AutoNation Earnings Call Insights: Capital Allocation, Used Car Business
John Murphy – Bank of America Merrill Lynch: Just a question on capital allocation here. As you guys are generating pretty strong cash flow continuously here, you slowed down on the share buyback. So just wondering where that cash ultimately will go, or we just saw a pause in this quarter and the share buybacks will pick back up. And also, would you consider a dividend in the future if you don’t think share buybacks are that attractive?
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Michael J. Short – EVP and CFO: I would say just to start off a discussion on capital allocation; our priorities really haven’t changed in a very, very long time. We’ve been consistently focused on maintaining a strong balance sheet as our first priority. After that we use our capital to make sure that our capital expenditures are funding our stores so that they stand tall and are ready to serve our customers. Then beyond that, we really do look opportunistically across all opportunities that we can evaluate to create shareholder value. As an example, that you’re familiar with our share repurchase history, and we’ve bought back over 400 million shares since 1999 at an average price of below $17, so we are disciplined and patient, and to that point, with regard to future capital allocation, it will continue to be on an opportunistic basis with the sole goal of driving shareholder value going forward. If that happens to be continued share repurchase of acquisitions or additional capital investments in technology, those are all great options for us. Again, just because we haven’t done a dividend in the past, doesn’t mean we won’t do one in the future. Again, if we come to the conclusion that that’s the best way to create shareholder value, then that would obviously be something that we’ve been interested in looking at.
John Murphy – Bank of America Merrill Lynch: Okay, but if we look at the quarter and stock in the mid-40s with no buybacks, I mean that’s a fairly strong statement given your track record of buying back the stock aggressively in the past, so I’m just trying to understand, I mean is this the kind of thing where if stayed in the mid-40s, tax policy didn’t change going forward, who knows exactly what’s going to happen with the election in, the fiscal cliff and tax rates on dividends at all next year, but if we saw a stock that stay in the mid-40s and you didn’t buy back stock in this quarter, it seems like you might be a little bit more inclined to pay dividend than you have historically. I mean is that a correct interpretation? I’m just…?
Mike Jackson – Chairman and CEO: I think the key word – I think Mike Short laid it out very well. The hallmarks of the journey is strong balance sheet, vest in our stores, and then opportunistic. And there has been price points at certain times. You could look at when we were very low at a certain price point; didn’t buy shares, and then another quarter at that exact same price, we bought quite a bit. So, it’s opportunistic, it changes as we go forward, and I can’t tell you what’s going to happen.
John Murphy – Bank of America Merrill Lynch: Okay, that is helpful. Second question on these average transaction prices it sounds like they came down a bit because of mix. I am just curious if you are seeing anything else out there as far as the pricing environment getting tougher as far as more incentives or gross gets back, I am just trying to make sure that this really is just a mix impact and there is nothing else underlying here going on as far as pricing deteriorating?
Michael E. Maroone – Director, President and COO: John, this is Mike Maroone. I think it is mix driven. Obviously, with the growth in the Import segment those are our lower priced vehicles, but I wouldn’t read anything further into it. In terms of the incentives it appears to be a pretty rational situation right now with pretty good supply and demand balance. So, I don’t anticipate aggressive incentives across the board, although certainly in the fourth quarter I think you’ll see the luxury business pickup. There is much greater availability and I assume it is going to be a very competitive environment, but in general I think the rational nature of incentives will continue.
John Murphy – Bank of America Merrill Lynch: And then just lastly you guys highlighted financing is getting much closer to normal through the spectrum of credit to your consumers. I am just curious how much further you think that that has to go and sort of secondarily where you think we are on leasing right now in returning to sort of a more normal level in the low 20% range for the industry and if that might be another opportunity in addition to credit easing a bit here today to really help sales recover?
Mike Jackson – Chairman and CEO: This is Mike Jackson. I think we have normal credit across the entire spectrum. I would say the only thing that is different than if I go back to ’05, ’06, ’07 using home equity as a piggybank to make down payments on the car that game is over so the consumers have to save up for the down payment, they can’t get it from someplace else and as far as in the past where you saw leasing at a much higher rate, that was a distortion created by incentives and subsidies, it was not the natural market. So, I think the market as far as the finance availability at the moment is normal, balanced appropriate.
Used Car Business
Simeon Gutman – Credit Suisse: I have a couple of questions on the used car business. I think new vehicle sales are outpacing used at least industry-wide and as we march back towards normalization, I expect that will probably continue. So, as we get closer to those older run rates of new car sales, the commitment down the road to used are realized businesses that have been a lot better more focused on used. Will there be a capacity or constraint issue on your lots, meaning trading new for used at that point and will that be less of a focused on used when we get down to that point?
Michael E. Maroone – Director, President and COO: It is Mike Maroone. I think used is always going to be a core part of our business and it’s certainly something we’re looking to increase our capabilities. The current situation really has a limited amount of late model, low mileage vehicles, so they seem to be in two buckets. That limited amount and then there is high number of high mileage vehicles. That’s really due to the pent up demand. I think over time, the used business will stabilize and I think there’s plenty of opportunity for us there. I don’t see any constraints as the units in operation come back and more vehicles come off lease, I think the supply will become more normalized, but we do think there is great opportunity in the used vehicle side.
Simeon Gutman – Credit Suisse: But there is no more – the priority to sell more new one – let’s say the new selling rates goes up to $17 million. Just from a physical capacity standpoint, you’ll still be able to source and emphasize the used business as much or will the new take more precedent at that point?
Michael E. Maroone – Director, President and COO: No, I think the used business has got great opportunity. As we move back to $16 million, $17 million, we’ll see a lot more trades, and I think there is still plenty of opportunity there. There is no capacity constraint.
Simeon Gutman – Credit Suisse: And then the second piece relating to price, when we’ve had low supply, and we clearly moved up in price quite a bit now, as you mentioned the spread is somewhat narrow. How do you think the pricing evolves? I guess there just could be two camps where you see a slow and steady moderation or just less growth, or you can see something more sharply correct as new outpaces. I’m curious if you have any thoughts there.
Michael E. Maroone – Director, President and COO: Well, I think prices will moderate as supply gets back to a more normalized level. I think that prices are very high on low mileage products, and both the incentives and the low interest rate environment certainly are skewing buyers today to new. But we’ve seen this phenomenon before and it all seems to even out over time, but I think there will be some moderation as supply is restored.
Simeon Gutman – Credit Suisse: And I guess any thoughts on the pace of that moderation? I know it’s hard to predict, and I think some of it depends on the interplay here of growth of new, but just curious if we can go more for soft-landing or hard-landing with respect to prices.
Michael E. Maroone – Director, President and COO: Well, I think it’s going to be a soft landing, and I do think that in late 2013 you’ll see more vehicles coming off lease and ’14 will get even better. So I think there will be more supply in ’13 and ’14.
A Closer Look: AutoNation Earnings Cheat Sheet>>