AutoNation Earnings Call Nuggets: Capital Outlook Allocation and Acquisitions Update
Capital Outlook Allocation
Richard Nelson – Stephens: Capital outlook allocation priorities seem to have really shifted from buybacks toward acquisitions. Wondering if you can provide some color on that. Is it a case for the valuations are now coming into the (wheelhouse) on the acquisition side?
Mike Jackson – Chairman and CEO: Actually, the process or the priorities have not changed one iota. We are doing every month, several times in month exactly what we’ve been doing for the last 13 years. We sit there and discuss where our capital can be applied best, it’s definitely done on an opportunistic basis that has to do with where the price of stock is, where we think the market is going, and what kind of acquisition opportunities are presented in the marketplace, do they fit and can we come to a meeting of the minds on price. Obviously, if you look at the past six months, we have done over $800 million of revenue run rate on acquisitions, meaning that it’s been a very good period of alignment on acquisitions. We have further discussions going on right now, but as I said in the past, you never know if you get to the finish line on these transaction. So I can’t commit in the future. So it’s done on an opportunistic basis, and that’s the way we’ve always done it, and right now, if we look at what is being presented to us in the marketplace and what we’re discussing, it’s the best return for our capital.
Richard Nelson – Stephens: Also, you mentioned the improvement that we are in an inflection point now with units and operation and positive for the several business. I’m interested in the used car business, how that improving supply, you see that evolving, the comps look good this quarter and we did see sequential improvement in margin and it’s supply driven improvement.
Michael E. Maroone – President and COO: Rick, it’s Mike Maroone. I don’t think the supply has yet changed, although, we are anticipating that it will get better especially for the certified pre-owned units, they’re still very tight and the supply is very limited so we are having to pay a lot of money to get those vehicles and that’s a growing part of the segment. The other factor is, the used vehicles out there coming in with very high mileage and we’re really working hard to retail those. So it’s keeping – putting enough pressure on the margins. But I think as it loosens up going forward and there is more supply, I think there is more opportunity on the margin side, but we are pleased that sequentially, our margins are up and looking for more…
Richard Nelson – Stephens: Finally, if I could ask you about F&I. You’ve seen any change at all in the pricing as a result of the (AMEX:CFP) bigger discussions along those lines?
Michael E. Maroone – President and COO: No, absolutely not. No developments there, don’t expect any development. We are very confident of our added value in the finance and insurance business. We negotiate great wholesale rates for our customers because we have – we can offer the financial institutions a very cost-effective way to acquire a lot of loans. We have a very reasonable margin on that business of 125 basis points, and so if you look at the added value we have for the customers and the financial institutions, I do not expect any changes in that business that would materially affect our performance or results.
John Murphy – Bank of America Merrill Lynch: Great execution in the quarter here. It was really impressive. First question just on acquisitions to follow-up on Rick’s question, as we look at this, you’re getting a little bit more aggressive on acquisitions or at least there’s more coming through at this point. Has something changed in the way that you’re evaluating your targets and maybe baking in more synergies, because you are operating so much better, or is this really just a function of what’s available and how things are going in the market?
Mike Jackson – Chairman and CEO: I would describe the journey this way John. If you go back to ’08-’09, transactions came to a standstill. You had a very disrupted marketplace and sellers said, ‘Hmm, I will not get anything near fair value for my business in this environment, and I’m going to hang on,’ and buyers were in no mood to step up and pay the kind of multiples you would have to pay in that environment with the expectation that everything is just going to work out. So deals came to a standstill. Now there is a natural flow of deals to the marketplace every year. The motivation to sell – and we always thought to motivate the sellers. We don’t make offers that can’t be refused. We talk to people who want to sell. Whatever the reasons are, capital demands and the manufacturers’ succession problems with the family, etcetera, etcetera. So, every year there is a graduation of deals that would normally come to the market. So, by the time you get to 10, 11 there is a backlog of deals. Then there was a gap in understanding around price, which further push things out and then there was finally a meeting of the minds of what’s the fair price around our threshold returns and what sellers would take. Now you are seeing the catch up from all that postponement that there is a lot of discussions and a lot of opportunity and when we see alignment we are going to step up and do it. You’ll have to get our report card quarter-by-quarter. I’m not going to sit here and say, you know, we are going to do X billion this year. That’s not us, that’s not how we do it. We take it quarter-by-quarter, but I’d paint that as a background description of what’s going on.
John Murphy – Bank of America Merrill Lynch: Second question. As we think about the success of your branding efforts, it sounds like early on in the markets where you’ve launched, you mentioned that you had gained some market share. I was just curious if you can kind of quantify that for us, because it sounds like it’s very successful very quickly. I’m just trying to understand what the benefits are that you are seeing in early days?
Mike Jackson – Chairman and CEO: So, it’s not a step that we took without some trepidation. We had local market brand name, some of them were in the marketplace 80 years old. You don’t walk away from those too easy. We would have strategically taken this step even if were to go backward for a given period of time to establish the new brand. So if we had to accept some disruption, we still would have green-lighted the project and we sort of said best cases we hold steady and the reality has turned out that we actually have some market share gains. You could attribute those market share gains also to the surge in spending in those markets. You couldn’t miss us in those markets during the branding period. So we consider anything that’s on the plus side of the ledger at this point, out of the box a success, and bodes very well for the long-term future that we’ve had this kind of response from the marketplace and from our customers. I can also tell you, the enthusiasm and the morale of our associates in embracing this branding is nothing short of phenomenal. They’re very proud of the Company that we’ve built, and if I go back years ago, we had a choice, we could brand early and overpromise and under-deliver or we could be patient and disciplined and when we find new brand, it really deliver on the expectations, and our associates know that we have a peer list product in the marketplace, and now, to be able to unify under one flag AutoNation and declare to the marketplace, yes I am an employee, an associate of AutoNation has been a tremendous morale booster of the Company. And we’re very satisfied where we are at this point and are very excited to get back on the road after we wrap up this quarterly report and do the rest of the Company and complete it here in the second quarter…
John Murphy – Bank of America Merrill Lynch: Then just on pricing and incentives, the industry seems to be relatively capacity constrained right now. So it doesn’t seem like there’s big incentive or pricing actions that have been taken by the automakers, but there’s this constant drumbeat of fear with the weak yen that the Japanese are going to start a price war. I’m just curious what your take on that is and if you’re seeing anything below the covers that we are not seeing externally that’s going on.
Mike Jackson – Chairman and CEO: Yes John. I would differ with your premise slightly. I don’t think the fact that we have rational behavior around incentives is because there is capacity restraint. If you look at inventory, they are actually quite healthy. I think where the industry is at 3.2 million units out there; that’s probably $100 billion worth of inventory, so there’s plenty of inventory out there. And I think the discipline is more transformational in the sense that at the end of the day all the segments are filled by everybody, everybody has a really high quality distinctive product offering, and there is stability around share where you would have to pay a tremendous price to move a point one way or the other. So I really see a stabilization around share with Detroit being somewhere in the mid-40s, the Asian somewhere in the mid-40s, and the Europeans taking the rest. And I really don’t expect a strategic inventive price war to be unleashed. Second, and talking with all the manufacturers, I don’t care whether it’s Asian, German or Detroit, everybody understands in this business that you have to produce where you sell and you have to remove exchange rate from your business plan and balance them out, and everybody – the situation is not comparable if we were having this conversation 10, 15, 20 years ago. Great progress has been made. (Along) the margins, exchange rates do not play the role they once did. I understand for an export country like Japan and globally it’s an issue, but if you look at where they are in the U.S. it’s certainly not the issue it was 15, 20 years ago. So, my view is that we have genuine rationale discipline around incentives. I don’t see incentives going away. There will always be tactical incentives. But I don’t see anyone unleashing a price war. I just don’t see who is going to do that and I do not expect it to come from the Japanese because of what’s happening with the Yen. By the way, they sort of view these exchange rates from a market perspective and I’ve been in this chair from a strategic point of view and the variability as profitability all in. They sort of take a strategic price positioning in the marketplace and either eat or reap the swings in the currency, but long-term they are all trying to balance it out with production…
John Murphy – Bank of America Merrill Lynch: And then just the last question, you mentioned that you thought housing was supporting truck ales recently, but housing starts in absolute terms are still relatively low versus where they have been historically. I mean, is there something in the end markets that you can identify specifically, because it seems to us like this housing recovery may actually not be the big driver and it might still going to come for pickup trucks. I’m just trying to understand what you are seeing in your data that gives you that level of comfort.
Mike Jackson – Chairman and CEO: Here is what we are looking at – okay, we all know we had a bubble in housing construction in ’04, ’05, ’06, up over 2 million units a year including multiple households. Then, we had the collapse and household construction dropped to less than 500,000 a year and basically we have been sitting there for four or five years clearing the inventory. And anybody who was in home construction did not buy new pickup truck. We’re now approaching a million units and I agree with you John completely, we are not back to trend yet on household construction. It should be let’s say a sustainable rate of 1.5 million, something like that, but it certainly doubled, this year it will be double what it was three or four years ago. So you have to take into effect we had a depression in housing, we had a depression in autos. And housing has finally cleared the inventory and we are seeing that construction and all of these contractors are looking out in the next several years and see they’re going to have work and they’re coming and buying pickup trucks. I would also not underestimate the impact of the energy sector, particularly in Texas, Colorado. For us, this fracking technique is like a production technique, it’s not like drilling a well, it’s very labor intensive compared to other ways to get petroleum, and they’re high paying jobs. So all of a sudden, you have these two industries, housing and energy that have jobs, they can’t be outsourced to India or any place else in the world. This is good American workers, and they all want full-size pickup trucks to drive to work and our pickup truck sales in the first quarter are up 18%. So listen, I’m not forecasting the recovery in the economy, but I’m saying compared to two years ago, three years ago, there are bright spots in this economy in housing, energy and automotive. That would say, this tepid recovery is moving into a phase where it can stand on its own two legs and as fiscal policy and monetary policy become less supportive over the next year or two, the economy can still probably support GDP growth of 2% to 3%, that’s the transition phase that I see we’re in.
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