AutoNation, Inc. (AN) Earnings Call Transcript & Summary

Good morning, and welcome to the Virtual Webcast of the 2021 Annual Meeting of the Stakeholders of AutoNation. We do not expect any technical difficulties. However, in the event we lose audio or webcast connection, and we're unable to provide any update, please wait 10 minutes for resolution. The polls are open. To vote, click on the Vote Here button at the bottom right-hand corner of the webcast screen. The polls will remain open until the conclusion of the matters to be voted on portion of the meeting. I'd now like to introduce and turn the meeting over to AutoNation's General Counsel and Corporate Secretary, Coleman Edmunds, to begin the meeting. Coleman?

Thank you, Marc. During the webcast today, the company may make forward-looking statements about our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risk and uncertainties, the company's actual performance and results may differ materially from what is said here today. Please refer to AutoNation's 2020 Annual Report on Form 10-K filed with the SEC on February 16, 2021, for detailed discussions of principal risks and uncertainties that could cause differences, and to our subsequent SEC filings for updates. With that, I'll turn the call over to AutoNation's Chief Executive Officer and Director, Mike Jackson, to share a few opening remarks before we call the meeting to order.

Thank you, Coleman. I want to begin by truly thanking all our associates for their tremendous efforts during an unimaginable year. They delivered record results and maintained a strong commitment to our company, customers and communities. Now I'd like to introduce the other members of the Board of Directors who have served with great dedication and distinction. Rick Burdick was elected as Chairman of the Board in February 2021. Rick has been a director of AutoNation for over 25 years, and most recently, served as our Lead Independent Director. Rick serves on our Compensation Committee. David Edelson has served as one of our directors since July 2008 and serves as Chair of our Audit Committee. Mr. Edelson is Senior Vice President and Chief Financial Officer of Lowe's Corporation. Steven Gerard has served as one of our directors since April 2019. He is the Chairman of the Board of Directors of CBIZ. He also serves on our Audit and Compensation Committees. Robert Grusky has served as one of our directors since June 2006. Mr. Grusky is the founder and managing member of Hope Capital Management, an investment management firm he founded in 2000. He also serves on our Corporate Governance and Nominating Committee. Norman Jenkins has served as one of our directors since December 2020. He is President and Chief Executive Officer of Capstone Development, a privately held commercial and multifamily real estate firm he founded in 2009. Prior to launching Capstone, Mr. Jenkins was a senior executive and Corporate Officer of Marriott International. Mr. Jenkins serves on our Audit Committee. Lisa Lutoff-Perlo has served as one of our directors since February 2020. Since December 2014, she has served as President and Chief Executive Officer of Celebrity Cruises, a multibillion-dollar cruise line and wholly owned subsidiary of Royal Caribbean Cruises. She serves on our Corporate Governance and Nominating Committee. G. Mike Mikan has served as one of our directors since March 2013. He is President and Chief Executive Officer of Bright Health Group, a consumer-focused health insurance services business. He chairs our Compensation Committee. Jackie Travisano has served as one of our directors since April 2018. Dr. Travisano serves as Executive Vice President for Business and Finance and Chief Operating Officer of the University of Miami. She chairs our Corporate Governance and Nominating Committee. I would now like to move to a couple of our slides that discuss our performance over the past year. For 2020, our revenue broke through $20 billion despite the pandemic. Operating income was up 24% to $990 million. Adjusted EPS from continuing operations was $7.12, an increase of 56%. And adjusted SG&A, as a percent of gross profit, was significantly improved to 67.2%. And for the first quarter results, we reported for the fourth time in a row, an all-time record performance, up 3x from a year ago, with same-store revenue and same-store gross profit improving 27%. Again, another significant improvement on the cost basis, taking out 1,120 basis points, reducing SG&A as a percent of gross to 62.7%. We also repurchased 5% of our outstanding shares during the quarter and announced that our development and opening of USA stores continues very well with a target to have 130 USA stores open by the end of 2026, with a target of ultimately achieving retail sales of 1 million units a year. I now turn it back to Coleman Edmunds, to call the meeting formally to order.

Thank you, Mike. I now call this annual meeting of stockholders to order. In addition to Mike, the other director nominees are attending today's meeting through the live webcast. The rules of conduct and procedures are shown at the bottom right corner of the webcast screen. The procedures we follow are simple and designed to ensure that we have a fair and orderly meeting. As noted, the polls are open. If you have not already voted your shares or wish to change your vote, you may do so by clicking on the Vote Here button at the bottom right corner of the webcast screen. The polls will remain open until the conclusion of the matters to be voted on portion of the meeting. [Operator Instructions] Please note that the meeting is being recorded. However, participants are not permitted to use any recording device. The Board appointed Broadridge Financial Solutions to act as the inspector of election to the meeting. We are informed by our inspector that our quorum shall be deemed present for purposes of conducting the business of the meeting. KPMG, our independent auditors, are attending today's meeting through the live webcast. We will now review the matters to be voted on. The first item on the agenda is the election of directors. The director nominees are Mike Jackson, Rick Burdick, David Edelson, Steve Gerard, Bob Grusky, Norm Jenkins, Lisa Lutoff-Perlo, Mike Mikan and Jackie Travisano. Your Board recommends a vote both for each of these nominees. Agenda item 2 concerns the ratification of the selection of KPMG as the company's independent registered public accounting firm for 2021. Your Board recommends a vote for agenda item 2. Agenda item 3 is a stockholder proposal regarding special meetings. The proposal was submitted by John Chevedden. I recognize Mr. Chevedden's authorized representative, Mrs. Cam Franklin, for a period of 3 minutes. Operator, please open Mrs. Franklin's line.

Good morning. Proposal 3. Good morning. Proposal 3, shareholder right to call a special shareholder meeting. Shareholders ask our Board to take the steps necessary to amend the governing documents to give the owners of a combined 10% of our outstanding common stock, the power to call a special shareholder meeting. This proposal topic won 36% support at the 2020 annual meeting, the highest support shareholder proposal at AutoNation in at least 10 years. This is all the more impressive due to the double-digit insider holdings at AutoNation. Insiders almost always resist improving corporate governance. It is time to update -- just a moment, the corporate governance of AutoNation and adopt this proposal. The 2020 management objections to this proposal have largely evaporated. In 2020, management said that only management should be able to call a special meeting because management wanted more control. With the almost universal adoption of online shareholder meetings, management now has the control it wants. Shareholder questions and comments can be arbitrarily screened out at an online special meeting, giving management exactly the control it wanted according to its 2020 annual meeting materials. For instance, Goodyear Management hit the mute button right in the middle of a formal shareholder proposal presentation at its 2020 Online Shareholder Meeting. With the CEO succession problems at AutoNation, shareholders may want to elect a replacement director for the current Chairman of the AutoNation Nomination Committee, Mrs. Jacqueline Travisano, or the previous Chairman, Mr. Rick Burdick. Shareholders may not want to wait for an annual meeting. The beauty of good -- a governance proposal like this proposal is that it would not result in more cost because their mere presence of good governance serves as a guardrail to make sure that management elects the best directors on their own because this management does not then -- shareholders have a practical remedy with teeth to make their director nominations known to management. Nuance Communications' shareholders gave 94% support to a 2018 shareholder proposal calling for 10% of the shareholders to call a special meeting. Please vote yes. Shareholder right to call a special shareholder meeting, proposal number 3. Thank you.

Your Board recommends a vote against item 3 for the reasons set forth in the company's proxy statement. This concludes the review of the matters to be voted on. The polls are now closed. The inspector of election will collect and tabulate all the proxies and ballots. Subject to a final tabulation, we report the following preliminary results provided by the inspector that all of the director nominees have been elected, that the appointment of KPMG has been ratified, that stockholders have voted against the special meetings proposal. The final voting results will become part of the record of the meeting and will be reported in a Form 8-K to be filed in connection with the matters voted upon at this meeting.

Thank you, Coleman. All items of business have now been completed. We will now answer any questions.

Mr. Jackson, we have a question. Could you discuss where you see the demand and the inventory situation that currently exist in auto retail?

The demand is exceptional. There is tremendous desire on the part of the American people to control their environment in light of the pandemic, and they have decided they want personal vehicles, personal transportation. They want to express their independence and go where they want to go, whenever they want to go, and control who is in the vehicle with them. This has created exceptional demand from every price point from $5,000 a car to $500,000 a car. We then have the situation from a year ago of the shutdown of the shelter in place, which closed new vehicle manufacturing for an extended period of time, which caused a reduction of inventories. And even though production has resumed, it is nowhere near the level of demand. And it looks like that circumstance will continue through the balance of this year now with the difficulties that the industry confronts with shortages on the microchip. But I should be clear that the shipments from the manufacturers are dramatically improved from a year ago, almost double. And if I compare it to what was full production in 2019, it's only down 6% at the moment. So the headline is very much that auto retail has more demand than supply. We've tried to balance this by aggressively purchasing preowned vehicles and have done that successfully. And you see our outstanding performance in the most recent quarters with a 28% improvement in units that pre-owned in the first quarter.

Mr. Jackson, that concludes. I have no other questions for you.

Thank you all for your continued support and your interest in AutoNation. We work on your behalf every day. This concludes today's webcast, and the meeting is now adjourned. Thank you very much.