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

All right. Moving along, when we think about companies that have excelled in their ability to both generate cash and return that value to shareholders. AutoNation stands above most. The company is one of the largest retailers of new and used vehicles in the U.S. based in Fort Lauderdale. With me today is Derek Fiebig, who is -- leads the Investor Relations charge at AutoNation has been a very big supporter of this conference for some time. The company has 43 million shares. And just to give some numbers behind that, 5 years ago, that number was 89 million shares. So it's just under 43 million shares at around $130, about a $5.6 billion equity cap. It's just under $4 billion of net debt. So total enterprise value just under $10 billion. So Derek, we'll get right into Q&A as soon as I can back up.

Okay.

So let's start broadly. Just the selling environment that you're seeing, we heard from Experian talking about the burdens on consumers with increased financing. Yes, we've seen SAAR continue to be actually pretty decent in the mid 16 -- or mid-15 and 16s. What are your thoughts on the buying environment at present?

Yes. I think, Brian, if you step back and look at what's going on with the SAAR, the retail SAAR, which is really more appropriate to us. That's tracking probably about 10% below where it was. And we have seen some healthy levels there. I think there's a little bit of -- you've got some pent-up demand there. You've got a car park, as you guys mentioned earlier, it's 12.5 years old. So it's holding up pretty steady. You have had obviously higher prices for vehicles that the consumers had to adjust to. And we're seeing that. There's been limited availability on the import side of things. Toyota and Honda are both pretty big shops for us. And we started a little bit more availability there. We were sub 10 days for a long time. And I think we have 5 for Toyota going back for quite some time. So it's good to have a little more availability. As you know, they sell passenger cars, too, which took typically a little better price point. So that's helping. So net-net, consumers hanging in there. It's -- we're still being able to get the people financed in the vehicles.

Just to help the audience understand maybe your business mix versus others, domestic versus luxury versus import. Can you just talk about that just so that they understand it.

Yes. I mean, roughly, it's -- the round number is kind of 1/3, 1/3, 1/3. We're probably a little bit less on the domestic side. I think that's probably about 25%. So It's a good mix of the business across the country. We have good relationships, obviously, with most of the -- most all -- as we participate with them.

The one thing I want to steal from the Experian presentation is just on leasing. And that it's been an important component of really the retail business for some time. Talk about what you're seeing there and maybe some of the factors that are driving the lease penetration for you?

Yes, clearly, it's down a lot from where it was pre-pandemic. We're seeing -- the leasing used to be, you look at it, you could only had to pay for half the vehicle, which gets the monthly payment down for things. The OEMs in the past have participated quite a bit from lease I mentioned and things like that to help to support that price payment for people. Based on where demand has been and where supply has been that hasn't been necessary to do. But if you think about the longer term in terms of things that you could use to spur demand, higher leasing is something that could clearly help on that front.

I've spent a lot of time today talking about just mix of business and particularly gross. But I also want to hit on 2 topics before we get there. One is impact from the UAW strike looks like we're heading towards a conclusion here, but any impacts that you've seen so far?

Yes. It's -- start first with the new vehicle availability. We had decent availability of product across the models that were impacted by that. So no real impact there. The -- we -- obviously, during the pandemic, we were selling a lot less [indiscernible] supply than we are now. So we've grown accustomed to be able to sell at lower levels there. On the parts and service side, I think that when they took down the parts depots, that was probably a little more meaningful. We did what we could to get ahead and position ourselves, probably had some deferrals of things that will get pushed out. But net-net, when you look at how bad some people are looking for the strike impact to be. For us, not really much of an impact. And we benefit there, too, that domestic piece is only 25% of our business. So you got to peel that back and then peel back to what the parts and service are after sales as we call it is and then the impacted vehicles on it. So a little bit of headwind probably, but nothing that's going to be massive.

More of a delay, right, as far as...

Yes, eventually, they're going to go back and get those vehicles serviced and we'll get them turned. So that's not a bad thing.

We've had a lot of conversation about electric vehicles the last 1.5 days. Clearly, the mood seems to be a bit of a softer demand level than maybe what many were anticipating. Can you just talk about what you're seeing and we can kind of dig in a little bit there?

Yes, a couple of things. We mentioned on our call last week that our base supply, which are about 30 for the overall company for EVs is at 60. So it's double. We've seen that -- you had some pockets of inventory that came on and weren't selling that well. We've seen where the OEMs have come in with some programs to try to help that product to [indiscernible] along a little bit. And -- but the higher-priced vehicles, it's a little more difficult than in some of the lower priced vehicles. Lower priced vehicles are qualified for the federal funds, which helps. And those are moving pretty quick. And at the end of the day, Brian, we are getting back to the whole affordability of a vehicle. And so if you've got a higher priced vehicle that's out there, it's -- there are certain buyers that will get it. Now the other dynamic that's happened with the electric side of things is the Tesla price cuts, which we saw this year. That -- if you're a buyer of a vehicle that's $100,000 versus somebody who's buying a vehicle that it's [ $40,000 ] or [ $50,000 ], the equation that you do in your head in terms of depreciation of an asset it's probably going to be a little more sophisticated. So you might be a little more concerned there. But as with everything, when you get a new product introduction and things start to happen, eventually, you'll reach an equillibrium there with the OEMs and the consumers are trying to find out what the right level of production is inventory and then at what price point things are going to move. So it's a big change that we have coming to the organization -- into the industry. But AutoNation, we've been around a long time. We know how to sell cars. We know how to service cars. We know how to sell used cars. So for us, I think when you look at what the impact is going to be, there's a lot of things that we can do in other parts of our business, which is great to have that diversification.

I agree with almost everything you said, you certainly know how to sell cars. Along those lines, I want to contextualize this, gross per new unit was just over $4,000 this past quarter and had been hovering in the high 5s, low 6s in the end of 2021 into 2022. We've obviously seen this compression. I think when we look at your stock, and that's what we're really here for. There's this push and pull in the market as to what normalization looks like on a gross per new unit and a gross per used unit rate ratio or -- not ratio, but just value amount. And then what that means for your earnings, right? You're trading at 6x earnings right now. It seems too low. Let's start the conversation there, and then we can just talk about where you think gross per new is going to head?

Yes. I think what it would be helpful to do is go back and look at where we've traded on a multiple basis over time. And over the last couple of years, that's come down because given supply and demand, we've seen a lot higher grosses on the front end there for cars on the vehicle side of things. I think we traded 12x during 2008, 2009 then I think it went up to like 15x forward PE and then kind of came down to 10. So we're trading at a lot lower value here. If I go back to 2019, over that time frame, we've also expanded our After-Sales business, which is our parts and service business. By -- the gross profit, there has grown by $500 million over that time frame. Now that business seems to be a lot more like some of the aftermarket business companies that you have, and I don't know what multiple they trade on, but we've shifted the business quite a bit. So I mean, we could argue what that might be worth in terms of the stock price there. We have seen where the gross profit has come down. What happened was you had inventory came off and you had really good demand and so that inventory got squeezed quite a bit. It's been slowly coming up -- and as that comes up, you've got greater availability of vehicles and absent any shifts in demand, that's going to shift what the price point is going to be for the consumer. So we look at the percentage of vehicles that we sell at or above MSRP. And so if I go back pre-pandemic, I think that number is probably about 10%. We've got a few vehicles that will sell above MSRP. So these are going to be special limited edition vehicles that the OEMs know that if you buy it, you're going to be able to turn it some place out. So we've got those. That's a small number, maybe 1%, 2%. The -- so then you've got like, so call it like 8% or so that would have been at MSRP. So we had about 90% that were below MSRP. That number got up to -- we were about 1/3 of the vehicles were being sold below MSRP last year. [indiscernible]

[indiscernible]

Yes, yes. So -- and that number is now at about 60. So you're getting a shift where you MSRP, you've got dealer invoice. So that's the difference there. And as that moves through as you get greater availability, if there's 1 car to be bought, the price is the price. If there's 30 cars to be bought, you're going to have a lot of cars that go out on the street is going to have a number of cars, too. So you have to -- the consumer is going to have a little more favorable terms, I think, at that point.

I just looked at my model at the end of 2009, you had 172 million shares outstanding. There's 42.8 million now. So...

That was 2009, you said '19. [indiscernible] was right.

I know that. But no, but when we were talking about -- you said where you were trading during the financial crisis that was down, you had a significant higher share count. Anyway, I'll move longer. So $4,000 in new gross -- market seems to think we're heading back towards $2000. Maybe let's talk about why that's not going to be the case?

Yes. I mean it's -- if you look at it, one of the things that you could say is you look at the average selling price of the vehicle. So -- and Melinda covered this in her presentation earlier today, we've seen our average selling price go from under $40,000 to $50,000 now. You look at what the percentage basis that we've seen in terms of what our new GPUs have been. The lowest that got to is like 4.4% in 2018, and I think it was 4.5% in '19. So it's going to be a balance between what the dollar amount is and what the margin is on that. So you've got a 25% increase in the selling price of the vehicle. So I think that's something you really can't ignore. The other piece that is out there is just how the OEMs are going to act. We've had a situation here where they've been able to get inventory levels down, which has been good for them. And that's set things up where they've been able to make money, more money. They haven't had to incentivize vehicles in a way they had pre-pandemic. So will they limit production and inventory? That's another question. And then obviously, the other side is just what happens on the consumer side of things, just where the demand is. But it's been a good time here to be in this business, and it's going to continue to be a good time in the business. One of the things that we've done, too, is we've -- a lot of their guys call it F&I, but we call it our CFS. So we've taken that up significantly as well, too. So that will be -- get a prepaid maintenance of other things. But as people are keeping their cars for longer, these are products that have more value. So if you're going to buy a car and keep it, you probably are going to want dent protection. You're probably going to want appearance protection and things like that. And so our team's really done doing a nice job of selling into the consumer things that are of value to them as their ownership lengthened.

Curiosity, have you ever done the stress testing as far as your own earnings -- what your earnings might look like if you see any more compression on the new side?

Yes. I mean we've done it. I don't want to put a number out there just because then the people might think that that's our number. But if you wanted to do in the number, what you'd have to remember to do, if you take the new gross down, we pay commissions on that gross. So you probably want to bring your SG&A down by about 30% as it runs with that. And if you did that and tax affected it, I think you'd get to a number that would kind of be a head scratcher looking at where the valuation of the stock is right now.

Yes. Good news is you generate a ton of cash and you can buy back the stock for...

Yes. And we're going to continue to grow the -- look to grow the after business, and we've got a used car business that we're growing as well, too.

Yes. Let's talk about the retail used car business. I think you all did a terrific job this past quarter from a volume perspective and also holding margin. Talk about the strategy there, and particularly as it relates to sourcing.

Yes. For us, it's -- the big thing that we focus on is just what the internal sourcing numbers are. And that number has been above 90%. I think it was 96% this past quarter. We don't really like to go to the auctions because typically, when you go to the auction, when you're the winner, you've just paid more than everyone else who's a sophisticated buyer. So did you really win. But we'll do that on a limited basis as need be, but it's how we source the vehicles. We also have -- and have had this for a while where it's just one price. So the price is the price for our vehicles. What you see online is what you get. You're not going to be able to negotiate when you come into the dealership. That's -- we think that, that works the best in terms of customer satisfaction, and it's -- that's worked for us. We've also got the AN USA stores, which we continue to grow. I might want to cover on that a little bit later. But it's -- the other thing is just reconditioning of the vehicles. So when we recondition the used vehicles, that's actually recognized in our After-Sales, we call it internal, doing that efficiently and effectively helps, obviously, on that part of the business, but it's actually in the #2 that's included in the cost of the vehicle. So there's -- not all of our competitors do it that way. So you might want to make sure that you're benchmarking that appropriately.

One of the things that, as [indiscernible] mentioned, really successful, it's been an entrepreneurial business. You now have a captive finance company. It's small, but talk about how that's helping on the used vehicle side, particularly as rates have risen.