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

Good afternoon. Our next company presenting today is AutoNation. Trades on the New York Stock Exchange. Correct, Dave? On the ticker AN. Winner of the largest market cap we have here at the conference this year. It is the company's first time presenting at the conference, but we have a familiar face rejoining us. I'm glad to welcome back Mr. Derek Fiebig to do the presentation. Derek?

Thanks. Appreciate it. Thanks, everyone, for being here today. Yes, I've worked with Three Part at a couple of different places, so I thought I'd come up and give it a try. Didn't think the weather here in Chicago would be the same as we have in Florida. But I still have a place in Michigan and my kids are up there so it's pretty easy to drive across. And then tomorrow, I'm going to go down to -- or tonight down to Bloomington, Indiana and talk to some of the MBAs down there that are incoming. So don't think that we're expecting our market cap to match everyone's that's here. Just figured I'd give it a shot today. And so this can be as interactive as we want it to be. I'm going to run you through our basic slide deck that we give for the quarter. A little bit on the industry will be included, and feel free to raise your hand if you want as we're going through it. So just investment highlights. We're a company that generates a lot of cash flow. It's pretty substantial and pretty predictable as well. We got a leading brand within the industry, experienced management team, strong balance sheet. We're building a lot of concentration, scope and scale within individual markets. That's one of the strategies we're doing, and we're working on end-to-end solutions for the 11 million customers that we have and the households that they represent. We've got a number of growth channels available to us. This looks at our footprint. You can see it here. We're actually the second largest public dealer now. Someone has been making a lot of acquisitions over the last couple of years and has passed us, but for the longest time, we were the largest footprint. Biggest in Florida and then Texas and then California, but you can see a nice array of dealerships around the country. We did about $27 billion last year in sales. We've got 24,000 employees. We have 353 franchises and 253 dealerships franchises. The difference there is if you've got a Jaguar Land Rover, that would be 2 franchises, 1 dealership or if you've got Chrysler Jeep, Dodge that would be 3 and 1 rooftop. We have some used-only stores, 16 of those, a lot smaller than what you'd see for a CarMax, but that's -- we have those. We're growing those slowly with time. We've got 4 auctions and 53 collision centers. You can see the breakout of our revenue, 44% of it was new last year, 36% used. The first gray bar there is our parts and service business, which we call After-Sales. And then you've got the CFS, which is the F&I as some people refer to it as. And you can see the profit we did, $5.3 billion last year, about 1/4 of that from new, 11% from used. Parts and service comes through at a nice margin. It's a 45%, 46% margin, so that was 36%. And then our -- the F&I products, that CFS that we sell, that comes through at 100% on a gross profit basis, so that was 27%. A number of initiatives we're working on at the company. Mike Manley joined in the fall of 2021. Mike used to run Fiat Chrysler. Before that was with the Chrysler side of things, Jeep, and he actually had come into the U.S. because he -- through an acquisition that Daimler Chrysler made of some dealerships that he had over there. So he brings a different mindset to auto retail in terms of what we measure, things that we look at a dealership that we didn't look at before, things like bay utilization for the service area, what the tech utilization is, more asset turnover base as opposed to really just being driven more by the gross profit that you have. We're growing our After-Sales business, which is parts and service side of things. Recently acquired a finco. We are expanding our used-only business and building scope and scale. We've had pretty robust share repurchase program, which I'll cover in a moment. And importantly, we do a lot with something called Drive Pink, which is our fundraiser. If you've seen the pink license plates, that's us. We do that. We've donated over $37 million to help fight cancer. So pretty good stuff. On the financial side, second quarter, we had good EPS. We were down a little bit from a year ago. It was a record a year ago. I'll get into some of the reasons why. After-Sales continues to grow. CFS, which is the F&I side of things, that was a record at $2,800 a copy. We did acquire 5 stores in California, and we're recognized for excellent customer service at 143 of our dealerships by J.D. Power. Here, you can see total revenue, $6 billion, pretty much flat versus a year ago. Gross profit was off 2%. SG&A was up 9% and operating income down 18%. Net income was down 24%. But with our share repurchases, we're actually only down 3% there. And you can see it on a sequential basis, a lot changed on a year-over-year basis when you look at how much we were able to make on a margin basis for new cars. So that explains a lot of it. Sequentially, not as big of a change and you can see we were $6.29 versus $6.07 on an EPS basis. So I mentioned the free cash flow generation. We did just about $500 million for the first half of the year. Our inventory was up. We took our used car inventory up, but we actually used -- we get floorplan assistance for that, so we borrow against it. That increased $171 million during the quarter -- or for the first half of the year. So that's money that's available to us. CapEx running $200 million year-to-date, so good cash flow generation. And what we've done with that is buy back shares. You start at the right, we had 89 million shares outstanding in 2019. That's down to 44 million as of the end of the second quarter. Share repurchases, did about $500 million in the first half of the year. And a lot of people say, you guys are really taking your foot off the accelerator on share repurchase. It's -- I don't know how many companies people follow that have bought back as much of their float this year as we have. Still have $670 million that was outstanding on the authorization as of the end of the quarter. And good liquidity, $1.4 billion. We just recently did our credit facilities, took the revolver up another $100 million. And so good business. We have bought back a lot of shares over time. I worked for AutoNation during the global financial crisis. Left to go back to Michigan. When I joined AutoNation, it was just November of 2008. The stock was at $5. I left, it went to $22. I came back, the stock was at $122 and the market cap was flat. So bought back an awful lot of shares. The After-Sales side of the business, you can see just the consistent growth there. We've grown that by -- it's one of the things that we're really focusing on, just how do we take better care of the consumer, have you come in, get your car serviced. We might not be the cheapest, but we want to give you good value. We want it to be convenient. We want you to come in, get it serviced there. If you're under warranty, you're going to get OEM parts. If you're not, we'll give you a good, better, best in terms of some of your options, so give you some choices there. But this part of our business, this covers your fixed overhead. Typically, dealers would look at it and you want to just cover it. To the extent that we grow the business, we're really weaponizing that part of our business and just generating some real profits for the business. So new vehicles, a lot going on here and a lot to unpeel. If you can look -- I'll start at the bottom right, just to kind of explain what's going on. This is the light vehicle SAAR, which has typically been 17 million or so. That fell off over the last couple of years, so you've got -- we've undersold what you should be selling by about 2 million to 3 million in any given year. Those numbers, we're starting to see that the SAAR is clipping up right now. A lot of that's driven, though, by fleet as opposed to retail. And retail sales are more important to us. We don't do much in the way of fleet sales. But if you look year-to-date, kind of flattish in terms of what's happened with the overall retail sales. The one big winner in there, we don't sell Teslas at all. Tesla has been gaining a lot of share in the overall market, where about 1/3 of our business is premium luxury, about 1/3 is domestic and then 1/3 is import. On the other side, you can see pre-pandemic, we had 52 days supply of vehicles, roughly 55,000, 60,000 units of inventory. As the pandemic hit and people bought cars and the production was off, that went down to 6,000 units, and now we're probably up to about 25,000 or so. You can see our unit sales. We're still tracking below where we were pre-pandemic. But if you look at the profitability there, that's gross per vehicle retail. It's at $4,600 now at peak. You can't see it here because it was fourth quarter 2021, peaked at $6,400 a copy, but up significantly from the $1,850 that we had before. We think there's -- this will be structurally higher. If you looked at the selling price of a vehicle pre-pandemic, we're selling about $40,000. Now it's closer to $50,000, a little over $50,000, actually, what you have. And we think that the inventory will be a little more constrained by the OEMs in terms of what they have on the dealer lots. It's amazing if you've got 40 of the same vehicles sitting there, what kind of price you can -- deal you can get on it, but if there's only 1 or 2, you can charge a little bit more. We don't charge much over MSRP. We'll do it for some specific low running volume vehicles. So if you wanted a G-Wagen or a Porsche or a Corvette or something like that, you'll probably be charged over MSRP. And if you go back in time a year ago, we were at about -- 70% were at or above MSRP. We typically sell about 2% or 3% above MSRP. That's worked its way down. Last quarter was 40% were sold at or above. So we're starting to see normalization as the inventory comes up. We're starting to see where people aren't preordering vehicles, so they're getting a little bit of a discount on them. The used car market is something that's getting a lot of attention with what's going on there. As I mentioned, we've got 16 AN USA stores, which are used-only. Pre-pandemic, we were -- we did a little less than -- about 1 used vehicle per new. That went to 1.2x used to new and then 1.3x last year, and it's coming down a little bit. But we didn't have any new vehicles to sell, so we had to go out and acquire. We have something called We'll Buy Your Car, where we'll offer you money for your car. You don't have to trade with us. We sold 300,000 cars each year for last year and the year before, and we got about 100,000 each -- on average between the 2 years that we did just through We'll Buy Your Car. So that's something that the franchise dealers have changed. Pre-pandemic, we really didn't do that. They probably gave some more running room to some of the used car-only people, but this is a part of our business that has changed pretty significantly. If you look what we're making there per copy, it used to be $1,400 or so. We're at about $1,800. The selling price of vehicles has gone up probably from around low 20s or $20,000 up to about $30,000, $28,000 or so. So pricing has gone up, too. Yes. Financing rates are higher in terms of what you're doing. Our penetration, so on the CFS, if you look at it here, you can see that we have that $2,800. The split between product base and financing, now is -- it was like -- we were below [ 70% ] that was product-based, now it's above [ 70% ]. So our attachment rate of products has really helped. On the finance penetration, it was high at the beginning of last year and worked its way down in the fourth quarter, and it's been pretty stable at that level going forward now. We saw more people come in with their own financing, some through credit unions and some who are buying using cash. So it seems to have leveled out here. But obviously, with interest rates being higher, rates have gone up quite a bit. So it's -- you see that. So for this CFS, the products that we'll have in there, the $2,800 a copy there includes both new and used. We attach more on the new vehicles. You don't need dent protection as much on the used vehicle. Some of them, you're not going to get that. But what we're finding is as the price of vehicles have gone up and people are keeping them for longer, there's a good value proposition for us to offer them things for prepaid maintenance or different things for the appearance of the vehicle. This SG&A as a percentage of gross historically was 72%. We saw that where it got down to 58%. A lot of that, you had higher gross profit, which helped that. We're seeing that normalize. But we actually took some good costs out of the system as well. Advertising has been moving higher. And we did -- we spent quite a bit last quarter on the We'll Buy Your Car to get our used car inventory up so we could have more to sell there. And adjusted operating margin's significantly higher than we were in the pre-pandemic. So that's kind of us in a nutshell. And from a strategic standpoint, what we're doing is we're working on just the whole life value of the customer. We want to deal with you more frequently and get a bigger share of the wallet there. We recently hired a CMO who came over from Macy's. He led their loyalty program over there. So we're looking at the industry in a nontraditional way, at the same time, big focus on operating excellence and what we're doing at our stores to make sure that we're running things right and taking care of the customer. We mentioned on our last call that almost 50% of our customers are one-and-done, so they'll buy from us and we won't see them again. And so there's a really big opportunity for us to make it more convenient for people to come into the dealership and get serviced. We've also bought a company called RepairSmith, which is a mobile repair and diagnostics company. So we've got -- a big van will roll out. We can change your oil, do some basic maintenance for you there, also run a lot of the diagnostics. We think that, that will help to feed our After-Sales business and also create better loyalty. If you live a long ways from the dealership, not that convenient to get there, we'll come and see you. It also has a fleet business, which is really good. We'll go out and service fleets for that. So that's kind of AutoNation in a nutshell. Welcome any other questions you guys might have. Yes?

[indiscernible]

Yes. So if you look at it there, that's on this new side here. So this just shows the average, if you go back then, was just under $17 million from 2013 to 2019, and we're tracking right now about mid-15s. It's a little over-indexed right now to the fleet side of things because they are replenishing those fleets. And the question -- there's kind of mixed signals in terms of the economy, and you look at things that are good for the auto industry, things that are bad for the auto industry. So it's not all green lights. There's a few flashing yellows that are a little bit of a concern but not massively. So we have some pent-up demand from that. Does anyone know what the average age of a vehicle is on the road now? 12.5, yes, yes, yes. 12.5. So that's an awful lot in -- out there. Yes?

[indiscernible]

The lifespan, like how long are people are keeping it? Or -- yes. Yes, it's a lot better product. It's the -- yes, yes. And that's a big thing. If you're going to keep it, most people when you look at the dealership, I'm going to pay a little bit more but I'm going to get better service on that and somebody is staying behind it. There's great people who do stuff that aren't at the franchise dealerships. But we see that as a good opportunity for us to extend into that more where you'll get your vehicle serviced for us longer. But you need to make it convenient and they need to see the value when you're doing it. Yes?

[indiscernible]

Yes, there's a microcosm of that really going on in the U.K. right now where you can see it with some of the dealerships over there. The model can work. You just -- we need to be able to make a margin on it. If we don't have to hold the inventory, we don't have a cost to that, we can get good asset turnover on it. That's not that problematic. The bigger question I would have is if you look a couple of years ago, there were 23 different electric vehicles you could buy in the U.S. I think the introduction this year's 40 new plates, and there'll be 50 or so next year. It's supposed to get up to like 230 or something in a couple of years. So will they differentiate themselves in the marketplace? Or will they need somebody to actually help sell them to the consumer? We've seen that California sales are quite high in terms of electric vehicles, but you've got both the federal aid there as well as some state aid money on it that gets the price down on those vehicles. Some of the more expensive electric vehicles haven't been selling all that well. We haven't made any public comments on it, but one of our big competitors mentioned a brand. You can go to our website. You want to buy $100,000 electric vehicle? I can get you in touch with some people here. The big question there will be what are we able to do from a CFS side of things? Can we still attach product, services and things like that to it? There's something called OTA, over-the-air. So you've got some of the updates that are going to happen from the software side of things. What we found -- and we've been selling electric cars and hybrids for a number of years, just given our brand mix. The first couple of years, it's lower in terms of the maintenance that you have but then it does go up later, so it's not that disparate from an ICE vehicle. But you also have a lot better loyalty. And I know I'm switching topics from what you asked. But the loyalty of them coming back, you don't have an independent aftermarket that's up there at this point that can take care of those. So we'll see what happens in terms of that direct to consumer. You mentioned franchise laws kind of in passing, but they actually are a pretty big deal. In some places, they've actually strengthened them a little bit in terms of what it means for the dealer, dealer body at Florida being one of the states that's been that, probably because there's a lot of people that have boats that I see go by the river in Fort Lauderdale that live down there. So yes.

[indiscernible]

[indiscernible] Yes, there's a lot being done on that. Ford wants -- Ford was pretty forward-thinking in terms of what they want the dealers to do from a charging standpoint. And do you have a public charging station available? One of the problems that -- you ever try to go to a car dealership at night? You can't get your vehicle in, right? Because you got to gate it so it's there. So if that were the case, would we have to then put something out by the road to make it happen? Or just how exactly would that work? And we're looking at that. Haven't ruled it out as something that we're doing. Right now, we're more focused on making sure that we get the -- we need to get -- meet each OEM's requirements to what's required. Because they come to us, we got to make sure they're charged 100% before they -- we give them to the consumer. Some of the luxury brands want to make sure that you give it back to them charged, which -- we didn't have to fill up a fuel tank, but for some reason, you got to give somebody a full charge when it goes back. I don't know how that makes sense, but it's something we're looking at as we think through just how do you take care of the consumer and what other transportation needs could make some sense. But there's a lot of bigger players in there just solely focused on that, too. Yes?

[indiscernible]

Yes, in terms of what -- how the franchise piece of that works, I mean, all the dealers, we all make money on the parts and service side of the business. So for them to try to move around us, I think, would be difficult. They'd get some pushback on that. The good thing about the diagnostics and the things that are available, though, is you can see what's wrong with the vehicle more clearly before it actually comes in. So from a convenience standpoint for the consumer, you're going to have the parts ready, you can have the right techs ready so that when it's in, you're not having to figure out what's wrong with it. So that could push more to the dealers, given our ability to -- we have really trained technicians, and you got to -- you get somebody certified. I was out in Vegas and we had -- there was a guy working on one of the Hummers in the fall when it had just gotten out there, and he told me he can't even touch the Chevy Bolt because he's not certified on those. So they could set something like that up. The question is would their shareholders be willing to do that, let them do that? And how much would it cost them, given the fact that there's 15,000 dealerships across the U.S. Yes?

[indiscernible]

Yes. When we -- what we've seen, and it's a different subset that we're going to have here going forward, by year 4, there wasn't much of a difference. Earlier on, there was -- you didn't spend as much on the electric vehicles as you would see. The other question is going to be as you start to have more end-of-life vehicles coming in with batteries and how that's going to be handled and what the opportunities could be there for the dealers to participate in that as well. I mentioned how many products are being launched. My background is that we're Tier 1 suppliers to the OEMs. I worked at Chrysler before that. Any time you're launching a vehicle, something is going to go wrong and you're going to have to go fix. And with all these products that are coming, that's something that -- we're going to have some recalls and things like that for a while. But eventually, if the vehicles become better built and there's not as much needed work for us, we're going to have to make sure that we're doing a much better job of retaining the customer to stay in a good spot. Yes?

[indiscernible]

Yes. I mean, the question is, could you make money on it? You might. Gas stations tend to make more money on what they sell in the stores as opposed to the gas, so if that's a starting point for it. You could see a world where people want to go into the dealer and charge their car, but you're seeing a lot of other places where they're putting it in at Walmarts, places like that where you're naturally going to go and be driving your vehicle, which might fit a little bit better. For the Ford program, there were -- they offered -- you could either be the top tier, which would require about a $1.2 million investment. You could be in the mid-tier, which would be about $0.5 million investment, or you could say I'm not investing and then you don't get any electric vehicles. Some parts of the country, that's a fine equation because there are some parts where it's not really practical to have an electric car, and they wouldn't be losing much in doing that. We didn't announce specifically how many dealerships were in which categories. Most of them were at the higher level, and then we've got some at the lower level. And then we just saw the announcement that you saw probably too, where Tesla, GM, Ford, all kind of making sure we use the same plug and all that. So we're still working through that in terms of how it's going to work. But it's a pretty significant investment that we're having to make in getting the vehicle -- getting ready for charging. And you also need bays that can lift something that's heavier. So you might not necessarily have that, and they're a little bit wider too. So it's a pretty big investment in terms of getting people certified as well as what you need to do from a capital standpoint.

[indiscernible]

Well, EV is going to go up. I don't -- some people are calling for it to be 25% in the next couple of years. I personally would bet the under on that. I think there's -- we're going to run into production snags and other things that are going to slow things down. Years ago, we were always talking about how electric -- electronics were going to -- there was -- all these electronics were going to be coming in the vehicle, and it was always like 7 years out, 7 years out, 7 years out. You hit the global financial crisis, and if you look at a vehicle that was made pre-2010 or after 2010, I mean, take premium luxury to the side, just what's included in things from a safety standpoint now. So it hits, and eventually, if they -- things will get to more and more electric. Some of the OEMs are playing a little different strategy. One of the Japanese is saying we're going to be 1/3 hybrid, we're going to be 1/3 electric, we're going to be 1/3 ICE. They actually happen to be very good at hybrids. So some of the other guys don't have as good of a product there. So I think that there's always going to be internal combustion engines here. It might just be the wealthy that get them in terms of to have that vehicle as opposed to an electric, but I don't see where the internal combustion engine is going away anytime soon. Yes?

[indiscernible]

Yes. So we've been the biggest for a long time. And so we talked about franchise laws. The other F is framework agreements. So each one of the OEMs has different thoughts in terms of how many stores you can have, how close those stores can be to each other. And so we, given our size, have bumped up against some of those. We also historically had a CEO who was pretty consistent in terms of his thoughts about us having too much inventory, which was a true statement. And I don't think that necessarily endeared us to some of the manufacturers. Now with Mike Manley as the CEO, he understands the factory side of things. So we're doing a lot of the things in terms of customer service and keeping -- paying close attention to what the OEMs require of us to put us in a position where if there's assets that we want to buy, that we can go ahead and do that. But it hasn't been a big part of our play. And even when we buy stores, we'll fly them all under the AutoNation brand with the exception of premium luxury, which they won't allow you to do that. So we've got the Mercedes-Benz in Delray and the BMW right next to it. Those aren't AutoNation stores. But the Cadillac dealership in West Palm is an AutoNation. We've got a couple of stores here, too, that you'll see that -- AutoNation Honda, AutoNation Chevy, AutoNation Ford.

[indiscernible]

Four minutes early. Well, thanks for your time. Appreciate your interest and enjoy the rest of this hot, humid day.