid the cost to build the brand. I wouldn't do it without digital capability. We've built that, we have that, that gives us a high degree of confidence, and it looks to us like the highest return on future invested capital will be in brand extension. Now that has to be borne out, but that's our point of view at the moment. Cheryl, would you like to add anything to that?

Yes. As I said, Brian, I think the great thing is we've got $1 billion worth of liquidity. We continue to generate free cash flow. If you look at the areas that we're investing in with respect to accelerate, you're looking at things like collision expansion, you're looking at the parts piece where there's good margin and great multiples in that sector. If you look at our historical pattern, as you know and follow it for a long time, we sometimes will participate on a stock at a certain price, hold off and then get back in at a different point. We've done that continuously over time. We brought in over 80% of stock at a price of about $19. So very favorable results from that strategy. We'll continue to do that. But I think the great news is, we're extremely well positioned liquidity-wise to be able to move quickly and be opportunistic when things present themselves. But I think it is important that we are focused on the brand extension and making sure that we're prudently allocating capital towards that. We'll do selective positions to fund part of that to stay balance. And that's really the approach that we're taking. It's consistent with where we've been headed.

Our next question is coming from John Murphy of Bank of America Merrill Lynch.

Just a first question on incentives. And it seems like there's a -- I mean, they're obviously growing, whatever form they're coming in. I'm just curious, Mike, as you're looking at this, I mean, there's a view that average transaction prices keep going up because mix is offsetting the price cuts. But it sounds like a very similar story to what we heard from a one '05 going into '07 where if there's more and more trucks, you can discount them and it will be fine. Are you growing -- you're sort of increasingly concerned. The industry is sort of giving away this richer mix at lower prices, and it's masking it with a mixed improvement for now that you just -- you'll never be able to get this price back?

John, no, my view is a bit different. If you had not increased the incentives by 16%, the volume would have fallen by more. So -- and then I look at it and say, okay, incentives are now up to 10.5% of MSRP, it's manufacturer incentive. To me, 10% has always been a red line where there's a severe diminishing return past 10%. To me, 30% leasing has always been a red line, where you have a massive distortion if you take it above that. To me, inventory is above 70 days is a red line. So we have 3 red lines that the industry in total is over on new vehicles. Now admittedly, trucks is underpinning the profitability and the sustainability of that. I just don't think there's another step. And therefore, if you level off incentives and leasing and bring inventories into line, then most likely, you'll have some sort of modest decline in new vehicle volume.

Okay, that's helpful. I was just curious if you're also seeing residual support that's not showing up in that incentive data. And it seems like there's some pretty aggressive resid assumptions going on some of the luxury past cars. What are you seeing on resid support? Is that actually showing up in the incentive data? Or is that an incremental layer of price discounting that's going on?

They catch a lot of it, but not all of it. And a lot of it is intercompany payments and intercompany guaranteed that's hard to get between the captive and the marketing company. But yes, the issue is where is the spiral that everything moves against the new vehicle market. And it looks like -- I've said it for a couple of years now, we're at plateau, it takes higher incentives to stay at plateau. And when the effectiveness of higher incentives is diminished, then sales will go into a gradual decline. It's not a cyclical decline. It's just very difficult to maintain well above 17 million units. So that's why we have the point of view that new vehicles will be plateaued to slightly down, but from a retailer, the other side of the coin is, there's a significant opportunity that creates in preowned. And we feel we are now well positioned to seize that opportunity, and we'll manage the situation with the new vehicle market.

Okay. And then just leads me to my second question on the used side. I mean, obviously, the GPU is under pressure this quarter. You guys talked about those going back up. As you can think about the used vehicle GPU opportunity, should we be thinking about sort of a recovery to the more $1,400 to $1,500 range or historically, you guys have been doing GPUs on used in the $1,700 to $1,900 range? I mean is there something -- some magic number or is there a target specifically that you guys are looking at in that business as you look at the recovery in the next of couple quarters, but then also look at developing this as a whole new stand-alone business line over time?

I would say, John, we're going to take it a step at a time and see what the ratio is between volume and price. I think the key -- we've created certain capabilities that we're now in the second quarter, are going to be able to see without the noise of the recall and without the noise of all the training and changes that came with the One Price. And I think if I look at our brand, if I look at the digital capability we have, the prudent thing to do would be to gradually move prices directionally and see where the volume price shakes out, so -- and then make decisions along the journey where the optimal route is. So I think at the end of the second quarter, we'll be able to give you a much better answer and have some idea where the volume price optimal path is.

Okay. There's one very large competitor out there that does $2,100 in grosses. I mean, is there something in that model that you couldn't do that will allow you to get there in the stand-alone stores? I mean it just seems like there's a real opportunity as you go into these stand-alone stores to really have big numbers if you operate well. I mean, is there some reason that you might not be able to get there in the stand-alone stores?

If you're referring to CarMax, which, I guess, you are, that's really an apple and an orange. There's accounting issues there of how they handle reconditioning, which they put in the front-end of the car where as we have it in customer care, but I'd have to do some work on that to get you an apple to apple.

Got you. Okay. And then just lastly, Cheryl, I mean, as we think about the investment in new business lines, is that something that you can purely fund through these asset sales and as we hear these asset sales coming through, we should really think about them as partially earnings, but also sort of redeployment of your capital base and maybe using it more efficiently over time?

Yes, I think that's exactly the right way to think about it. So a lot of it is just to cover some of the capital that we put into these brand extensions. But also keep in mind that our base business continues to generate a lot of cash. So I feel very comfortable that we've got plenty of room to be opportunistic, not only with making sure -- as we talk about too, the cadence of the brand extensions, right, so if certain parts kick in and going well, we can increase the pace at which we do those. We have capital to do that. We'll continue to be looking at share purchase as we always have for the last 15-plus years and acquisitions, to Mike's point. Right now, some of the pricing of what sellers are looking at isn't realistic but if prices shift and there's great opportunity in a certain market, we're certainly not fully out and we'll also look at potential acquisition on the collision side if it's in the right market, and we don't currently own a collision center. So I just want to emphasize, we'll continue to be broad and opportunistic as we look at it. And certainly, we have the capital to be nimble on the different things. Dispositions, you're thinking about properly, which is really just a better strategic redeployment in certain cases of land or in certain cases, if there's a good market opportunity with a price that a buyer wants to pay, we'll be selective, and we'll use that to put it towards a higher returning projects with the brand extensions.

So it's fair to say that there should be some volatility to the upside as we go through these asset sales over time. And quarter-to-quarter, it's hard to predict, but there'll be a bunch of these coming in the next -- probably the next couple of years? Is that a fair statement?

If you look over the last 2 years at cash raised from select sales, it's been about $250 million. So we have done it selectively in the past. We've always been prudent about pruning our portfolio, repurposing assets at the margins where we need to on the bottom portions of the portfolio. So there has been some of that in the base, and we'll expect to see some of that in the base going forward. But as you pointed out it's hard to predict the timing of those.

Our next question is coming from Bret Jordan of Jefferies.

I guess, last year, we're talking about a lot of regional volatility and certainly, some weakness in the energy belts. Could you just talk a bit about your primary Southern markets, maybe Florida, California and Texas, and just talk about trends we're seeing down there?

Sure. Bret, this is Bill. So the energy markets, primarily Colorado and Texas are still seeing pressure. There's less stress on them than there was, say, this time last year. California remains strong and is growing. Florida and the Southeast, we have a little bit of a slowdown, a little bit of, let me say, economic impact, but overall, the different regions are performing well.

Okay, great. And then a question on the brand extensions and really around the parts and service side. As you got another quarter under your belt, have you thought about maybe how much -- what percentage of your parts you're going to direct source versus out buy? And then, obviously, you're talking about that being a high return on capital area. What do you forecast for the average facilities, contribution from the service side of the operations as opposed to the retail side of the operation?

I'm not sure I can give you a detailed answer on that. What we said on the last call if we -- the meaningful benefit from brand extension in parts will arrive in 2018, and it's $100 million in gross profit, incremental in 2018. We said that on the last call and nothing's happened since the last call to give us any concern with that number.

Okay. And that's margin associated with direct source parts sales? Or is that margin associated with the entire service initiative?

That's just the parts sales.

Okay. And is there sort of a rough idea -- if you look at your idea model out of pro forma AutoNation USA, what the service bay contribution to it is, just sort of roughly?

So the way to think about the AutoNation USA store is entirely the ramp and therefore, the pace with which we will build future stores. Obviously, with a company of our size, opening 5 stores in 2017 is no big deal. We can't really move any number meaningfully. However, if the ramp in the store, the profitability because we have a brand and digital muscle and it's an extension in existing markets is good, then we can really put a pretty good pace in to which we'll build future stores, in which case we can give you a very good idea what it would mean to the company over the next 3 to 5 years. Now it's a little premature to go beyond that until we get these stores opened and see what the ramp is. And the ramp will determine the pace. If it's taking longer than we thought, then we'll go slower. If it's on pace, then we could be opening 5 to 10 next year with 10 being on the high side and 5 being like the base plan. And if that goes well, then that can go on for years. And then we can give you a very good idea how it'll play out. But it's just premature at this point.

Our next question is coming from David Tamberrino of Goldman Sachs.

Mike, you provided some pretty good color earlier on what you think the sales pace in the U.S. is going to be, continuing the 17 million range, but really, we need incentives to continue to drive that plateau, if you will, year-over-year. I'm wondering what you're seeing in the near term, maybe April or just heading into May, from an incentive perspective and OEM discipline given at least the industry not necessarily your inventory is elevated at this point, if there's any brands or OEMs that are causing either yourself or other dealers to price a little bit more aggressive.

I think our inventories are fine. We're at 71 days. I think the industry is above 80 days, which is elevated. A lot of discussion around GM, knowing their down time in production plan and what they have coming, and we've seen this before. They front-load before they close the plants, so that's completely understandable. But I think the basic statement is if I look at the level of inventory and the production plan, basically, decision has already been made. The industry will sell over 17 million vehicles this year. That is not the variable. The variable is the level of incentive and the level of leasing. For 2017, the die is cast. It's plus 17 million units. So now the next question is what will '18 be, and basically, that decision has to be made sometime over the summer or over the fall of 2017. And there, if the plan is to take incentives up another level to try to drive another 17 million plus, I don't know whether that's doable or not. But '17 is done, '17, the die is cast, it will be plus 17 million units. Our only variable is what are the -- how high are the incentives and where are they're packaged.

That's helpful. Just maybe as an offshoot to that. As we think about general incentives continuing to increase in order to keep retails are effectively flat year-on-year in the first quarter. It was up about 15% at least based on the data we see. If you think about your comments there, heading into '18, if the industry were to say to themselves, hey, we want to keep 17 million sales pace again in the U.S. Do you think we're looking at a plus 20% incentive level, a plus 30% on top of what 2017's levels are? Do we get up into the 13% of MSRP, or is that just...

I really don't know. 2018, I really don't know, it's too soon. As far as second quarter, incentive started out very quiet, but that's typical of the begin of the quarter, after that, we have very strong close in March. But now, they're in the marketplace. They're beginning to take hold. It's beginning to build, and off we go. It's just -- I've given you a feeling about 2018, and we need more time and more conversations to see how the hand is going to be played in 2018.

Our next question is coming from Adam Jonas of Morgan Stanley.

Mike, I got a question for you on used car values and technology, okay? Now car company executives, they don't seem to hold back on their views that cars are going to change more, say, new cars will change more and showrooms over the next 5 years in terms of automation or safety than the last 50. But I can't get anyone in the auto retail space, new or used, to admit that there's any risk of potential obsolescence in the value of those 11.5-year-old cars on the road in a world where new cars could be 5x safer per 100 million miles or whatever, take your number, because they say it's never happened before. I'd love to know your view. I understand this is a bit theoretical, but do you see any scope for any length between tech moving in an unprecedented way and used car values moving incrementally so towards an obsolete or uninsurable value?

So listen, I don't think it's a theoretical question at all, and I think it's a very profound question that the industry is going to have to come to grips with it. Maybe my time horizon is a bit different than yours. I'd make a couple comments. One, what we see every day. Here's what happens on the showroom floor today. When people came in, most people, it's been 4, 5, 6 years since they've been in a showroom. And they're absolutely positively amazed with the new technology in the cars and how far they've developed since the last time they looked and paid attention. And it is a big reason why they step up and pay the price for a new car and make the decision to go for a new car. It's a clear black and white, and you're absolutely right, it's on the technology side. If you go back in the '50s and '60s, it was fins on the car that made them want to buy a new car. That doesn't get done anymore. But technology is absolutely getting it done. Now here's the interesting factor though. They're only willing to pay so much for the technology. So if it's, for instance, fuel economy technology which can be absolutely amazing, well, they want it for free. They are not willing to pay anything for it. Now on the safety side, there is some willingness to pay for the technology. But if you go fully autonomous, well, true autonomous, state-of-the-art today is $200,000 a car in computers and sensors and everything else, so that probably comes into marketplace where you're replacing a professional driver, and you could amortize those cost, that make sense. But for the personal used market, it's going to come in as incremental improvements in safety and true full autonomy is 2025 and beyond. And then you have 250 million, 260 million units in operations and there may be some adjustment in preowned value, but the consumer still is very sensitive around price. So I think in principle, you are right, but I don't see a moment where you obsolete everything that's on the road because something has come along that's absolutely so shazam that -- at a price that someone is willing to pay that they say, I just won’t have a preowned car. I don't see it. The line, that technology is giving people a reason to buy cars is happening on the showroom floors today.

Okay. Maybe just as a follow-up, and I'll move on. I'm more referring to automated features like, things that are less -- like within 1% of the value of a new car that could make a car a lot safer, but still has a steering wheel. I'm referring to like Toyota Safety Sense being standard on every car by the end of this year, and you're obviously a huge Toyota dealer as well. Do you think that, that move by a 15% market share player in the U.S. to make 100% of their cars, including the Yaris and Corolla having AB and/or pedestrian detection standard that, that puts Honda in a position like kind of untenable marketing position where they have to go 100% as soon as possible. And that leads to Nissan that means they need to go to 100%. Meaning for competitive reasons, do you think that, that Toyota move is significant enough to accelerate going standard for the industry?

Yes, I do. I think the benefit is so compelling that it's a true differentiator and everyone will figure out when and how they can follow as fast as possible. And it will become, over the next several years, almost the price of emission. I think it will unfold that way, but I don't think that pulls the rug out completely from the value of the preowned marketplace.

Our next question is coming from David Lim of Wells Fargo.

Mike, just had a question when on the used vehicle GPUs, on the scenario that the index, whether it be Manheim or NADA, now goes on sort of a slight glide path down. What is the propensity for you guys to maintain that? And how does the model change if there's like a steep decline in used vehicle values out there?

Bill will talk about it. But now that the recall is out, our mindset is basically, we're running a fruit stand with preowned. It's got a shelf life, and it's got to go. So we like to have fresh fruit, and we like to move it while it's still fresh. So we have a very high turn rate. And obviously, the whole recall thing slowed that down with it. It was a problem, but that's behind us now. And so if there is a gradual movement in our residual values, it's a no issue of us because the velocity is so fast. If there was a precipitous move from one day to the next, obviously, we would take a hit. But then it's immediately behind you. Bill, you want to talk about it?

Yes, I don't know if I could put it any better than the fruit stand, but on average, 30 to 45 days supply of inventory so any one point in time if there was a dramatic change in values, it would only affect us for that 30 to 45-day period of time. The new cars coming into inventory would come in at the lower values, and we'd be able to maintain that. And then with the capability that Mike was talking about, being able to essentially appraise and price our vehicles, we have great control over that, and we'd be able to react and adjust to it in a very timely manner.

Got you. And then on the One Price model, can you remind us how the salespersons are getting compensated? And then I have one more follow-up.

Sure. So currently, our salesperson is paid -- about 80% of our sales associates are on a production base pay plan, so they get a salary component and then they get paid so much per vehicles sold. So it is a volume-based pay plan primarily with different incentives for CSI and a new car side or things such as winning a trade at the door, additional compensation on that end.

So that's also relevant to the One Price for used vehicles? That's what I'm trying to understand.

Yes.

Okay, got you. And then, Mike, what we're hearing with OEMs in general terms at least maybe some of them is that they're thinking residuals be darned, we got to get year-over-year volume growth, and that's what we're hearing through the grapevine. Is that something that you're also hearing as well?

Oh, absolutely. Here's how the conversation goes. I describe the state of the marketplace much like we talk about today. The OEM then goes, Mike, you're 100% right. And then he spends the next half hour telling me why it doesn't apply to his company. And you add it all up. It's for every company I talked to. You add it all up. And the market is going to grow by 15%, and it simply isn't going to happen. And what OEMs missed is as exciting as their new products are, everybody has new products. Exciting new product is the price of holding your position in the marketplace, so there it is. Hence you end up with 4 million units in inventory and the decision is basically made, the industry will sell over 17 million units with the variable being.

But they do understand the residual risk that's involved here?

Well, their finance company, they're going to be calling them because they're going to be forced to reconcile depending on the reserves they set up. We know officially what they publish as the residual. They have a reserve set against that. How much they put into their plan, I don't know. But once they're outside that corridor, they are then -- they have to adjust for it.

Our next question is coming from Brett Hoselton of KeyBanc.

Let's see, a number of investors are looking at an IPO right now of a company called Carvana, and I'm not sure how familiar you are with the company. But to the extent that you're familiar with that, I was wondering if you could kind of compare and contrast kind of the Carvana business model with your business model. And then also particularly, looking at the digital capabilities of your business model versus theirs, specifically around financing approval capabilities and maybe inventory management capabilities.

Yes, of course, we are familiar with Carvana. We look at everything that's out there. I would say the first difference is we're profitable and they're not, so that's the starting point. I'm not sure our digital capabilities with anyone and they're only going to get better. We started years ago. We understood that to compete in this marketplace, digital was going to be crucial. It was the reason we left behind local market brand names that were 100 years old because they compete in digital, you need one name. And so we took the lead, took the brand AutoNation and then we understood that it had to be -- your digital site had to be transactional. People had to be able to do things, and we're well on our way. So -- but we -- here's another learning is that 99% of customers want to come to a physical place, examine the vehicle, have the right to change their mind to something else. On a price point that runs from $20,000 to $30,000-some on average between used and new, they want affirmation and confirmation that they've done the right thing, they want to test drive and they want to be able to change their mind. And here's one of the great ironies, they feel more empowered and controlled in a dealership than they do in their own driveway. Because it's awkward in their driveway when the car just shows up and they look at, and say that's not what I hope for, how do I get out of this mess? How do I get this thing out of my driveway? They don't like it. So we think we had it figured out, this right combination of brand, digital muscle and brick-and-mortar. And we'll see that unfold over the next year.

Mike, that sounds compelling. Can you -- is the 99% some sort of a study or something along those lines?

That's our practical experience because we had an assumption that it is going to be very different and got our head handed to us. I have to look around whether a piece of research has been done on that.

Our next question is coming from Colin Langan of UBS.

I don't know if I missed this, but is there a breakout for parts and service performance by type, with warranty and customer pay?

We couldn't understand the question, the line is breaking up.

Sorry, do you hear me now or?

We could hear you, just every third word.

Do you hear me now?

That's better.

You're perfect.

Okay. It's just -- general question on parts and services. Did you provide the breakout by type, customer pay, warranty? Wondering if you can give that color.

Yes, now -- this is Bill. Yes, we did. Our customer pay gross was up 4% and our warranty gross was up 14% on a year-over-year basis.

And how should we think about parts and services going forward? Do you still have a pretty good tailwind on the warranty line?

Parts and service remains strong, will be in the -- well, mid-single-digit growth rate.

Okay. And then F&I per unit was down slightly. Is there anything unusual in the quarter? Or is that just where it kind of heading at?

It's good you asked that question. So our F&I on preowned is lower than it is on new. So as we grow preowned faster than we've grown new, that will level off or be it a slight decline on the F&I impact. So it's a mixed shift factor.

Okay. And then just last question. In the past, you've talked about stair step, nothing being this year. I mean, is that rising again as incentives have creeped up? Or we have not seen a big change there?

I think most manufacturers have seen the harm to the brand that comes with aggressive stair steps because we've been talking about residual value and nothing undermines residual values faster than aggressive stair steps. And you may say to me, "Well, Mike, how can that be?" Well, what stair steps do is you force retailers to make extreme discounts on certain units in order to hit your stair-step target, and that puts a very wide bandwidth on pricing on your new vehicles. And the retail market sees that and is valuing those vehicles at the low end of that price band. So if you want to say, who are the big practitioners of stair steps, I'd say, well, that's easy, go look at 3- to 4-year old retail values, the ones with the lowest one are practicing stair step. And you can definitely see the linkage between some of the extreme discounting that stair steps trigger and resell value. So most manufacturers like, oh, that's not a sound strategy, I shouldn't pursue that because when I put my resale value in the ditch relative to everybody else, it puts me in an uncompetitive situation and it weakens the brand. So there's still some out there. I don't expect the large responsible manufacturers and brands to go down that road.

Our last question in queue is coming from Bill Armstrong of CL King & Associates.

So you mentioned that you expect used car sales to grow significantly faster than new. And we thought that for a while also with the influx of off-lease vehicles and what should be more attractive pricing for used cars. But as you pointed out, the OEMs are aggressively incenting new car prices and also there's a bit of a disconnect in terms of the composition of used cars coming out in the market that doesn't quite correspond with the demand. So when we look at the interplay of all those factors, what's going to drive superior growth in used cars because it sounds like maybe the value proposition that we might have initially expected may not be as compelling versus a new car?

I think from my perspective, I agree with everything you said. The factor that you didn't mention is market share. So AutoNation intends to take market share in preowned. We think our brand, our digital muscle, our ability to centrally acquire preowned at attractive prices and a selling experience with One Price that the customer really has responded to, puts us in a position to take share.

Okay, it makes sense. And maybe just coming back to an earlier question about the big safety technology and then potentially causing dislocations or obsolescence in used cars. Maybe if we go back in history, back to the '80s and '90s when we had airbags and antilock brakes and then even back to the '50s and '60s with the introduction of automatic transmission and air conditioning, did those technologies to your knowledge have any meaningful impact on used car valuations?

No, I don't think there was any event that was a seismic disruption that you would use the word obsolete around. So that's just not my experience. I think there will always be some sort of price premium for new innovative technology and the people who come in and look at it can afford that, and they can justify, stepping up to the price of a new vehicle to get that. So that's a -- it's a very compelling case for new vehicle sales, but I don't think it leads to obsolescence in the preowned market. I really don't.

Thank you, everyone, for joining us today. We really appreciate the discussion. Thank you.

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