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

[Audio Gap] That we have. So we can go there. How do we interact more with them on the parts and service side of things, just focusing on that? And then also thinking through how is the business going to change in the future? How is transportation going to change? And what's the appropriate thing for AutoNation to do, to be positioned in order to capitalize on that and play on that. So, a lot of those things will become more apparent as things evolve, but he's not here just to look at what's happening in the near term for the operations, but where things are going to head Brian, and how do we take the brand that we have in AutoNation because before when I was here, you didn't have one brand in AutoNation. You had Elway, you had Maroone, you had Desert. Now everything is underneath the one flag of AutoNation, which helps from a branding standpoint. And also moving forward on the used car side of things with AN USA, we've got a dozen of those continuing to work on growing on the used car side of things, another way where you can interact with the consumer over more of the life of the vehicle as well.

This is a -- I guess, it wouldn't be a reminder first time today. We do encourage participation from our colleagues. I'm going to ask a bunch of questions here. But just if anything comes up, please feel free to reach your hand up and we'll get you a microphone. You mentioned one different thing that we, first of all, we have AutoNation USA, which are used car superstores that you have 12 and you're working towards 50%, but you also bought a captive finance company this year in CIG. Can you talk about what that does for AutoNation from a strategic perspective, a differentiation or differentiator versus other retailer peers? And how does that augment your offerings in finance and insurance?

Yes. I think it's really initially going to be targeted at the used car side of things with AN USA. Obviously, the captives for the OEMs have good solid businesses there. We're not looking to supplant that. We use the expression crawl walk run, and we were using that before things got choppier in the waters for fincos. But our AN USA team is really excited about having it in there in the arsenal to work with them. I was at our store here in Henderson yesterday. And we're going to have it in there in the system, and it should be beneficial where we can capture a little more of the stream of the overall profits that are available. From an accounting standpoint, obviously, CECL makes you recognize some losses upfront for anything that you generate. So it's going to make my job a little more interesting on the IR side of things. But there's value there and using the trust that you have from AutoNation, I think, plays in well with that.

Is this -- is CIT going to function more as more on the used side? Or is this going to be something that is going to potentially compete against captive fincos on the new?

Yes, not competing against captive fincos or the good lenders. I think if you were a marginal lender to us on the new side, your chances of being replaced there be a little bigger, but mainly going to be focused here, Brian, as we launch it just on the used side. And over time, we'll see where that can expand to on the franchise dealership as well.

Yes. This follows, at least, in my opinion, down a line that I started under Mike Jackson, where AutoNation now has AutoNation branded aftermarket parts. Can you talk about that business? And maybe how that is growing and how that's helping you from a growth perspective or even a per vehicle retail perspective on the parts and service?

Yes. It's -- we call it precision parts, still small but growing. Obviously, there's an opportunity there. If you tour one of our dealerships or go back, you'll see the things that are pink, if you go back in the service area. So, it works really well on the used side. And then things that are outside of warranty, where you can get a better deal and it's how do you take good care of the consumer and how can we make some money on that. So not significant in terms of size right now but will continue to grow over time.

Let's talk about the business of selling new cars. What are your dealers telling you about the demand environment? Clearly, there's very little inventory, but we've certainly seen average selling prices rise, now interest rates have helped push -- the average monthly payment well above $700. So, talk about the demand environment at your dealers?

Yes. Well, there's a couple of things going on there. You've got the mix of products that are out there when the OEMs had chip shortages, they were selling the vehicles that they're making the most money on. So, you're going to apply the chips to the ones that are going to be high profit. So that's pushed things higher from an ASP. You've also seen more crossovers, less cars. The import brands are light on inventory right now. So if you look at how their sales have been tracking, they're down, too. So, some of it is the shift there. Clearly, the consumer is not as good of a spot today as they were a year ago or even 6 months ago with interest rates being higher. And -- but there's still enough demand out there for vehicles and a need. Tony covered this yesterday, you look at the car park, how big that is, average age of vehicles now is over 12 years, which is great for the aftermarket. So I'm sure everyone here is liking that. And leases, there's some people who have leases and those people are coming out of those and need a replacement. So demand is holding up. It's not as strong as where it was. I think there is sticker shock when people come -- and do you have the right vehicles for people out there with the right build combinations. And so we'll see. I mean the SAAR looks like it's -- the SAAR it's not as meaningful now as it used to be because we've been at the same level of sales now pretty much for the last year or so. I mean, it was -- I think it we'll do like $1.14 million this month for October for the industry and that's up a whole 1% from the $1.12 that it's been running at. So it's -- we're at a really low level here. Brian, go ahead. Yes.

So I want to bounce back just on inventory somewhat to a follow-up to Brian's question on the management change. But as you look at the inventory you have now and then you gave some numbers in your presentation. I guess the question I have is -- as the team at AutoNation is talking, I mean, have you reset the expectation for what is a healthy inventory? And will that be significantly lower than it was pre-COVID. And as you're talking to the OEMs, I mean I know there's a lot of chatter about the OEMs philosophically changing too to potentially produce fewer cars. But are you seeing that as well in your conversations with them?

Yes. The -- if you look at it, a lot of the incentives that the OEMs had before to overproduce aren't there anymore. They reset things. Their profitability is quite good right now with this lower inventory. So I don't know where exactly it's going to settle out in terms of overall day supply, but it's going to be inside of where it was. They've got a lot going on. They don't need to have to be worrying about how much incentives they're going to have to put on their vehicles to move metal on dealers' lots. If you look at just what's happened with the ramp-up of electric vehicles, that's a big change for them. So, they've been able to make money here. We think it's going to be lower than it was exactly what the level that's going to be, I don't know. But it will be north of where it is, but I don't see it getting back to 60.

We're going to go to Carolina. And then if we can get a microphone to Bret, while Carolina is asking her question.

That would be fantastic. Great. So you talked about, I think, success related the after part service business for your company, and you also talked about electric vehicles. A big industry question we have here today is Ken the independent aftermarket actually do some of this work. Can you just talk about how that might be a benefit for your company?

Yes. So yesterday, I went to the GMC Buick store, and we had a tech their name Dave. He's been one of our top tech. He's 9.5 years with the company, and he was working on Hummer that we had there. He told me he can't work on a Bolt. So, if you think about that, that's a GM product, I mean, normally, you could work. But from a certification standpoint and everything that needs to be done, you're going to see it coming through the dealership. So I think it's going to take a while for the independent aftermarket to get built up to the point where they're going to be able to do things in terms of the investments that are needed and particularly when things are under warranty, just making sure that you're working through it properly. And no offense to everyone who's in the independent aftermarket, but I hope that the franchise dealer body does a better job of defending our turf than we did before and seeding so much of that away to the independent aftermarket.

Great. And you touched on it, but the technician issue seems to be -- is becoming a bigger headwind. Can you -- what can you do in terms of that?

Everyone's dealing with the same problems that skilled trades or technicians or whatever. We have a lot of value in terms of the brand, who we are as AutoNation, giving people opportunities to grow, but it's something that there's a lot of focus on. We had Hurricane in came through Florida, where we are on the southeast side of the state, nothing really happened, but it was amazing to me to see what the organization did to take care of our colleagues who were forced out of their homes. So cultural things like that. We're paying for people temporary living and things like that. So what can we do from a mentoring internship program to have things like that to build up our techs is something that we're working on. We've done a pretty good job on that on the East Coast. -- not so much over here on the West Coast. And -- but it's a great thing for people to do. Other thing is, it's simple stuff, too, making sure that your areas are air-conditioned. So you're coming to a place that's good to work at. And if you walk through one of our service areas, it's -- you can wear nice shoes, and you'll be fine. It's not like it used to be. I mean these are -- they're working in a pretty good environment. And there's a lot of technology involved in it, too, not just on the -- for the electric side of things, but just think of all the sensors you have on a carnal and what happens if you get some light damage to the front end, all that's going to need to be reprogrammed, realigned, make sure that it works. So these are pretty high-tech things that guys are working on now.

And then just one last industry question in terms of wholesale sourcing. Any thoughts on where the wholesale market is sourcing from there? And any changes given Carvana's acquisition of ADESA?

Yes. The -- on the wholesale side, we're trying to stay internal. I think we're over -- it's over 90% that we're doing in just internal generated. Part of that's trade-ins. Trade-ins have gone kind of marched around between 50% to high -- maybe 60 -- almost 60% there, and we'll buy your car is a big piece of it. Typically speaking, if you're buying at the auction, you're paying more than anyone else wanted to pay for it. So it's -- that's normally not a real winning proposition. It is normalizing that part of the market, not quite there yet, but it's getting closer to where it needs to be. And so there might be a little bit of wash back that we'd have in the -- on the used car side that we haven't totally felt yet. But as I said, we're at 30 days supply. So we flip our inventory pretty quickly there. So that helps you if you get misaligned, you can get it right back.

Bret?

Yes. I guess on the third quarter reports, you and your largest competitor had big difference in GPU outlooks going forward. I think you were maybe talking about front end on new units being closer to 4,000 and then you were talking maybe closer to 2,000. And when you think about the outlook for new unit profitability, is that more tied to the OE production constraint or other dealers being willing to hold the line on price and really force transactions towards MSRP -- like what do you see as the big variables driving that GPU?

Yes. Bret, I think it's supply first. Once you have more supply, it will be more of a competitive market in terms of -- for the consumer of what are they going to do. And I don't know what their time frame is that they're looking for it. The -- as you know, there were a number Yes, yes. And there are a number of us that didn't really have that view. We see things normalizing over time. I just -- I don't see it. I mean, if you look at -- we're still at 10,000 units grounded and it's going to take a while for that to get to a point where you're really going to see a big shift. Now mix is going to matter. When the imports start producing more, those are lower-priced vehicles typically, and we get a little less gross on those than we do on the, obviously, premium luxury as well as the domestics, which are more truck based. So we'll see where it shifts out. We see things being a little more robust than they do.

Can you comment on off-lease used vehicle supply and the equity and the residual of those vehicles coming back to you? Are you still seeing significant volumes there? And how do you look at that as a sourcing driver for 2023?

Yes. It's -- leases are down overall from where they were, and will continue -- that's going to be a bit of a headwind for us. But it has been a headwind because -- the -- you had a good deal of equity, too, where some people just kept their cars, and that was a big shift where people would as opposed to turn it in. You look at what you can replace it for. And a lot of people said, okay, I'm just going to keep this car for longer. That's why we'll buy your car as an important part. Leasing is going to come back over time. But right now, there isn't -- you can look at the deals, the flash deal looks great. It's like, yes, hey, that's $400 for that, and that kind of putting 9 grand down to get to that. So the leasing will come back. I don't know to what extent we get it as far as it was before. But it's not as good of a supply as it has been just because there's not as many off-lease vehicles right now.

Derek, how do you, as an organization, look at direct-to-consumer selling vis-a-vis omnichannel, your ability with basically a nationwide brand to effectively deliver if you have to, vehicles that could be sourced from one of your dealerships in California to someone who wants that car in Florida. What is the company thinking about from an online capability standpoint?

Yes, it's -- 90% of our deals start online. And -- but the final delivery of vehicles where somebody doesn't go into the store, it's pretty low. People typically want to get into the dealership. And you know what, you want them to come into the dealership because you have a parts and service business there that's 46% gross margin, and you want to have that relationship with them. But if people want to have their car delivered to their home, we'll do that. It's a really low number for us. And obviously, we've got the AutoNation brand now. So there isn't as much of a need to launch something that's separate. So we're playing in that venue. Other people have leaned a little more into it. And -- but I think there's real value to have a relationship with the consumer come to your dealership. And quite frankly, we have the footprint, too, so it makes sense. Now can you ship a car from California to Florida? Yes, you could. Is it going to make sense for you to do that from an economic standpoint? I guess it depends on what the vehicle is.

Yes. So I mean, do you do any geofencing as far as people in California can't find it or when they go searching -- there's a 500-mile radius.

You can open it up. You can look and see our vehicles anywhere in the country and just drill down on it. Now you got to be a little bit careful there because some of those vehicles aren't yet at the dealership. If there's some new coming in, they might not have been received yet, but we do show them on our website so that people can come in and get them or say I'm going to want that one, please hold it for me.

Let's talk about the AutoNation USA rollout. Just one second. -- give me one. The AutoNation USA store rollout. We're at 12. We're clearly having some cross wins within the used vehicle market as far as product availability. Anything about the current environment that would cause Mike and the team to maybe take a pause on... On that rollout to 50.

Yes. No so the number is over 130 is what we're looking to get to. Our real issue has been on the construction side of things, having the labor for that, getting permits. So right now, we have 24 properties that are under development, and we're actively working those. There's another set right behind that, that we're negotiating. So their comments just a little delayed from where it was because of what's happened on the construction side, I think. So that's really been the gating item for us here.

[ Julia ]?

Sorry, I just wanted to ask kind of the other part of that online question. -- just in terms of more demand, if we're starting to see people order Teslas without test driving them, inventory on the lots is pretty low. So you have to kind of preorder anyway for 6 months or whatever. Have you seen demand change for e-commerce and digital? Have you seen it kind of increase given some of those?

No. The numbers that I looked at, I just looked at this year's numbers, I'd have to dig into like where it was a couple of years ago, and it's been pretty steady in terms of what you're saying. There are a set of buyers that will buy things now that the consumer is changing, right, in terms of how much we buy on our phones right now using Amazon compared to what our parents would have. So you're going to have some of that where people are just -- might do it without test driving, but a car is a pretty personal thing and know on how you fit in it? How does it feel when you sit in it, how does it feel when you drive it. But I'm from Michigan, grew up in the car family. So I'm probably a little biased on that. I think how it sounds. All those things matter how it accelerates. But people will go there. If you go back historically, though, a lot of people ordered cars before -- and the ordering of the cars is good because you've already made that sale. And it's going to come in and that transaction will work and you have the relationship with the consumer. So we'll see where it shifts out. We'll be over from where it was. But if you have a car sitting on a lot and somebody needs a car, you're probably going to put them in that one as opposed to waiting to give them something. And it's going to evolve, and it will change, but I think it's good for the consumer to have choices. You might have to wait, though. Some of these cars, you have to wait a long time to get.

You're in a pretty unique position in that in a lot of your markets, you dominate with almost every brand within a locale. I would suspect that this would lead to some pretty significant scale advantages if you were to put some sort of parts of EV only parts of service facility within that space. Is that something that would be potentially considered where you almost have a clearinghouse for all electric vehicles under one garage in the center, let's say, of South Florida.

No. I don't know how -- exactly how that would work, Brian, just because of the brand-specific nature of things. Obviously, we've done that on the collision side, and there's things that we can do from a conditioning standpoint on used vehicles, too. But you're going to have to work through the warranty and whatnot piece of that. But given our size and our ability, I think we're going to be able to compete pretty well with anyone out there on servicing of electric cars as it comes.

Want to -- go ahead, Alex.

Can you hear me? So I know you touched on a little bit. You got 24 under construction and as far as dealerships go, it sounds like. And then you also -- I'll go ahead and graduate you guys exited, I guess, the Broom investment at a great time last year and did really well and recognize that. But I know linkable charging stations is down there in mind me as well. look at anything on the charging side to be able to touch those customers more by offering some charging solutions with the EV side as a way to expand in a way to kind of diversify what you're doing in that space.

Not necessarily. Never say never. We're in the process right now of getting the chargers in our dealerships. So I think the goal this year was to get -- we thought we'd do 600 chargers this year. We were at 667 last week, I looked at the number. And that's expanding. We've got a lot more programs from the OEMs that have launched recently. Obviously, Ford's one of them. You've got other ones as well that have come on Toyota as a program now. And so we're working with them and the consumer and taking care of our OEM partners and what we need at the dealerships and our existing, and we'll see if it makes sense down the road and maybe do something else on the charging side of things.

I'm going to ask the same question I asked Tony yesterday. It really comes down to $10,000 question about automation as a stock. When you think about normalization on new vehicle supply, a normalization on used vehicle pricing, what do you think the -- I would say, the trough earnings for this company could be without being -- to be so specific, but maybe try and vector that for us so we can better understand.

Yes. So this is an eye chart, but it's in the deck. So -- and you can get it offline. So a lot of conversations we've had, Brian, about what's normal. So I said, let's go back and look at our reported results going back to the global financial crisis and see what's happening. And if you look at what's happened on new, the average over that was $2,200 a copy for front end. The use has kind of bounced around a little bit, but it's probably around, I think, what's that, say, 1,600... That... Yes, 1,600, yes, 50. So we did the math on that and said, okay, for our third quarter, let's just keep units the same where we were. And let's just do the math and flex what the gross profit would be if we normalize new. And so we took new down to 2,200 on that. Now there's a part of our compensation, which is variable. So if you had a $100 decrease in your gross profit for new you'd have to shift that down, SG&A will go down 30%. So we did that math, and it came out to -- the third quarter would have been $4 per share on our share count that we had, or $4.50 at 50 million shares. So I can do that math. It's $4.50 x 4 would be $18. And then so it's -- you look at where we've traded historically, call it a 10 multiple to keep the math easy. It's 180, which is a pretty good investment to buy back the shares at this point.

Yes. I agree. Over here.

Derek, I want to follow up on normalization. CFS is one that's gone up a lot since then. And I didn't hear you talk there about normalization. Can you talk about what's driven that up and kind of what gives you guys the confidence that maybe that doesn't step back as consumers [indiscernible]?

And it's really a good question there, Daniel. It's really the products that you're selling and the value that you have and we're pushing hard to keep that where it is. You will have some -- you could have some affordability issues. But it's having a good product for them as opposed to just making it off of rate.

So over the last 10 years, have you introduced new products, as we see the 1,200, 2,400...

It's been a function of making that a priority for us. And you have seen some leakage on the new side of things. So it's -- that's part of an offset there, too. I think it was -- I don't know if it was a strategic decision of the company to make a little bit less on the front end and make more on the F&I side of things, but it looks that way in the numbers.

Taking -- I guess last one, just thinking about leverage, about $3.1 billion in straight debt against about $2.1 billion or so in EBITDA. What's the company's comfort with leverage vis-a-vis the repurchase of stock. Is there any set metric that you all look at?

No. I mean we have that in here, we talk about what the historic levels of where we've been. I mean this is a business that it does well with leverage, too, but you have to balance that. So we've got room to put more leverage on this company if we need to. But it's -- you look at where we're at right now, we're 1.5x on a gross basis and 1.3x on a net basis. So there is an opportunity there to have more. But I wouldn't say it for share repurchase, Brian. Is it -- are there some investments that make sense to that you can look at in terms of how we can better serve the serve the consumer for a longer period of time or in some different ways.

Well, Formula has clearly been a successful one for quite some time. Derek, I appreciate you coming back -- good to be here. There are different times, second different -- or second uniform...

So I think it's the second time AutoNation and I wore the Bastian Jersey and the Tower Jersey here, too. So we've got 4 of them. So journey [ of an ] IR guy.

All good journeys. Well, thank you very much. We're going to move it along. But we look forward to seeing you here next year and maybe visiting you when it's very cold [indiscernible].

Great. Thanks, Brian.