AutoNation Inc (AN) 2017 Q4 法說會逐字稿

Welcome to AutoNation's Fourth 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 Robert Quartaro, Vice President of Investor Relations for AutoNation.

Good morning, and welcome to AutoNation's fourth quarter and full year 2017 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, Chief Executive Officer and President; Cheryl Miller, our Chief Financial Officer; Lance Iserman, our EVP of Sales and Chief Operating Officer; and Scott Arnold our EVP of Customer Care and Brand Expansion. Following their remarks, we will open up the call for questions. Chris, Kate and I will be available by phone following the call to address any additional questions that you may have.

Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our SEC filings including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.

And now I'll turn the call over to AutoNation's Chairman, Chief Executive Officer and President, Mike Jackson.

Good morning, and thank you for joining us. Today, we reported all-time record EPS from continuing operations of $1.64, an increase of 44% compared to the fourth quarter of 2016. Fourth quarter 2017 EPS from continuing operations included a benefit of $0.45 per share from the recent tax reform bill and a net gain of $0.17 per share related to business and property divestitures. Fourth quarter 2016 EPS from continuing operations included a gain of $0.19 per share related to business divestitures and a benefit of $0.09 per share related to a legal settlement. For the full year, EPS from continuing operations was $4.43, an increase of 6% over the prior year.

Fourth quarter 2017, total revenues was $5.7 billion, an increase of 4% compared to the year-ago period. Same-store revenue for the quarter was $5.6 billion compared to $5.4 billion in the same year-ago period, an increase of 4%. Same-store gross profit was $851 million for the quarter compared to $794 million in the fourth quarter of 2016, an increase of 7%.

AutoNation's comprehensive brand extension strategy continues to gain momentum. Same-store total variable operations gross profit on a per-vehicle retail basis was $3,380, an increase of $125 or 4% compared to the year-ago period and up $135 or 4% sequentially.

There are roughly 4 million vehicles off lease in 2018 with an estimated average price of approximately $25,000. We expect new vehicle unit sales to be approximately $16.8 million for the industry in 2018. Our assumption is based on a mix shift from new to nearly new vehicles to an increase in off-leased vehicles returning to the market.

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

Thank you, Mike, and good morning, ladies and gentlemen. For the fourth quarter, we reported net income from continuing operations of $152 million or $1.64 per share versus net income of $116 million or $1.14 per share during the fourth quarter of 2016, a 44% increase on a per-share basis.

As previously disclosed, the tax reform bill will have an effect on both our fourth quarter and future results. The fourth quarter 2017 results included a benefit of $0.45 per share due to a onetime impact on our deferred tax liability. Looking forward, we anticipate a benefit of approximately $75 million to $100 million or approximately $0.80 to $1.10 per share for the full year 2018 resulting from the decrease in the corporate federal tax rate. Taking into consideration the loss of certain deductions, we expect our 2018 effective annual tax rate will be reduced by approximately 12 to 13 percentage points.

In the fourth quarter, revenue increased $203 million or 4% compared to the prior year and gross profit grew $58 million or 7%.

SG&A as a percentage of gross profit was 71.7% for the quarter, which represented a 50 basis point decrease compared to the year-ago period as solid gross profit growth led to SG&A leverage. In the first quarter of 2018, we currently expect SG&A as a percentage of gross profit to be elevated at approximately 75%, driven by our brand extension investments including launch-related costs for our new aftermarket collision parts business, the initial phase of which will be fully in place by the second quarter, and the timing of stock compensation expense compared to the prior year. However, for the full year 2018, we expect SG&A as a percentage of gross profit to be roughly flat with the full year 2017.

In November, we issued $750 million of senior unsecured notes consisting of $450 million of notes at 3.5% which are scheduled to mature in 2024 as well as $300 million of notes at 3.8% which are scheduled to mature in 2027. The note proceeds were primarily used to reduce borrowings under our commercial paper program and our revolving credit facility. As a reminder, we have $400 million of 6.75% senior notes due in April. We intend to fund the maturity with lower rate debt from availability under our commercial paper program and our revolving credit facility. At the end of December, we had $2.7 billion of nonvehicle debt, a decrease of $154 million compared to September 30, 2017. Nonvehicle interest expense increased to $32 million compared to $30 million in the fourth quarter of 2016, driven primarily by higher average interest rates, partially resulting from the paydown of lower-cost debt with the issuance of our senior notes and an increase in capital leases due to acquisitions.

Other operating income was $25 million in the fourth quarter of 2017 compared to $48 million in the prior year. Other operating income included net gains related to store and property divestitures in both periods and fourth quarter 2016 also included proceeds from a legal settlement.

In 2016 and '17, we generated total proceeds of approximately $360 million from divestitures and real estate sales. On an annual basis, the 2016 and 2017 divestitures previously generated almost $1 billion of revenue and approximately $15 million of pretax profit. For the full year 2018, we expect to raise another $200 million of proceeds from divestitures and real estate sales.

AutoNation has approximately $114 million of remaining board authorization for share repurchase. As of December 31, there were approximately 92 million shares outstanding and this does not include the dilutive impacts of stock awards.

Capital expenditures were $108 million for the quarter. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales.

Our leverage ratio decreased to 2.8x at the end of Q4 as compared to 3x at the end of Q3.

Our quarter-end cash balance was $69 million which, combined with our additional borrowing capacity, resulted in total liquidity of $1.4 billion at the end of December.

We're excited about the recently signed tax reform bill and the positive impact to our employees, customers and shareholders. With this savings, our active approach to capital allocation has not changed. We will continue to invest in our brand extension initiatives as well as opportunistic share repurchases and acquisitions with a continued focus on driving long-term shareholder value.

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.

We're extremely proud of the growth in our business since the launch of our comprehensive brand extension strategy. Gross profit for variable operations was $476 million, an increase of 8%. Same-store total variable gross was $3,380 on a per vehicle retail basis, an increase of $125 or 4% compared to the same period a year ago. I would also note that total variable gross profit per vehicle retail goes up $135 or 4% sequentially.

Retail vehicle unit volume was 3% compared to the -- was up 3% compared to the fourth quarter last year. The implementation of One Price and AutoNation preowned 360 brand extension initiatives are what drove our outstanding performance in the quarter.

Used vehicle gross profit was $74 million, up 16% compared to the fourth quarter of 2016. Used vehicles retailed were 54,600, up 2%. Retail used vehicle gross profit was $1,353 on a per vehicle retail basis, which was an increase of 7% compared to the fourth quarter of 2016. We anticipate continued growth in our used vehicle sector with the continued development of AutoNation preowned 360.

New vehicle gross was $158 million, down 3%. We retailed 86,100 new vehicles, an increase of 4% compared to the industry which saw a 3% decline compared to the same period a year ago. New vehicle gross profit was $1,836 on a per vehicle retail basis down 7%, primarily driven by margin pressure in our Domestic and Import segments.

Customer financial services total gross profit was $244 million, up 14% we set an all-time record in customer financial services gross profit on a per vehicle retail basis of $1,732, an increase of $170 or 11%. Our strong performance in CFS was driven by improved AutoNation branded product penetration. We see more opportunities to increase AutoNation branded customer financial services product penetration as we continue to improve our bottom quartile stores through training and development.

I would like to provide an update on our AutoNation USA stores. In 2017, we opened 3 AutoNation USA stores. We opened our fourth location in Houston market in January and our fifth AutoNation USA store located in our Las Vegas market is slated to open by the end of the first quarter. Also by the end of the first quarter, we'll open our fourth AutoNation Auto Auction which will be in Atlanta.

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 compared to same period a year ago unless otherwise stated.

We saw strong customer care performance for the quarter driven in part by the ramp-up of AutoNation's parts and accessory initiatives including AutoNation Precision Parts and AutoNation Auto Gear. Customer care gross profit was $369 million up 6% compared to $347 million in Q4 2016. Customer pay gross was $154 million, up 9% year-over-year. Warranty gross was $78 million, up 3% year-over-year and collision gross was $32 million up 8%.

I would like to provide a recap on our customer care brand extensions. For the full year 2017, we have built or acquired 8 additional AutoNation collision centers. This brings our collision center network count to 76 collision centers from coast-to-coast. We plan to build or acquire at least 10 additional collision centers by the end of 2018. AutoNation is among the largest collision providers in the country.

We've increased our parts offering through AutoNation Auto Gear. We now have over 26 high-quality accessory brands, representing over 60,000 accessory parts to consumers. I'm excited to share that we have recently began the launch of our AutoNation collision parts line. Our aftermarket collision parts offering fills a key demand with our wholesale customers and complements our existing OEM offering.

We currently have 6 distribution centers in place, 4 of which are operational and the remaining 2 will be coming online by the end of the first quarter. We will continue to expand our distribution network to support our national wholesale footprint, creating more opportunities to offer both OEM and AutoNation collision parts to all of our wholesale customers.

We continue to expect our brand extensions and customer care to contribute approximately $100 million in incremental gross profit in 2018. The pace will start slower and will accelerate throughout the year. We expect customer care same-store gross profit growth for 2018 in the high single-digit range. We are excited about the early results of our brand extensions, the opportunities it affords our associates, the uniqueness of the offerings and the differentiated experience they create for our customers.

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

Thanks, Scott. We are very optimistic about the pro-growth environment for business in the U.S. which includes the recently signed tax reform bill. As a U.S.-based company our employees, customers and shareholders will benefit greatly from a reduction in our corporate tax rate. We estimate approximately 90% of the automotive retailers are structured as pass-through entities for income tax purposes. The reduction in these entities top marginal rate from 39% to 29% is less than AutoNation's expected tax savings, and therefore, we do not expect to see dealer discounting to consumers as a result of tax reform.

What an extraordinary year 2017 was. We saw 2 catastrophic hurricanes in 2 of our largest states in which our associates stepped up to the challenge to assist their fellow associates in community. We continue to roll out our brand extensions which included opening 3 AutoNation USA stores, 8 AutoNation collision centers and 2 AutoNation auctions. We're thrilled with the early results of our brand extension initiatives, which are noticeable in this quarter with all-time record $1,732 for same-store customer financial services, gross profit per vehicle retailed, same-store customer care gross profit of 6% and same-store used vehicle gross profit up 16%.

It is evident by the continued growth we saw in the fourth quarter that we made the right decision to launch our comprehensive brand extension strategy which includes branded customer financial service products, One Price, AutoNation preowned 360, AutoNation Precision Parts and AutoNation Auto Gear.

AutoNation's commitment to its brand, associates, customers and shareholders and its drive-think culture is what keeps the company the industry leader it is today and will be tomorrow.

And now we're delighted to take your questions.

(Operator Instructions) David Tamberrino from Goldman Sachs.

Mike, you just noted that you don't expect to see dealers discounting. So you don't expect to have that benefits of tax reform really competed away. Absent the outlined changes in strategy you've been going through over the last 2, 3 years, where is that incremental cash flow that you're going to be having running through the P&L going to be allocated to? Is it potential returns to shareholders? Or is it really ramping up, and maybe accelerating that strategic investment?

Yes. Firstly, a couple points of commentary of my experience with private caps that are structured as Sub-S pass-through entities. Tax discussion never occurred at the store level. That was always above the store and I just don't see how that seeps into the store and results in a change of how the store is run, from everything I know and experienced. Certainly, going forward, with a reform fair or a U.S.-based company tax rate input, AutoNation in the position where we've demonstrated a, I would say, considerable amount of expertise at capital allocation to take fundamentally the same strategy and push forward with it. We will invest in our business first, our brand, our initiatives and then we'll opportunistically add both share repurchase and acquisitions. Exactly how that plays out is very difficult to predict. If you would ask me a year ago how 2017 was unfolded, it would have -- I wouldn't have been able to predict it, but clearly, we had a unique share repurchase opportunity in the third quarter and took full advantage of it, repurchasing $400 million worth of stock in a relatively short period of time. So it just puts us in a position to do everything that we're doing well even to a greater degree.

Got it. Shifting gears, you're thinking about the industry being about 16.8 million this year. I think that's probably around where consensus estimates are. What are you hearing from your OEM partners? Is it the similar? While the industry is going to be down, here's all the new product we're launching and we're going to be expecting it to be growing 3%, 4% or growing above market? And is that kind of the line that you hear from every OEM? Are they a little bit more disciplined or sounding more disciplined seeing that we're going to be down year-over-year again most likely?

I think there's a certain acceptance that consensus are at their limits of utility and that the return for incremental investment is highly questionable and the future price tag is quite acknowledged at this point. You combine that with -- the manufacturers are very focused on shifting the mix closer and closer to what consumers really want to purchase, aligning both their development pipeline and their production. And so now they're years into adapting to this significant shift towards SUVs and trucks. And so their profitability is in very good shape even with a slight moderation on volume. So they can be a bit more selective in what they do in fleets, and I think you see that with certain manufacturers. And I think they can accept that the alternative course of pushing incentives even higher isn't the appropriate way to go. That's my sense coming back from the Automotive World Congress and the Detroit Motor Show and talking to everyone. But you never know. We'll see how it develops.

Got it. That's very helpful. And just lastly, you mentioned the off-lease potentially being some diversion of sales. What do you think the mix of that off-lease vehicle coming back is? Is it going to be more closely aligned with what customers are looking for from the crossover and utility segment versus passenger cars? Or is it still probably off balance to what the customer is looking for?

That is absolutely off-balance because the way you have to think about is these are vehicles that were put in the market 3 to 4 years ago. And the shift had already started towards trucks back then and has only accelerated since then. So it's not ideal and that then will be reflected in the pricing. But still, it's a value point for consumers and a volume of choice that they never had before. But you're absolutely right. It's not an ideal alignment with where today's consumer is.

James Albertine from Consumer Edge.

I wanted to ask a question on the used-to-new vehicle retail ratio. If I'm doing this math correctly, it looks like it was about 63% or so or 0.6:1 which was down a little bit year-over-year. The fourth quarter is not a big season for used sales but wanted to understand kind of your ability to focus more on used in the event that new vehicle sales are perhaps weaker than many are anticipating in 2018. So can you offset the weakness in new vehicles and sort of add incremental units on the used side is sort of my question.

First, we had an excellent volume performance in new during the quarter, Lance can talk about some of the drivers behind that in a moment. In pre-owned, I'll take a quarter like this the rest of my career but I don't think I'm going to get it. We had a increase in gross profit all-in in our preowned business. Same-store sales was 16%. Now every quarter is going to be a little different where you find the optimal line between margin and volume. Also, we were much more effective in our wholesale -- management of our wholesale operations. So just a very good operational execution combined with finding the optimal line between volume and profit led to an outstanding result. So I think, over time you'll see our preowned business is growing faster than our new business, but in this particular quarter, it went the other way but the results all-in are outstanding, and I wouldn't change a thing. Lance, why don't you talk about what happened in vehicle business?

So in new, we really saw strength throughout the -- all 3 regions. So it wasn't concentrated in one particular area but we definitely capitalized on it and we performed well in our e-channels and our phone channels, on our conversion rate and that's really what drove it. So we -- but it was across the board. It was not focused on a particular area. It was across the enterprise that we grew our new car volume.

And if I may, as a follow-up, exceptional results certainly on the F&I PVR side. That ceiling you keep pushing it higher, it seems, every quarter now, above $1,700 a unit sort of outstanding relative to where we thought it would be at this point. Can you help parse out sort of the dynamics there between new and used that are contributing to that result? And if we do see, over time, a greater switch to CPO or used vehicles from new, what impact you would expect that to have on the F&I PVR?

Yes. Overall, the credit for the increased performance in our F&I is not that we're making more money on originating the finance contracts. That number is relatively steady, but the adoption rate of AutoNation branded products from service contracts, other items is steadily going up and, therefore, taking the results to a higher level. So it's very encouraging, very satisfying result to see the difference that a branded -- branded products can make for us in this field of business. It is our most mature branded initiative that we started first with. As a matter of fact, it was a success we see -- we achieved with these products that gave us the confidence to then move into other items from parts, et cetera -- accessories, et cetera. So now on this issue of what happens if you see a significant shift between new and used, Lance, do you want to talk about that?

Yes, I think that'll affect our margins. We do have a higher margin in new than we do in used on CFS. So any shift of that nature will impact us in relatively the same way.

Michael Montani, you may ask your question, from MN Retail.

Mike Montani here. Just wanted to ask, first off, if I could, for a little additional color on the F&I side. Can you talk about sort of the top 20% of the stores or 25%, what kind of F&I per unit are you all seeing there, just so we can get a better handle on the potential?

I don't think we have that handy.

Yes, I think the way to think about it, too, obviously, luxury stores are going to have, in many cases, a higher dollar PVR because of the price of the vehicle. Certain states tend to skew higher on a PVR basis as well. So what we focus on across the portfolio and driving that is comparable stores, so similar brand market. If there's underperformance, that's where we target that bottom quartile in training but I would say there's brand differences in PVRs also depending on what brands are leased more that'll have a different PVRs and loans. So we look at all the different elements and I would say where the biggest pickup and focus has been is on the product penetration as well as the incremental profitability that we're earning from the branded products, and that's been substantially -- you've seen that come into play over the last 2 to 3 years and you see that bearing out in the results.

And just the last 2 areas as a follow-up, to get some color, if you could, would be on tax savings side, is there any way to think about percentage retention goals? Because so far, I feel that all the numbers you've given are really gross but you're clearly giving some of it back to your employees. And then on AutoNation USA ramp, can you share some of the unit volume that you're seeing from these stores?

Yes. So I'd say on the tax savings, those are actually net numbers. So when we talk publicly about the savings that was really on a net basis. So if you think about the context of our total SG&A, certainly, we felt it was very important to make sure that we encouraged our employees, and especially our long-tenured employees, through the 401(k) rather than a onetime bonus but the numbers that we've talked about are on a net basis. We had already in our forecast been planning for the brand extensions which are well underway. And to Mike's point, we'll continue to use the tax saving to deploy to -- additional parts of the brand extension strategy but also opportunistically, whether it's acquisitions or share repurchase, and again, that depends on prevailing prices in the market. AutoNation USA, still early days. As Lance mentioned, we're really talking about 4 or 5 stores at this point, challenging to compare the early results because 2 of those stores were in Texas. And so when you look at the impact of the hurricanes in Corpus and Houston, certainly, you can extrapolate those trends from the early results, but stay tuned there. But I'd say from a materiality standpoint, currently, the AN USA stores are not material to the overall volume. The tax savings, most of that will drop through in opportunistic capital allocation similar to how we've managed that in the past.

Brian Sponheimer from Gabelli.

A few things here. One, on the used profit on a per-vehicle basis, specifically the margin, we saw a sequential tick down to the levels that you all saw more in the beginning of the year. I think that that's one of the concerns right now just on a -- just today. Can you talk about that a little bit and why you're not as concerned as, say, you were in March or June this past year?

I'd say overall, again, increasing same-store preowned gross profit by 16%, I'll take the rest of my career. And I've already explained we're always looking for the optimal line balance between volume and gross profit. I would also say that all-in, when we consider front-end gross and F&I products, we , I believe, showed that we increased sequentially on pre-owned. It was level, it was level. So all-in, it's level. So Lance, anything to add on that?

Yes. I would just say that one of the things that had a similar impact on the quarter was we're supplying the Houston market with inventory and vehicles that we move from other stores and vehicles that we've purchased. We had maybe a slight oversupply in that market and so we had to work through that as this demand kind of diminished as the quarter went on but -- so working through that in December and in beginning of the fourth quarter. So that drove a little bit of it.

Okay. And then I want to make sure I heard right, is the expectation for -- on a same-store basis high-single digit customer care revenues in 2018, what's really driving that from both an underlying perspective and then also some of your brand extension measures?

So, yes, gross profit-wise, we expect high single digit in customer care in 2018. We continue to operate our core business as efficiently and strongly as we can, and we believe brand extensions now are starting to contribute to our core business and we think that'll continue to ramp-up through 2018 to take us to that high single digit.

Okay. And then just one more if I could sneak it in. Just, Mike, how far through the $100 million of incremental profit from those brand extension measures do you think you are at present?

Most of that'll be realized during 2018. So you didn't see much of that in 2017. Obviously, if you look at Q4, you had a very solid profit margin within service, but most of that incrementality will ramp-up through the course of 2018. So I would think of that as a little bit back-end loaded. And again, as I mentioned, with SG&A, think of that as a little front-end loaded, particularly, as we go through the launch cost phase through the first quarter of the collision parts initiative in particular.

Rick Nelson from Stephens.

Per unit had a record this quarter to front-end yield. You discussed also very strong. Can you discuss the opportunity to get more aggressive on pricing to potentially drive core volume and more F&I opportunity?

Rick, line was not clear as far as the question coming through so...

Was it F&I? I think it was an F&I pricing question Rick on whether we have a pricing opportunity within F&I.

Exactly. That seems to be a big competitive advantage for the company in 1Q, could potentially pass on to the customer, drive more volume and more...

Again, I think, that's some of what you see with respect to the products we sell but I think the way we try to drive value to the customer wasn't just through pricing but through general service delivery. So if you think about the fact that there's a more favorable deductible if you service at AutoNation stores under our products and think about the customer service aspects, we look not just at pricing opportunity but total customer value proposition within F&I, and that's the benefit you've seen over the last few years' results in that area. And certainly, we always continuously evaluate the price of the products in each market. In certain markets, they're regulated; in certain markets, they're not. And we look at the value proposition, so we're constantly looking at the performance of products what things are covered, not covered, in conjunction, with our private label partner on that side as well.

Also, kind of -- like, can you give an update on AutoNation USA, how that's performing relative to your expectation and also the expansion plans there beyond the 5 stores that you discussed?

So Rick, as Cheryl stated earlier, there's 2 -- our early stores in Corpus and Houston were both negatively and positively affected by the hurricanes. It's very difficult to get a good read on those 2 particular stores. Our Phoenix store was the third store that opened and that one opened in December. That one should give us a better read on uninterrupted growth, those types of things. So we should be able to give you an update on that later this year on how that store is performing.

Bret Jordan from Jefferies.

On the AutoNation USA and, I guess, do you have any initial feedback on how the customer pay service initiative is working? Are you bringing people back into the store? I mean, obviously, short time but do you have any color there?

Sure. This is Scott. I can add to that. So we are starting to see customer pay traffic coming to the store. We're seeing that coming off of the used cars that are being sold. We offer a maintenance program at no cost to the consumer when they purchase a vehicle. And so that customer is now starting to come back into the earlier USA stores and showing up as a customer pay customer. So yes, we are starting to see the traffic build. It'll build slowly at first but consistently and continue to move up.

Okay. And then on the branded products initiatives, obviously, you're entering collision and I think you're doing mechanical parts as well. Where do you see the inventory come in to that strategy being?

When you say inventory, are you talking about parts inventory?

Yes. I guess how far are you going to take the breadth of AutoNation branded collision parts and mechanical? I mean, sort of, how do we think about working capital in that segment?

So I'll address the parts inventory and working capital, I'll leave to Cheryl. But we will continue to bring in the parts inventory to support the rollout of our brand extensions. We have brought in AutoNation collision parts, so far Precision Parts inventories as well as Auto Gear. But it runs in line with the pace of our sales as our OEM parts do today.

From a working capital perspective, I would just note that a lot of this is relatively quick turn at this point. We've got $1.4 billion of liquidity and it's at a very favorable pricing term to the -- at the point that we get to enough scale that we think it may make sense to do a segregated facility, we will continue to consider it. But given the favorable liquidity and pricing we have on our unsecured debt today, we don't have a dedicated facility in place at this point.

Okay. Because, I guess, it sounded as -- I mean, we heard more about AutoNation collision parts in this call than we have previously. And your wholesale partners that you're selling to, I guess, is that something we're almost sort of creating an LKQ type model where you're going to be selling into the broader market more aggressively?

I would say -- this is Scott again. I would say -- I'm not necessarily sure we're creating an LKQ model. What we are doing is aligning ourselves with those wholesale operators that buy OEM parts. And now we will be able to lock in and offer OEM parts as well as aftermarket parts. So we believe it's extremely complementary to what we do today. The insurance companies dictate the percentage of aftermarket parts versus OEM parts, and so now we have an opportunity to offer both. So I think it's very complementary to what we do today.

Our next question comes from Chris Bottiglieri from Wolfe Research.

So Waymo ordered a bunch more [specific.] I know it's still very early but I was wondering if you could provide more guidepost on what this relationship entails, what types of service and frequency this agreement entails. And then just finally -- if eventually EVs are fully electrified, how do those dynamics change between kind of the range and frequency of services?

Yes. I'd say from the Waymo relationship that everything continues to go extremely well on that front and we are -- as we said before, we're doing some of the more complex service as well as the maintenance for them. And so we expect that to continue to potentially ramp in the future as they ramp their portfolio and profile. And I'll let Scott handle the EV question in terms of the amount of service on EVs as they're fully electrified.

All right, this is Mike. I'll take that. Now if you look at how electrification's going to unfold, you have mandates that are going to drive an introduction of a dramatic increase in number of electric vehicles, both battery electric vehicles and hybrid. And eventually, in the 5- to 10-year horizon, there's a sight line to profitability on those vehicles. Now from a customer care point of view, it's ironic but hybrid vehicles are actually far more complex than a straightforward internal combustion engine. And those who can handle and repair are fewer. There could be an increase actually in the need around the skill set for customer care with the introduction of all these sophisticated hybrids. Now over time, battery -- fewer battery electric vehicles are somewhat simple, straightforward. In the context of a shared service, though, their utilization rate is far higher than a different type of vehicle, and therefore, their maintenance needs are actually higher because they're going to go through their useful life in a relatively short period of time from a time point of view, but from a mileage point of view, we'll rack them up by the hundreds of thousands. It's not an issue that we're concerned about.

Okay. That's very thorough. And then one other related question of the philosophical nature. You addressed this in your prepared remarks a little bit. But obviously, the pass-through still had a 25% tax reduction. I know it's lower than you're obtaining. But maybe I was hoping you could walk through some of the other qualitative or quantitative rationale for why you think the industry as a whole kind of compete -- keeps the excess profits? Is there something to do with the timing or the mechanics of, like, tax payments or other reasons that give you comfort that this won't be gradually competed away?

First, I would object to the term excess profits right off the back. I think the tax rate on retail in the U.S. has been excessive and onerous for decades and never made any sense whatsoever. And I think the U.S. corporate tax system has been broken for decades and it's been shackles on this economy. So I don't see it as excess profits at all. And I just know the culture of our competitive set that all tax policy, tax decisions, tax efforts were always outside the store. And I just don't see that dynamic of a mindset, "oh, all of a sudden we have this excess profit, let's go give it away." I just don't see that happening. That's my point of view. We'll see.

John Healy from Northcoast Research.

Mike, I wanted to ask your expectations about gross profit per unit on the used side as we think about 2018. You made the point of calling out the used volume. I think in the release you guys also talked about kind of the rising rate element of things. Is it reasonable that you would expect gross profit per unit on the used side just maybe, given the -- even the mix of the off-lease returns and maybe be pressured for the industry this year? Or do you think stable and -- or improvement is the most likely scenario?

Our goal is clearly stable-to-improved, but, again, there's a lot of moving pieces here. And as we demonstrated in the fourth quarter, you try to manage it to the optimum level during the quarter. So there are several different scenarios as in -- as how it could unfold, but we definitely want to increase our gross profit from our preowned business. That's -- I'm looking at the total pie. I want more higher gross profit in our preowned business then we had the year before. What the exact split is between the various pieces, volume, front-end PVR, F&I PVR, I'm open to constant dynamic discussion as long as we're making the pie bigger.

Okay. Fair enough. And then I wanted to ask about the gross profit per unit maybe out of the AutoNation USA stores. Can you maybe give us some color in terms of, maybe, even combining that with F&I per unit on that side, maybe how that compares to kind of the legacy historic store?

I think, Cheryl said it best earlier or Scott. We had 2 stores and both were totally disrupted with hurricane from which it is very difficult to draw any conclusions. The other 2 stores are barely open over a month. I think we'll wait a little bit and we'll give you further reports.

John Murphy from Bank of America.

This is Aileen Smith on for John. Can you talk about the potential for small businesses to support retail and/or fleet sales by taking advantage of recent tax reform to step up investment particularly on trucks and vans? Did you see any of this impact whether on sales or orders roll through in late December or early January? And is this something you anticipate occurring in this year?

I think, overall, the customer is going to be in a good spot so when you think about just general customer ability for affordability, certainly, when people have more take-home pay, that puts them in better position relative to buying new or pre-owned vehicles. So we think generally that's positive, however, I would indicate we have a 16.8 million SAAR call for the year. So I'd say it's somewhat tempered. But on balance, I think it's a positive as people start to see the increases in their take-home pay and corporate and/or pass-throughs start to see some benefit in their tax rate as well.

Great. That's helpful. And you came in notably better than your outlook from last quarter for SG&A as a percent of gross profit to be around 73% in 4Q and commented that most of this was driven by gross profit growth and operating leverage. But is there any amount of this that's attributable to the ongoing investment in AutoNation USA coming along better than expected or efficiencies that you're realizing that you weren't initially anticipating?

Yes. I mean the way I would think about is, certainly, when you deliver numbers like 16% used gross profit growth in the quarter that provides some good leverage to SG&A. We're certainly still in a ramp-up phase for the brand extensions. And as we mentioned in the call remarks, we expect that to increase SG&A in Q1. It'll level off through the year and probably be similar to what you saw -- full year 2018 is what you saw full year 2017. So I would say the general efficiencies in brand extension in customer financial services products are in the numbers, but you do also have the continued investment and build cost in the numbers as well. And what really gave you some of the Q4 leverage, particularly on a year-over-year basis in SG&A, was the really strong growth that we delivered in all of our sectors.

Great. And one last housekeeping item, if I may. Do you have any idea of how much more real estate or dealerships you have left to sell? Or is there an expected cadence through 2018 with divestitures?

Yes. So when you look at 2018, we expect to generate about $200 million in proceeds and that's really part of that broader capital plan as we invest in the brand extension initiatives and stores and also in building out our collisions footprint, so about $200 million, keep in mind that as we sell some of that we lose revenue. We don't lose a high degree of profitability because, again, we're being selective in this plan where we look at dispositions that are portions of our portfolio that don't have the same return as the top-performing parts of our portfolio. So $200 million is the total number for the expected proceeds for 2018.

Colin Langan from UBS.

Any color on new margins? Usually, Q4 is pretty strong with luxury mix and it was down year-over-year. Anything unusual there?

Yes. So our new car margins, we had pressure in domestic and import, and we still see the stair-steps and target-based incentives are having a toll on some of the manufacturing partners. So those activities are still happening out there, so primarily, in those 2 areas -- in domestic, import. So those are the pressure areas in the fourth quarter, but hopefully, that helps.

Got it. And any color on SG&A as we go into next year? Will we start to normalize on some of the incremental investments in AutoNation USA and other initiatives? Or should we expect more accrete there?

Yes. So for the full year, we expect it to be relatively flat with 2017. So if you look at 2017 full year, it was about 72.5% range. But we did talk about this year, 2 components SG&A in Q1. The first is the timing of stock compensation expense. Some of that will be in Q1 this year versus Q2 last year based on the timing of our annual meeting. Really it's just an accounting difference between the 2 quarters. So we just talked about that on a comparable basis. And then we have the ramp of the collision part. So as you look at that ramp phase as we're building for that, before that's fully ramped up and open and selling at its regular cadence level later on into the year, you have a front-loading of some of those expenses before you start bringing the growth in. So we expect Q1 to be heavier in SG&A followed by decreases on a comparable basis through the year in SG&A, resulting in the same relative level in '18 as it was in '17 because we're continuing to do the brand investments. So that's the way we think about the cadence of SG&A through the year and, certainly, Q4 seasonally tends to be a better SG&A quarter as well. So that's what you see in Q4 of this year and that's more similar to what you expect to see in Q4 of '18 compared to a first quarter of 2018.

Got it. Just one last question, I guess, clarification -- just the comments earlier on about the pass-through tax rate going from 39% to 29%. Are those the right rates? Because I've seen a lot of different estimates out there. And so how did you come to that, I just -- sounds like 2 or 3, if I got those numbers right, and what were the analysis behind that?

Yes, so I think basically, if you look -- it's hard to tell directly because the way that people structure their entities are different. So if you're -- if you end up paying things that look like more of an individual rate versus if you're organized by an S-Corp, but we think on average, the top rate and that pass-through range ends up being at the 29.6% level.

So every car dealer I've spoken to over the past month, he quotes -- said that's what their tax calculation comes to.

And the other thing I would just caution you on is that the optical top rate depending on deduction. So for example, our corporate tax rate dropped by 14 percentage points. However, you lose certain deductions. So if you think about pass-through entities depending on what their deduction status was prereform and postreform, that could have an impact on their ultimate pass-through rate that may differ from location-to-location, dealer-to-dealer depending on their state tax rate status, et cetera. So we give that broad estimate but certainly individual rates depending on people, deductibility and circumstances can vary substantially.

David Lim from Wells Fargo.

I just had a quick question. Mike, I think you were saying 16.8 million on sales in 2018. And somewhat -- even with the tax reform, from a family perspective, would you see possible upside to that as discretionary spending could go up?

I think so. Absent tax reform, I would say 16.8 million is maybe an optimistic case now. I would say it's a base case with the possibility we could have a pleasant surprise on the upside.

Got you. And then are you -- and I know you mentioned this before, but during your time in Detroit, you did mention or I thought I heard you say that OEMs are becoming more and more disciplined with incentive actions. Even as we finish the first month of 2018, are you still seeing that? Or are you seeing some maybe lack of discipline on the fringes?

Well, I've learned from my career you never judge anything on January. It's a wacky month with a strange transition from the highest-selling rate of the year to a very low-selling rate. The cutoff days are complicated with year-end. When manufacturers cut off programs, it's a very wacky month. So we sort of just get January and February behind us, March is the tell. March is the real deal. It's the spring market and there's usually not much noise in it. So I think as far as making a judgment on all these questions, we'll know after March. Much better idea how this year's going to unfold. I agree with your point, though, there is -- there could be upside to this year. It could happen.

Finally, on that 16.8 million, are the OEMs actually planning their production for that number or possibly a higher number or a smaller number?

I think that you've seen adjustments on the production side and on the -- and we've seen that (inaudible) show up in the inventory where they have a feeling that it's proving to think this view of roughly 16.8 million and not count on being over 17 million once again.

Michael Montani from MN Retail.

Just a follow-up clarification, if I could. Have you provided the CapEx outlook yet for this year? And then when you mentioned high-single digit service gross profit growth was that same-store or an aggregate?

Same-store on customer care. Cheryl, capital?

And then we didn't provide a specific capital outlook, but, again, we've mentioned ramping up through the year in the brand extension initiatives including some of the collision center acquisitions or buildout, but some of that will be offset by the $200 million of expected sales. So we didn't provide a specific outlook but we expect it to be reasonable in the aggregate considering the reduction in the asset sales because of the proceeds.

And are there any good guys to know about on the working capital side just because -- following up on Brett's point, there does seem to be some builds potentially in parts inventory?

I think on capital side, we're in good shape.

Yes, we're in good shape. There's certainly some seasonality to working capital. So for -- as an example, as captives become more automated in some ways with e-contracting that can help us reduce our contract in transit which is the type of thing that can be used as an offset for some of the working capital build. And again, at the appropriate time and scale, we could certainly put in place and are prepared to do that if it seems prudent from a pricing and other perspectives specific working capital facilities related to parts. But where we are today from a materiality perspective and given how strong the rates and facilities we have in place are, we have not pursued that at this point.

Thank you, everyone, for joining us today. Very much appreciate your questions. Thank you.

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