AutoNation Inc (AN) 2017 Q3 法說會逐字稿

Welcome to AutoNation's Third 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. Please go ahead.

Thank you, operator, and good morning, and welcome to AutoNation's Third Quarter 2017 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, CEO and President; Lance Iserman, our EVP of Sales and Chief Operating Officer; Scott Arnold, our EVP of Customer Care and Brand Extensions; and Cheryl Miller, our Chief Financial Officer. 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 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 AutoNation's Chairman, CEO and President, Mike Jackson.

Good morning, and thank you for joining us. Third quarter of 2017 was unprecedented with 2 major hurricanes disrupting our business in 2 of our largest states by revenue, Texas and Florida. I would like to take this moment to thank the entire AutoNation family for coming to the aid of their fellow associates before and after the hurricanes. We saw an outpouring of support for all our associates and we also make sure that every associates in the impacted areas were paid during these disruptions.

Today, we announced our multi-year strategic partnership with Waymo, Alphabet's self-driving technology company. AutoNation's franchise stores, AutoNation USA stores and other AutoNation locations will provide strategic capabilities to maximize Waymo's self-driving vehicles' lifetime across the United States. AutoNation's service and maintenance is a long-term focus, leveraging our technical and cosmetic expertise with the goal of maximizing the useful life and appearance of Waymo's vehicles. Our partnership begins in California and Arizona and will expand with Waymo as they add additional markets and (inaudible). Our joint mission is to keep people safe whenever they are in a vehicle.

Turning to our third quarter results. They reported EPS from continuing operations of $1. Same-store gross profit for the quarter totaled $832 million compared to $822 million in same period a year ago. Third quarter 2017 same-store used vehicle gross profit was up 9% compared to third quarter 2016 and same-store retail used vehicle unit sales were up 7% compared to the same period last year.

As we discussed in the second quarter, we experienced challenges with our centralized One Price strategy. We have made key improvements as forecasted in the third quarter driven by the AutoNation preowned 360, our internal fragment which includes technology processes and procedures that govern our preowned business. As a result, our same-store used vehicle gross profit per vehicle retail increased $160 per car compared to the second quarter of 2017. And we expect continued improvement in our used vehicle gross profit [sequentially] in the fourth quarter.

AutoNation's total retail vehicle unit sales for the quarter were up 1%. On a same-store basis, retail vehicle unit sales were up 2%. The hurricanes caused significant disruptions of up to a week in some stores during the quarter.

In the third quarter of 2016, we shared with you our next phase of our customer-focused comprehensive brand extension strategy for both retail vehicle sales and customer care and expect -- we continue to expect to earn approximately $100 million of incremental gross profits from our parts initiatives in 2018. Including this benefit, we expect to generate high-single-digit customer care gross profit growth in 2018 on a same-store sales basis. Pace will start to slower -- will start slower and accelerate throughout the year. I'll now turn it over to our Chief Financial Officer, Cheryl Miller.

Thank you, Mike, and good morning, ladies and gentlemen. During the third quarter, we repurchased 9.2 million shares, representing over 9% of our float for $400 million at an average price of $43.28 per share. AutoNation has approximately 114 million of remaining board authorization for share repurchase. As of October 31, there were approximately 91 million shares outstanding. This does not include the diluted impact of stock awards.

For the third quarter, we reported net income from continuing operations of $98 million or $1 per share versus net income of $108 million or $1.05 per share during the third quarter of 2016, a 5% decrease on a per-share basis. We estimate that Hurricane Irma negatively impacted net income from continuing operations for the third quarter of 2017 by approximately $8 million or $0.08 per share.

In the third quarter, revenue declined $135 million or 2% compared to the prior year and gross profit grew $10 million or 1%.

SG&A as a percentage of gross profit was 71.8% for the quarter, which represents 110 basis point increase compared to the year-ago period due to pressure on gross profit from lower vehicle margins and new unit sales as well as investments related to our brand extension strategy. We currently expect fourth quarter SG&A to growth -- to be in line with our year-to-date average of approximately 73%.

At the end of September we had $2.9 billion of non-vehicle debt, an increase of $290 million compared to June 30, 2017. Our non-vehicle debt fixed to floating mix was approximately 62% fixed and 38% floating.

In October, we amended our $1.8 billion unsecured credit agreement by extending our maturity by 3 years to 2022 and adding in additional covenant flexibility for year 1. We continue to maintain an excellent group of supportive banking and captive partners and we're able to secure financing at favorable terms due to our resilient business model and disciplined financial management.

Non-vehicle interest expense increased slightly to $30 million compared to $28.9 million in the third quarter of 2016, driven primarily by higher interest rates and an increase in capital leases due to acquisitions.

Other operating income was $14.2 million in the third quarter of 2017 compared to $10.2 million in the prior year. Other operating income included gains of $9.3 million related to store divestitures and a gain of $4.7 million related to a property disposition.

Capital expenditures were $39 million for the quarter. Capital expenditures are on an accrual basis excluding operating lease buyouts and related assets sales.

Our leverage ratio increased to 3x at the end of Q3 as compared to 2.7x at the end of Q2. Our quarter-end cash balance was $53 million which, combined with our additional borrowing capacity, resulted in total liquidity of $728 million at the end of September. We remain well positioned to maximize shareholder value through execution of our brand extension initiatives as well as disciplined capital allocation.

I'll now turn the call over to Lance Iserman, our Executive Vice President for Sales and Chief Operating Officer.

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

Gross profit for variable operations was $464 million, up 1%. Variable gross was $3,243 on a per-vehicle retail basis compared to $3,304 in the same period last year. Same-store retail unit volumes were up 2% compared to the third quarter last year.

Used vehicle gross profit was $83 million, up 9% compared to the third quarter of 2016. Used vehicle retells were 58,000 units, up 7%. Used vehicle gross profit was $1,437 on a per-vehicle-retail basis which was an increase of $160 compared to the second quarter of 2017. As Mike mentioned, the sequential increase in our used vehicle gross profit per vehicle retail was driven by our internal framework AutoNation preowned 360. AutoNation preowned 360 includes our technology, processes and procedures for One Price. We'll buy your car, training, systems and reporting. We have made progress towards finding the right balance between margin and volume, and we will continue to fine-tune our strategy moving forward.

New vehicle gross profit was $142 million, down 9%. We retailed 85,200 new vehicles, a decrease of 1%. New vehicle gross profit was $1,669 on a per-vehicle-retail basis, down 8%, primarily driven by domestic margin pressure.

Customer financial services total gross profit was $239 million, up 6%. We set an all-time record in customer financial services gross profit on a per-vehicle-retail basis of $1,668, an increase of $61 or 4%.

The AutoNation Vehicle Protection Plan or VPP was the first AutoNation branded product rolled out. We continue to see the benefit of this branded product as well as opportunities in our overall customer financial services.

I will now turn the call over to Scott Arnold, our Executive Vice President of Customer Care and Brand Extensions.

Thanks, Lance and good morning, everyone. My comments today will be on a same-store basis and compared to same period a year ago unless otherwise stated. Customer care gross profit for the quarter was $362 million, up 1.5% compared to $357 million in Q3 2016. We estimate that the disruptions, closures and loss selling days due to both hurricanes negatively impacted customer care gross profit by approximately $9 million or 2.5% as compared to the third quarter of 2016.

Customer pay gross was $151 million, up 5% year-over-year. Warranty gross was $78 million, which was flat year-over-year; and collision gross was $30 million, down 3%. As noted before, we estimate that each of these were negatively impacted by the hurricanes.

I'd like to provide a brief update on our customer care brand extensions. Since October of 2016, we have built or acquired 6 additional AutoNation Collision Centers. This brings our Collision Center network count to 73 Collision Centers from coast to coast. We expect to open 2 additional Collision Centers by the end of this quarter, and we have signed an agreement to acquire 3 additional Collision Centers which we expect will close by year-end. AutoNation is among the largest collision providers in the country.

Including our parts initiative, which we anticipate will contribute approximately $100 million in incremental gross profit next year, we expect to generate high-single-digit same-store gross profit growth in customer care in 2018. The pace will start slower and will accelerate throughout the year.

I'll now turn the call back to Mike Jackson, our Chairman, Chief Executive Officer and President.

Thanks, Scott. It's really an exciting time at AutoNation. Our brand extensions have become an integral part of AutoNation's sales and service. Our strategic partnership with Waymo, along with our brand, our expertise and our commitment to innovation have uniquely positioned us to lead our industry towards the future of mobility and enhance the car buying experience and ownership experience for our customers. We're now delighted to take your questions.

(Operator Instructions) Our first question comes from Brian Sponheimer from Gabelli.

Just going through the Waymo partnership, can you talk about just the genesis of how talks began and really where this all started?

So I visited Waymo 6 years ago when it was Google X. I was probably one of the first industry people in the door and had a -- spent a day debating and discussing their approach to autonomous and had one of their earliest vehicles going down the 101. And I've been going there ever since, on -- every year to 18 months, and I developed a deep admiration for the rigor and discipline of thought and principle they had to the whole approach to autonomy, where you have to underpromise and overdeliver rather than overpromise and underdeliver when it comes to autonomy and safety. And in there, there was an epiphany which I confirm from my own experience and my understanding of customers that this idea that you can have an autonomous system that someone -- the driver has to supervise and be prepared to intervene at any moment doesn't really work. It's almost against human nature that you have to pay strict attention and be prepared to intervene. So they said they don't need 99.9% protection. They need 100% protection, which means you need redundancy, duplication and sophistication. So then my friend, John Krafcik became CEO and he and I had a running discussion that obviously these are some of the most sophisticated vehicles on the road and for -- to realize the value of the investment in the vehicle, they need to perform at a high level for literally hundreds of thousands of miles. And we both agreed that AutoNation was uniquely positioned to provide those capabilities, both with our scale and our expertise. Also, with -- now you combine our parts initiative with our discussions with Waymo, of course, it had to be done cost effectively. And this was -- with this in mind was another reason for the brand extension, particularly in parts. So you put that together and you now have a strategic partnership to realize this vision of a shared vehicle that is operating autonomously but at the highest levels of safety, and we think we have significant value. And I believe Waymo is the leader in this ambition to have a shared autonomous vehicle operate on a commercial basis with customers in the marketplace. So it's the beginning of a journey. As they add markets and as they add brands, because we can manage any brand, we have the technical expertise to do it, we will grow together.

That's incredibly exciting. I guess just more about the current environment. Your thoughts on both new and used gross inventory and the balance between cars and SUVs, crossovers and trucks.

Things are much better than earlier in the year, the pace is pretty good. Some of that is hurricanes coming and going, but we've had 2 good months in a row from an industry point of view. We see that for October reflected in our sales. Also the pace is pretty good. And so I think the year will end high 16 million, if not 17 million units, and I expect much the same next year. The mix is better as far as what the inventory is and the inventory is more in line. The manufacturers did a pretty good job in model year changeover. Now my view still is that the new vehicle business, as far as a humble retailer trying to make money at it, has its challenges. It's very competitive out there and it has I think the validity of our strategy of brand extension will become more and more compelling as the results roll in. So I'm very pleased that in the preowned market that we are in that magic place where we have a consumer offer that they've embraced. So our volume is up 6%, 7%, and sequentially on an operating basis with our new 360 process, we're able to sequentially improve gross profits. Now Scott's talked about the brand extension. I wouldn't pay too much attention to the customer care figures in the third quarter. Obviously, when you close your -- well, I don't know that -- Cheryl, how many dealerships do we have closed at peak? 125, something like that. You can't make up that lost time in customer care because it's all based on hours turned. But we said we see high-single digits as a benefit of our brand extension in customer care and collision next year.

Our next question is from Bret Jordan from Jefferies.

On the Waymo, is there much of an investment as far as tooling or talent? Obviously LiDAR is not something most dealerships have a whole lot of exposure to right now. Or is this really sort of -- are they going to provide you with sort of the back end that -- the help on technology and tooling to get you up to speed in this category?

So we have tremendous technical expertise and we have the ability to learn any new systems quickly. And we are willing to go through an investment period with Waymo to set the stage for future growth. Obviously, they're in an investment period, we'll be in an investment period, and this is my call. I think Waymo is the leader. I think they have absolutely the right concept of how to do this. They have the discipline to do it the right way for the long term and I think that just is a partnership that will grow and we will determine exactly who does what as the relationship develops.

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

Just a question I have is can you talk about the acceleration that you saw in September related to new and used vehicles and what you're seeing so far at the early part of Q4 given the replacement demand and the deferred demand stemming from the hurricanes?

Lance, could you take that, please?

Sure. So we saw -- in September, we saw significant improvement in the Texas market, Houston in particular, and that was a market that was under extreme pressure prior to the hurricanes. So we saw a very good rebound with that. And I think that, that will probably wane as the fourth quarter moves forward. So I don't think we'll see any of that in the next year but we still see strong volume coming out of Houston and Texas in Q4. And for Florida, the -- we didn't have the bounce-back in September but we're certainly seeing some of it now in October, not to the extent that we're seeing in Texas but certainly strong recovery.

Are you seeing like an abnormal amount of acceleration in used vehicles? I guess what I'm trying to get at here is the people who are trying to replace their vehicles from a used vehicle standpoint, they probably haven't gotten their insurance checks until as of late. So are you seeing kind of a more of a bump-up in October versus let's say September?

No. We saw strong used vehicle demand immediately after Harvey, probably slightly better than our new vehicle demand in Texas.

Our next question is from Chris Bottiglieri from Wolfe Research.

I wanted to talk about your portfolio optimization efforts. Looks like you're down about 10 dealerships year-over-year. I think our original goal was $250 million proceeds, by our math you're almost there. So I wanted to get a sense kind of how you think about that. Are you pruning bottom performers? Is it geography-based, brand-based? And then as it relates to Waymo, thinking about national scale, I know we're probably a decade away, but -- or depending how the rollout is, but how do you think about your store growth in the future like in relation to these Waymo initiatives?

This isn't your first question regarding investitures. As we talked about, we will sell select assets and redeploy that into the brand extension initiative. We generated proceeds of about $250 million from 2015 to '16. We talked about the initial $250 million in divestitures from '17 to '18. We're partway through that. So as you saw in the quarter, we continue to do some of those select dispositions. I'll observe that, if not, only one specific geography. What we do if we look at the lower-performing parts of our portfolio sometimes with respect to demographics that have changed and we look to redeploy that into assets that have a higher return opportunity, namely, in this case, the brand extension, particularly on the parts side of the house.

So on Waymo, and I don't want to speak for them but I'll just see what I observe. They've obviously launched operations in sunny climates. I think that makes eminent sense since obviously inclement climates raises complicating issues that need further work. AutoNation's footprint is extremely strong in a Sun Belt climate all the way from Florida through California. So I think we're well positioned or well into this foreseeable future to grow together. Obviously, we will have internal discussions with Waymo as to what their launch plans are on various markets. That will be confidential information not for me to say, but we will be prepared whenever they come to a market to provide the care that those vehicles will need in those markets. We're committed for this partnership long term to make it win-win. Good for them, good for us. I think we bring unique capabilities. I think they're a unique leader. I think this is something that we'll develop, but for the foreseeable future, the issue you raised in my observant opinion is not an issue.

And just one little unrelated one. The GPU is obviously very strong sequentially. If I heard you right, you expect it to further improve next quarter. I guess one, like how far are you along in developing and implementing the pricing algorithms for One Price? Do you think we're approaching kind of like the new run rate? I mean, it's bigger picture, but once you have this fully implemented, does this reduce the volatility of your GPUs? And how do we think about that?

Yes. We're looking to reduce the volatility around gross profit per unit. We endeavor to see more incremental improvements sequentially in the fourth quarter from the third quarter. That is not by raising prices but it's both what it costs us to acquire vehicles and what it costs us to recondition vehicles, and again this then goes back to the parts initiative where we're now able to recondition vehicles at a lower cost point. So that's a win for our -- we're using our scale. It's a win for our customers and a win for the company. So I think all that's doable and we see our ambition is another step in the fourth quarter and then we'll see where we're at.

Our next question comes from James Albertine from Consumer Edge.

Just a point of clarification. Apologies if I missed this in your prepared remarks or in the release. I didn't see it in there. Is there an element of exclusivity with respect to your Waymo partnership? I just -- I recall that others have perhaps announced similar partnerships but I want to understand how this might be differentiated from those that we'd heard in the past.

So no, there's no exclusivity. We have to earn our way every step of the way, but I'm optimistic. If I look at the win-win benefits on both sides and unique capabilities that we bring and Waymo's unique leadership position, I think this is a partnership that will work. But it will have to be -- you have to earn your way in life. I did not ask for exclusivity and -- nor was it offered.

Understood, understood. And if I may, maybe shift to the F&I segment, very, very strong it seems results again in the third quarter. You've been above that $1,600 [PBR] level for some time. Just wanted to understand sort of the next phase as you see F&I from here given there is a little bit of I think undergoing a mix shift to used from new and just wanted to kind of see what you are gleaning from investor appetite for some of the products particularly on the [I] side.

Yes. I'll have Lance answer that. But in principle, this is a brand extension. We use our scale to work with various partners to put together what we think is a compelling offering for our customers and then we put our brand on it, which the customers trust, and we have a very high -- with that formula, we have a very high adoption rate. So Lance, you can talk about the state of the business today.

So I think if you look at it from perspective of our growth, we still have underperforming stores that we concentrate on, our quartile 4 stores that we still can -- we still have a lot of runway if we get those up to the average. We have more room to continue to grow there. So that's how I sort of look at it. Performing at a very high level, our vehicle service contract is well received and we're doing well with that and penetration.

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

This is Aileen Smith on for John. To ask another question on the Waymo agreement, do you believe this opens the door to further service agreements with other nontraditional industry participants and tech players? And could you even see a model in the future as new mobility services become more prevalent where the dealers could function in some ways as operators of their own fleets?

My view is there's Waymo and everybody else. I think they're clearly the leader. And as I said, this is not a new relationship from my point of view. It's something that's been in -- underway for 6 years. Now around that, can there be other interesting things to talk about? You know me, I'm out there, I'll talk to everything, look at everything, but I think this is the one that is the leader and I like partnering with the leader. Now that's a judgment on my part. Some people may agree, some people may disagree, but that's the big decision we've made. This is a big commitment on the part of AutoNation and a big partnership with Waymo.

Great, that's helpful. And then the significant ramp-up in share repurchases in the quarter, is this representative in any way of a change in the capital allocation strategy, particularly away from ongoing investment in the AutoNation USA initiative? Or is it just more a function of relatively strong cash flow -- inflows from the business divestitures which are helping, which is allowing you to opportunistically take advantage of the share price?

The key word there is opportunistic. That's the one we use every time this question comes. I think Cheryl has said it 500 times over the years. And if you look at our track record, that is our view. I understand we had operational difficulties in the second quarter that we said would resolve in the third quarter, but I understand investors want to wait and see if that does indeed happen and I look at that and say, well, at $42 a share, I'm confident that we do have our arms around this. Then we opportunistically buy the shares. I put my money where my mouth is. So now we made that move, we've repurchased 9% of the company at $42 a share, and I think it was a good investment on the part of the company and a statement of confidence about the future.

Our next question comes from Rick Nelson from Stevens.

To follow up on Cheryl's comment about the SG&A expense ratio, 73% expected for the fourth quarter. You were at 71.8% this quarter. Is that seasonality or increased spending [expected]? What is driving that change?

There are a few factors on that, Rick, but I would say [after] continued investment in brand extensions, we have an ambitious agenda for next year. Certainly, we're putting all the pieces in place to accomplish that and so we expect you'll see some of that in Q4 but we were very happy with the sequential improvement in SG&A in the third quarter. And I think that demonstrates the continued discipline and opportunity with the stabilization of the [new PBRs] you'll see better flow-through in our main SG&A numbers and we were glad to report that for the third quarter. In the fourth quarter, we would love to do the continued investment in the brand extensions for next year.

The used car segment had really bounced back here in the third quarter, changed primarily operationally and you say that One Price selling is more of a volume driver or margin driver, we obviously saw what volume, more so with volume this quarter.

(inaudible) I would say the AutoNation brand and One Price experience for preowned drives tremendous traffic and interest to our website and to our stores. So the One Price, though, I have to be competitive in the marketplace. So therefore, on the margin side, we have to have really strong operational execution. That was not there in the second quarter. We had some issues. I was very forthright about that. We have comprehensively addressed them. And yes, I see more stability in that going forward. So that's how I see it. The One Price is a experience and a brand attribute that customers like and draws us a lot of business. Sales associates are very enthusiastic about it, particularly millennials that we're now able to attract the workforce so they don't have to negotiate. And then we, on the operating side, have to bring in the gross margins. That's the formula.

If I could ask you about Hurricane Harvey, you quantified the negative impact of Irma. I'm curious if Harvey was in fact a positive and how much that may have added.

Here's a way to approach it, Rick. So first, let's not talk about the impact of storm profit or loss on a running basis. Let's just talk about direct cost because you had a hurricane. Cheryl, do you want to talk about insurance costs, emergency pay, deductibles, that sort of thing?

Yes, Rick. So the way to think about it, and that's the reason why we called out Irma specifically, and Lance related the fact that you really didn't have a bounce-back certainly in the third quarter related to Irma. So that was a big store closure event not only on the days it was closed, but you lose traffic on the days before the storm and the days after the storm. So I think of that one was a wind event and you didn't have as much property damage. In the case of Harvey, we had some property damage. A lot of that was covered by insurance, some was not. We had store closures. We did benefit in September for some of the rebound. So when we look at -- Irma was a very clear negative when we spoke about that. On Harvey, you had definite out-of-pocket expenses. But given the fact that we made that up, we did not call that out specifically, you can argue about what the run rate would've been without the storm. It's harder to specify it, but I think on average, we say that Harvey was not a net negative, was a net positive probably to the full magnitude. Hard to separate it from the base financial results.

Our next question comes from David Tamberrino from Goldman Sachs.

Mike, how do you think about the revenue opportunity and margin profile per vehicle in this Waymo deal?

So we want to be at the absolute intersection of autonomy sharing and electrification. What does electrification have to do with it? Well, to run the autonomous systems, the vehicle cannot be on a standard electrical system in a car. So these are hybrid vehicles from Chrysler. And the level of electrification will change increasingly going forward. So here you have, in my view, an intersection of electrification, sharing and autonomous with a company that has been working on it for 6, 7 years and we've been there, as I said, from the beginning. So I like the idea of partnering with Waymo from the beginning, that we can really each understand the optimal line of what we do and what they do to ensure the maximum utilization and life cycle of these vehicles. Obviously, we're in -- they are in test market in Phoenix, some other activities in California. So to me, the level of revenue generated and the level of gross profit generated will not be material because we're in the infancy. However, when they are -- when all questions are resolved in a constructive way to move forward, then we will move forward with them. And then I think if we play it out, we're here involved on the ground floor with the leader on the future of electrification sharing [an] autonomous. And we're going to have a tremendous added value and really partner with Waymo to see that. So if I think about this in 5 to 10 years' time, I think this is a very important relationship for AutoNation and its future and we are committed to it as they are. I wouldn't increase next quarter's EPS.

Yes. That's not what I'm obviously suggesting. I'm thinking about -- I am just trying to understand if I think about your traditional parts and service business, it's a 50% margin. If I try to think about typical parts and services revenue, I mean, is that the right way to go about it? And does that change at all after Waymo moves from development to deployment?

Yes, all that. So we're in the -- let's say we're in the development phase here, and I'm looking to cover my cost and position ourselves for growth together. So now I don't determine the growth rate. That's really up to Waymo. But they certainly haven't made this investment over the past 6 years to just be in a few markets. And when everything is validated, this works everywhere in the United States. So I think we're not looking at Waymo and Google as a company. I say, okay, here's a company that has huge resources. It has 2 founders who are committed to the principle that there is a way to comfortably move people from point A to point B safer than what's done today and thereby save lives, and they've committed this as part of their legacy to do and they're executing it in a very disciplined, thoughtful, long-term way. So this isn't a company -- and massive problems have been solved. So I don't want to put an exact percentage. That's not for me to say, but massive problems have been solved and sorted out. So they are on the cusp of taking other steps but that's for them to say. So I look at this and say, I want to be part of it and I want AutoNation to be part of it because we -- our principles are in alignment. Our brand is think and drive safe, and we mean it. So -- and now we have right fit. You have that too. So that's what's behind it. And I think companies, when I look at, again, the future of mobility will revolve around, to a certain extent, sharing electrification and autonomous. We want to -- we think we can play a vital role in that and in my view Waymo is the company I want to do that with.

Completely understood. As I think about the relationship evolving, do you think at some point in time down the line that you'd help them from an asset ownership perspective where you would own the vehicles and then rent them out to Waymo? Or is it just strictly the maintenance side and the service piece of it?

All of that is to be discussed. I'm not saying what's on the table, what's off the table. This is a strategic partnership. John and I go back 15 years. I think he's the right man for this to lead Waymo and the ambitions that it has and what it wants to realize as it's now actively in the marketplace with consumers. We have tremendous understanding of consumer behavior and of the technical aspects around the optimization of the fleet's life cycle and we will find that optimal line that is a great value to them and rewarding to us. I'm sure of it. I just don't have all the answers today but I know if we don't join hands and start walking down the road together, you'll never find it. So it's a true sense of committed partnership, and I'm excited by the prospects even though if you want to [push me with the numbers] that's somewhat over the horizon.

Completely fair. Just very intrigued by it.

Our next question comes from Andrew Fung from Berenberg capital markets.

I guess somewhat related to Waymo and then shared mobility, I wanted to get your sense on and views on third-party lead generators. And obviously, you guys have evaluated their use in the past. And I guess more recently, you guys have been investing heavily in your digital footprint as well as brand. So I wanted to get a sense if do you have an updated view on their role longer term and especially, I guess, given your views on shared mobility in the future.

Well, I think we're in a good place. We've -- first, I'm very encouraged and excited about our own capabilities around AutoNation Express and our own digital sites which we continue to invest in and continue to see better -- higher and higher traffic, better and better performance, and this puts us in a position to negotiate with third-party providers where we find again that line that's good for them and good for us. It's all one side. If it's not sustainable, it's not going to work. So I'm very pleased with our partnerships with TrueCar, Carz, and Carguru and all the companies at Cox. We're in a good place.

Okay, great. And then I guess just as a follow-up on used pricing. Beyond the near-term sequential improvement that you're calling for from fourth quarter, how do we think about -- I guess if you guys rule out more AutoNation USA stores, is there -- I guess how does used margin evolve perhaps as they become a larger portion of the mix?

Well, I think I already said earlier on the call, we hope to take another step in the fourth quarter sequentially and then we will have fully implemented all the measures that we drew up earlier this year to get us to a better place and then we'll sit down and have an internal discussion and say, okay, what's next? What else is possible? And I'll be in a better position to give you a good answer then. You just have a little more patience with it. The parade is moving in the right direction but I can't really today call out that there's a next step today.

Our next question comes from Ali Faghri from Susquehanna.

So I want to focus on the used side, so I'll ask about new. Your car GPU remained under pressure in the quarter, maybe down I think about 6% year-over-year and then took sequentially a step-down from the second quarter. Those results are weaker than most of your dealer peers. I'm just trying to get a sense of what exactly is driving that and then how you think about new car margins as we head into 2018?

Lance, could you take that for me, please?

Sure. So you're referring to used -- new car margin specific, correct?

Yes. New car GPU.

So I think when you compare to our competitors, you have to take into consideration our brand mix. We're basically 1/3, 1/3, 1/3; Domestic, Import and Premium Luxury. And don't think that our other -- our peers have that sort of brand mix. They're more skewed heavily toward Premium Luxury or in some other direction. So I think we're going to continue to face headwinds there. The domestics are still under tremendous pressure on the margin piece. The Import seemed to have stabilized a bit and Premium Luxury was up a little bit for the quarter. So I think we are where we should be. Not where we want to be, obviously, but we have to compete in the marketplace and represent the brand that we own. So we'll continue to push our volume on new to maintain our share. And wherever that brings us some margin and we'll do the things obviously that we need to do to mitigate any other decrease, but I think we're where we should be.

Our next question comes from David Lim from Wells Fargo.

I just had a quick follow-up. Now given your background and your industry knowledge, I wanted to get your opinion about autonomous. Now there are a lot of suppliers developing turnkey technology and OEMs are developing this technology. Now if an OEM uses a supplier for a full turnkey solution, who holds that liability, especially given the OEM's branding? And I know that you have deep knowledge about branding obviously, given your background. And just wanted to ask that question to you.

Well, I'm not sure I can really give you that answer today. I'll think about it. I'll work on it. Maybe we can talk about it again. In my mind, I think here's the bifurcation. You have Level 4, Level 5 purely, truly autonomous, and that's what Waymo is coming down the home stretch on. And there you make the assumption that there is no driver or supervisor who's on standby to take over at any moment, and this requires a level of redundancy that is remarkable to get from 99% to 100%. And then it's a fault position if something happens. Now here is the point. Everyone else, all Level 2, Level 3, you're a little bit in the twilight zone, quite frankly. You're saying enjoy and trust this system and never take your eyes off it. And if you take your eyes off it, it's going to disengage. And the experience at Waymo is if the consumer truly trusts it, then they stop paying attention. And if you don't trust it, then you have to pay attention all the time and you go, well, this is annoying as hell. I'd rather drive the car myself. And I think this twilight zone is what the bigger industry is going to struggle with. And so there it is. I can't tell you about the liability questions at the moment.

Our next question comes from Colin Langan from UBS.

Can you just clarify, the $0.08 impact from Irma, is that the cost of the damages and the lost profit from sales and parts and services? Or is it just damage cost? I just want to make sure I understood what the guesstimate was including.

I would say that consists of damage. But keep in mind, Irma was a windstorm event, and so there wasn't the same level of physical damage in the parts of Florida that we operate in as what you might have experienced in terms of damage in Harvey where it was flooded. So I would say it doesn't include a [level of property damage] yet. It wasn't anywhere near as what some people experienced in Harvey, no. So I would say the biggest thing is we paid our associates while the stores were closed. That's important as part of our principle. We also had lost sales in that period. You heard from Scott's remarks the lower customer care in part was driven by those store closures, particularly on the service side where that business doesn't recover. There were not anywhere near the amount of damaged vehicles in Irma that you saw in Harvey, so you don't have a big pickup in sales. So when you add the store closures from a sales and service perspective loss, when you add the associate pay, which is part of our core principle to pay associates and you add a very minimal amount of property damage, that's what comprises that $0.08.

So it sounds like you don't think the full $0.08 will be recouped in Q4.

No.

Because, as you say, the [damages only a part] of the sale?

I think that unlike Harvey, we did not see the rebound in Irma, you also did not see the destruction of vehicles that required replacement anywhere near in the markets in Florida we operate versus what you saw in Harvey. And keep in mind that these days, even in 12 to 15 inches of flooding, once they had electronic in total vehicles like you saw unfortunately happen to consumers in Houston, and there were not flood events of any magnitude in the Florida or Georgia related to Irma.

And how should we think about the repair [sort of] parts and services benefiting Q4 from the 2 different storms?

Typically, when you have incidents like that, you really never fully recover the parts and service. You see that with major snowstorms and other incidents as well when they're closed. Sometimes you'll pick part of that back up, but I wouldn't think of that as something that's ever fully made up.

Got it. And just lastly, any pushback from the OEMs on the private label parts initiatives? I imagine they're not too relevant (inaudible)

There has been a discussion, of course. And I say to them -- I said look, if I go back 10 years ago, we had front end gross on new vehicle sales of 8% and 9% off to 4% or 5%. And now today, we have front end gross of 5% and new vehicle sales is almost a commodity pass-through business and that we have to make all our profits somewhere other than selling the new car. Now I have a franchise, so I've agreed that we will do tremendous volume on new vehicles. I understand that. That's my responsibility. But then I say to manufacturer, I said, by the way, it's your stair steps and your margin programs that have brought us to this state and you're quite delighted with the fact that front-end gross margins are down to 5%. So you have to understand, I've made this investment in this facility and I need a way to grow and to do that profitably. And a lot of business that I gave you in the past for relationship reasons, just only for relationship reasons and partnership reasons, no longer make sense with the front-end gross of 5%. And the end of the conversation, I would say, is I have earned their respect. And they said if I was in your shoes, I'd be doing the exact same thing. And I guess we don't have to worry about too much because who else can do it other than AutoNation? So okay, and I'll take an okay. That's fine with me.

Thank you, everyone, for joining us today. Appreciate it.

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