Autonation, Inc. Q3 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the AutoNation third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during this session, you will need to press star, one on your telephone. Please be advised that today’s conference is being recorded. If you require any further assistance, please press star, zero. I would now like to turn the call over to Rob Quartaro, VP of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to AutoNation’s third quarter 2020 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer, and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions. I will be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Now I’ll turn the call over to AutoNation’s Chairman and Chief Executive Officer, Mike Jackson.

Thank you. Good morning everyone. Thank you for joining us today. AutoNation’s third quarter results were the best ever in the company’s history. We reported an all-time record adjusted EPS from continuing operations of $2.38, an increase of 102% compared to last year. In the third quarter, we saw solid demand and a strong pricing environment due to low interest rates and increased interest in vehicle ownership from consumers. With the higher demand and tight inventory, we adjusted pricing and were able to improve our margins. New vehicle inventory remains tight and we expect it will remain tight into ’21. For the quarter, same store total variable gross profit per vehicle retail increased $966 or 28% compared to the prior year. Same store new vehicle gross profit per vehicle retail increased $914 or 56%, and same store used vehicle gross profit per vehicle retail increased $602 or 43% compared to the prior year. With our continued focus on our We Will Buy Your Car initiative, we’ve more than doubled the number of vehicles we sourced compared to last quarter. Approximately 75% of the pre-owned units retailed are acquired from customers. For the third quarter, we acquired over 12,000 units with We Will Buy Your Car, and we’re currently sourcing over 4,000 units a month to both supplement our inventory as well as reduce our average used vehicle acquisition costs. During the third quarter, we continued to leverage our digital capabilities to drive cost reductions and increase efficiency for the business’ long-term success. These efforts combined with our strong gross profit growth drove significant SG&A leverage in the quarter. Adjusted SG&A as a percentage of gross profit was 64.4% in the third quarter of 2020, representing an 800 basis point improvement compared to the third quarter of 2019. We are committed to operating below 68% SG&A as a percent of gross profit on a long-term basis. Our AutoNation USA stores delivered another profitable quarter. The continued growth and strong execution at these stores solidified our decision to move forward with the AutoNation USA expansion announced in the second quarter. We plan to build over 100 AutoNation USA pre-owned stores with over 50 completed by the end of 2025. Our plan includes five new AutoNation USA stores to be open by the end of ’21. The AutoNation USA expansion will include extending AutoNation’s coast to coast footprint into new markets with our first new stores open in Austin and San Antonio in ’21. These stores will continue to leverage the AutoNation brand and its proven processes for a competitive advantage. With this expansion, we have set the long-term goal of selling over one million combined new and used retail units per year. Additional information regarding our AutoNation USA store expansion can be found in the third quarter 2020 earnings presentation on our Investor Relations website. I will now turn the call over to Joe, our Chief Financial Officer.

Thank you, Mike, and good morning everybody. As Mike just highlighted, today we reported adjusted net income from continuing operations of $212 million or $2.38 per share versus $106 million or $1.18 per share during the third quarter of 2019. This represents a 102% increase on a per-share basis. Third quarter 2020 adjusted results exclude charges of $28 million after tax or $0.31 per share associated with the previously announced exit of our aftermarket collision parts business and an unrealized loss of $2 million after tax or $0.02 per share associated with our equity investment in Vroom. During the third quarter, same store revenue was in line with the prior year as increases in used vehicle and customer financial services revenue were offset by declines in sales of new vehicles and customer care. Tight supply of new vehicles continued to limit sales volumes and lower miles driven has limited the pace of customer care recovery. That said, we continued to execute at an extremely high level during the quarter with adjusted same store gross profit increasing 13% year-over-year. Recovering demand coupled with limited new vehicle supply drove strong margins with same store total PVRs up $966 or 28% compared to the prior year. We were also able to grow our same store used unit sales, which were up 3% year-over-year as we successfully met strong demand with trade-in volume and inventory sourced through our We Will Buy Your Car program. Looking ahead, we expect a rebalancing of volume and vehicle margins as inventories recover next year. Our customer care business also continues to gradually improve. Adjusted same store customer care gross profit declined 2% in the quarter compared to the prior year. Moving to cost, and as Mike highlighted, adjusted SG&A as a percentage of gross profit was 64.4% for the third quarter, which represented an 800 basis point improvement compared to the year-ago period. This impressive performance was driven by the combination of strong cost discipline, leverage of our digital capabilities, and healthy vehicle margins. Looking ahead, we remain committed to maintaining expense discipline and we continue to target operating below 68% SG&A as a percentage of gross profit. A decline in floor plan interest expense also benefited our results. Floor plan interest expense decreased to $11 million compared to $33 million in the third quarter of 2019 due to both lower interest rates and lower average floor plan balances. This combined with lower non-vehicle interest expense, a slightly lower effective tax rate, and fewer shares outstanding generated adjusted EPS from continuing operations of $2.38, up 102%. Moving to the balance sheet and liquidity, our cash balance at quarter end was $351 million, which combined with our additional borrowing capacity resulted in total liquidity of $2.4 billion at the end of September. Our covenant leverage ratio of debt to EBITDA declined to 2.0 at the end of the third quarter, down from 2.3 times at the end of the second quarter. Including cash and used floor plan availability, our net leverage ratio was 1.4 times at quarter end. Looking ahead, we will continue our disciplined capital allocation strategy utilizing our strong balance sheet, robust cash flow generation, and ample liquidity to invest in our business and drive long-term shareholder value. To this end, today we are providing additional detail regarding the expansion of our AutoNation USA footprint, leveraging our established brand and proven success to further penetrate the attractive used vehicle market. Our AutoNation USA stores require upfront capital investment of about $10 million to $11 million per store, and we expect to build at least 50 additional stores by the end of 2025. Our AutoNation USA expansion is an exciting growth driver with each store expected to earn a pre-tax profit of almost $2.5 million annually once running at initial run rates. In addition, today we announced that our board of directors has increased our share repurchase authorization to $500 million. I will now turn the call back over to Mike.

Thank you Joe. Throughout this pandemic, AutoNation has remained committed to our associates and communities we live and work in. 2020 marks the fifth anniversary of our Drive Pink initiative. Our associates, our customers, and our partners have helped AutoNation reach a tremendous milestone of raising and contributing over $25 million in the fight against cancer. I want to thank our associates for all their efforts as we drive towards the next $25 million. I’m excited by the opportunities that are in front of us. We have built an industry-leading brand and are one of the largest and most recognized automotive retailers. We will capitalize on our strategic advantages, and we look forward to now taking your questions.

Your first question comes from Rajat Gupta with JP Morgan. Your line is open.

Hey, good morning everyone, and thanks for taking my questions. Also, congrats on a very strong quarter.

Thank you.

I just had a question on the gross margins, just to start with that. Clearly these levels do not seem to be sustainable longer term. Firstly, do you agree with that, and then when can we expect these levels to start moderating? Are you already starting to see that here early in the fourth quarter, or do you expect this to happen sometime middle of next year, fourth quarter next year? Any clarity on that would be helpful, and I then have a follow-up.

There has been a significant shift towards individual mobility due to the pandemic and shelter-in-place measures. This has led to increased demand for both pre-owned and new vehicles across all segments. The demand for individual retail is strong and expected to continue for several years. However, we currently lack the inventory to meet this demand, leading us to adjust pricing accordingly. We anticipate an improvement in availability next year. In the fourth quarter, we do not foresee any improvement in the supply chain, but we believe conditions will change in the first half of next year. At present, we are facing a considerable volume opportunity that cannot be fully realized due to inventory constraints, which has prompted our pricing adjustments. When supply increases, we expect the strong individual demand to remain. Interest rates are likely to support auto sales and the housing market for several years, and we remain optimistic about the overall auto retail market. While I can’t speak to fleet sales, I can confirm that demand for individual car purchases, both pre-owned and new, is exceptionally robust, outpacing supply. As such, our volume opportunities are limited, necessitating pricing adjustments. When supply improves, we will manage the situation effectively, resulting in increased unit sales.

Got it. It seems like you’re suggesting that you might be moving towards a slightly higher gross profit per unit level on both new and used, just structurally given how strong demand is expected to be. Is that fair?

I believe that's a reasonable assessment. The situation won't remain exactly as it is now, but similar to our digital initiatives that have established a new cost foundation over the past couple of years, we have committed to operating below 68%. For the near future, we anticipate increased retail demand, lower interest rates, and improved cost efficiency, making us more productive.

Got it. Just a follow-up on the AutoNation USA plan, the detail in the slide deck is really helpful. You talk about achieving a $2.4 million initial run rate. Could you give us a sense of what you’re expecting these stores to run at, just from a majority perspective? What’s the long-term potential within individual stores? I’m assuming it’s higher than the $2.4 million. Any color on that would be helpful.

Yes, so at $2.4 million, it’s an outstanding internal rate of return, and one of the best investments we can make as a company, leveraging on our brand, our pre-owned one price process. The way that we think about these USA stores is very much as point of sale delivery centers and speed to market reconditioning centers. It’s very cost effective rather than moving everything around and doing the reconditioning centrally. Our speed to market is a real strength. What we’re saying and what we’re publicly committing to is this number, which we’re already achieving today, is well above our return threshold of a 15% internal rate of return, and therefore that’s what we went public with. Obviously, we’re ambitious and a continuous improvement organization, and ultimately we will see if we can do more, but as far as a green light to build another 100 stores, we’re there.

I appreciate the information. I have one final question regarding SG&A. The dollar amounts for SG&A increased significantly from the second quarter to the third quarter, and it appears to be only slightly down year over year, perhaps by a couple of percent. Considering your previous announcement about a permanent reduction of $3,500 to $4,000, it seems like the SG&A numbers should be a bit lower. I'm wondering if this is the right run rate to use, or if there are still additional cost-cutting measures in place that aren't reflected in the SG&A here. That's all from me. Thank you very much.

Yes. Of course, the issue is that total gross is significantly higher than a year ago, and we are a commission-based system, so just with generating the higher gross we have higher commissions by definition. The challenge is really to be more efficient in total and have a lower percentage of payout so SG&A as a percent of gross could go down. I don’t want to restrict improving or increasing total amount of gross, but why don’t you give a little color on that, Joe, please?

Sure, thanks Mike. To expand on what Mike mentioned, there was a $105 million improvement in gross compared to last year and a reduction in SG&A of nearly $5 million, which translates to an 800 basis points improvement year-over-year. Regarding headcount, we are about 15% lower than at the beginning of the year, which impacts compensation. Specifically, compensation decreased by approximately 330 basis points year-over-year. Advertising is also down, about 120 basis points, and store comp and overhead, which I referenced last quarter, decreased by 360 basis points. We have leveraged our digital capabilities and sales process effectively. As Mike noted, with a significantly higher gross and elements of variable pay, despite having 15% fewer employees, we will see some pressure on total SG&A dollars, but there has been marked improvement as a percentage of growth. To return to your question about gross, I want to draw attention to two additional factors. First, while vehicle pricing is important, another major contributor is TFS, which has shown year-over-year improvement. Secondly, fixed gross is still recovering; it is adjusted to be down only 2%, and I believe that as vehicle usage increases, we will continue to see recovery, which should provide a comparative advantage.

Understood. Thanks for all the color, and good luck.

Thank you.

Your next question comes from Rick Nelson with Stephens. Your line is open.

Thanks, good morning. Just to follow up on the last question, as we look out to 2021 as supplies normalize, you give back on PPU, SG&A presumably widens, do you think you can grow in an environment like that, and if so, what would be the growth drivers?

Joe, you’ve done a lot of work on that.

Yes, so when you say growth drivers, you’re talking about top line, correct?

Talking revenue, or what?

It’s actually more in terms of earnings, but as you kind of move down the income statement.

Yes, so let’s start with gross. From a gross perspective, I think we’ve just addressed, I think you are going to see a rebalancing, which we recognize and will address. Again, I think continued benefit in areas like CFS and fixed gross will all continue to drive the gross profit. We really have adopted a very different mindset regarding costs, so now you get down into the cost lines, and with the commitment to keep the headcount low, again I mentioned we were 15% down at the beginning of the year. I’d say that we’ll continue to have leverage. We are committed to operate below 68%, and I think we’re going to continue to see an advantage when it come to the cost of floor plan, which has been a benefit. I think as Mike highlighted earlier, we see interest rates staying low for some sustained period of time. When you couple longer-term the USA expansion, I think that complements the existing franchise growth, and I would highlight if you go all the way down to EPS, we’ve announced this morning an increasing authorization of share repurchase which, if you will, think about operating leverage and financial leverage, we’re thinking about that in totality to drive ultimately down to growing EPS year over year.

Got you, thanks. That’s helpful. Regarding the GPUs we’re seeing in the third quarter, do you think they will carry over into the fourth quarter? I know seasonally you tend to have more premium luxury which results in higher GPUs, but do you believe they will maintain on a like-for-like basis?

Rick, we see no significant change in inventory levels or demand in the fourth quarter. I believe we will start to see movement in inventories next year. That's our perspective.

Okay, and then finally if I could ask on the AutoNation USA side, the big change in store growth outlook, I’m curious what’s driving the confidence and what do you think is unique about the AutoNation USA model compared to competitive formats.

It’s very addressing. We opened five pilot stores and committed to stop and have them perfected before we committed to a big rollout, and we were really disciplined and took the time and the effort to get those stores just right. I would say we had a lot of new ideas as far as customer process going into the USA stores that we put in place, and over time we realized that the processes we already have in our AutoNation stores are world class and what the customers really embrace and like, so we actually transformed our USA stores and all its processes - digital marketing, everything - to standard AutoNation, which we use, and it made a huge difference in taking out cost and being effective. We also have confidence that the brand can move into new markets and be embraced by customers, so with a very good outlook on understanding what we did right and what we did wrong, I use the expression, we paid our tuition, and it gives us a great deal of confidence to go forward. Within all that, you also have what I talked about before, that there has definitely been a shift in consumer mindset towards personal mobility rather than shared mobility, and interest rates are coming down, not going up, and interest rates are going to be low as far as the eye can see, the next several years. You put that all together and it’s clearly an opportunity that’s ready to be embraced, and we have it figured out, we’re highly confident, and off we go.

Great, thanks for all the color. Great quarter, and good luck as we push forward.

Thank you.

Your next question comes from John Murphy with Bank of America. Your line is open.

Good morning, everyone. I have a question for Mike regarding strategy. In the press release, there was mention of a goal to retail over a million new and used units. I'm curious about the current lack of new dealership acquisitions. If we assume that stays more or less the same and consider achieving a one-to-one ratio of new and used units in your dealerships, it seems that AutoNation USA would account for approximately a third of your total volume. It appears that new sales constitute about a third of that volume, used sales in your dealerships also around a third, and then AutoNation USA stores roughly a third. Is that estimation accurate? Additionally, how do you differentiate between used units in your franchise locations compared to those in AutoNation USA? Are they competing against each other, and how will that dynamic evolve as your business expands?

They’re very different in the sense that in a new vehicle store, it says AutoNation - let’s say it’s a Chevrolet new vehicle store. The average price point in that store for a new vehicle is $40,000, and you combine that with the pre-owned business that that store is doing, our average retail unit is around $30,000, something like that. Our price point in a USA store, which is strictly pre-owned, is $20,000. The other thing is the USA store, whereas people have a singular focus on, say, Chevy going into an AutoNation Chevy store, the USA store is universal. We sell everything at a different price point. The other thing we’ve learned is on We Will Buy Your Car - USA store is much more approachable and the customer doesn’t feel they’re going to be confronted about buying a new car, and they’re very comfortable to come in and sell us their car. We have an industry-leading process where we give them a check within an hour of the car coming in and being appraised, so it’s really quite remarkable, and the fact we have a centralized shared resource center in Texas makes all that possible, that we’re able to do that at lightning speed. Again, it’s part of our technical capability. So as far as growth for the future, it’s really a capital allocation journey. We’re going to generate remarkable amounts of capital and we’re going to apply them to building these USA stores. We’re going to do some new vehicle franchise acquisitions where appropriate with good return, and as announced, we’re very open to share repurchase. We think there’s an opportunity here. So if you put all those together, it’s a pretty compelling vision and strategy going forward. Joe, you’re key strategy officer also. Did I miss anything in your story?

No, I think you communicated it very effectively. It’s a balanced approach that we’re sticking to, and very thoughtful. Well said.

Maybe if I could just have a follow-up, though, as you do more retailing online, the customer gets more comfortable with that, is there any reason that the inventory at the AutoNation USA stores as well as your franchise stores couldn’t all be included in a single portal to drive a better offering, a wider offering to the customer?

We’re there already, correct, Joe?

Correct.

Yes, that’s done. That’s done. You go to AutoNation.com, it’s all there.

Okay, a quick housekeeping question. Everyone is discussing SG&A, but what portion of it is variable? Is there a rough guideline we can use to estimate that better as we move forward?

Maybe half. It's likely a rough estimate.

Got it, and then Mike, just lastly on the demand recovery here, I agree with you - it seems like there is some incremental stickiness to this demand recovery. I’m just curious, as you look at the release of some of the pent-up demand from the crisis months that we’ve actually been through for a while now, but the last couple months as you look at the 16.2 that we saw in September, do you think if you had a lot more inventory, you could have sold significantly more, and is there any potential for a couple months of payback before you re-base and the cycle really takes off, or do you think we are in take-off model for the cycle for the next three to five years? It’s what it seems like.

I don’t believe this is simply pent-up demand from the shelter-in-place period, although some of that may exist. This represents a fundamental shift in demand towards individual mobility. It's important to be cautious when looking at the total SAR, which includes fleet numbers, because those figures are affected by decreased travel and the downturn in the rental car business. My focus is on the retail selling rate, which is currently constrained by availability. As availability improves in the first and second quarters of next year, I expect that number to turn positive. I think we are beyond what some might refer to as a snapback or pent-up demand phase. Instead, there’s a reorientation and prioritization of household budgets. People are expressing a desire to move away from dense living environments and seek more space at home, possibly working from home more than they anticipated. They value the independence to choose when and how they travel, and many are hesitant to return to public transportation. This trend spans all price ranges, from affordable used cars to premium luxury vehicles. We're hearing this feedback consistently. Additionally, the current attractive interest rates serve as a catalyst for this shift in household spending. Families are cutting back on many expenditures, focusing more on their living situations and how they navigate their communities. These factors present positive outlooks for auto retail in the coming years.

Completely agree. Thank you very much for the time.

Excellent.

Thank you.

Your next question comes from Adam Jonas of Morgan Stanley. Your line is open.

Hey Mike. I have a question about your digital fulfillment. Can you tell us what percentage of your used vehicle sales are completely digitally fulfilled, meaning there is little or no interaction between the consumer and a dealer?

In our retail location?

Yes.

It’s a low percentage, and that’s where the consumer is happiest. They want to choose to do as much as they can digitally, and then at a certain point, they want to engage with a delivery center, or we deliver to the home.

So it is less than 1%? Is that correct?

Well, I’d say it’s low single digits. It’s low single digits.

Okay. I’m curious, Mike, have you used the Carvana website to buy a car or to see how it works? What do you think of that user experience? This isn't about the business model or the valuation, although I’m sure we’re all interested in their multiple. What do you think of their user experience for purchasing or selling a used car, and how will this be different as you roll out AutoNation USA?

I think it’s a very good experience; however, ours is better and the reputational scores, and Joe, maybe you have them there, and the net promoter scores of AutoNation are industry leading. We have a great experience and we’ve found the right line, and we’ll let the consumer decide where that line is. What I can tell you is where the consumer is happiest is right where AutoNation is, and we fully originate 45% of our business through the digital channel and then at some point, there’s a crossover and we let the customer decide where that crossover is. We give them a fabulous experience from that crossover, and they can move seamlessly back and forth. Our reputational scores and our net promoter scores, that’s exactly where the consumer is, and we now have a robust platform that’s capable to move wherever the consumer wants to go, as far as where that line gets drawn. But this leads into the decision as to why we’re building USA stores, because the customer wants a delivery center. They want a place to go to complete the transaction, and another benefit is our reconditioning costs are significantly lower and our speed to market is significantly higher by being close to market, rather than moving everything around multiple times, because we also care about making money at the end of the day. That’s another expectation we have. We have a double expectation - delight the customers, sell a lot of vehicles and make money. So that’s a harder, more arduous place to get, and we’re there, and that’s why we’re going to go out and build 100 USA stores.

That’s great, Mike. Just one last question from me regarding the culture and incentives related to the digital initiatives you’re heavily investing in and accelerating in the coming years, compared to the legacy stores or operations where your investment in people and systems is more focused on the brick and mortar side. Considering your shift to omnichannel, how do you address potential conflicts between a corporate digital initiative aimed at achieving shareholder returns and same-store efficiencies? How do you motivate the general managers at the brick and mortar stores to adopt a channel-agnostic approach, so they remain indifferent to whether sales are generated in-store for a commission or through a completely online process? Thank you.

Yes, transitioning to an omnichannel experience was a significant cultural challenge for us. We invested heavily, as I mentioned, and experienced a considerable period of adjustment. It was tough, disruptive, and required a lot of determination. We overcame those obstacles, and now we find ourselves in a much better position. One clear sign of our progress is that we have implemented a single pricing strategy for all pre-owned vehicles throughout the entire company, regardless of whether it’s in a traditional dealership or an AutoNation USA store. We have established the technical capability to maintain this consistent pricing across our inventory. Running an AutoNation USA store is now something that people genuinely aspire to, alongside the traditional new car business. While we will continue to focus on digital and technical improvements, we no longer need to invest at the same high levels as in previous years since we have already built a functioning system that we can enhance going forward. We have a solid understanding of our 9 million customers. For instance, if a parent buys a car for their daughter in California and then visits one of our dealerships in Miami the following week, we know the details of that previous transaction. Likewise, if they come in for service in New York but have a home in Florida, we are aware of their entire relationship and history with AutoNation, including their preferences and likely next purchases. This comprehensive understanding has transformed our marketing costs and improved our sales team's productivity. Essentially, we are operating on a unified platform, as one company and one brand, rather than as separate cultures or entities.

Thanks Mike.

Thank you.

Your next question comes from Bret Jordan with Jefferies. Your line is open.

Hey, good morning guys.

Morning.

On the We Will Buy strategy, could you talk to us about what percentage of the cars that you’re buying that are young and healthy enough to turn around and resell, and I guess whether there’s any trend in negative equity that’s preventing the vehicle owner from converting. And then I guess I’ll ask my follow-up question at the same time - are you seeing, given this demand for personal mobility, a reduction in volumes, folks not coming in to sell you their car because they want to keep them?

Joe, you want to take that?

Sure. From a procurement standpoint, I generally think that between 60% to 75% of our cars are acquired from customers, depending on whether it’s a franchise or a USA store. We have a much lower dependency on auctions. The program We Will Buy Your Car accounts for 10% to 20% of our acquisitions, with almost 20% in the USA and around 10% in franchises. This gives us a significant advantage compared to our peers. I don’t see anyone approaching our percentage of cars acquired from customers, which clearly benefits us when considering the value proposition we can offer to customers. Does that help to clarify?

Yes, it does. Are you seeing any trends that negative equity is preventing people from selling to you when they want to?

We have not seen that.

Nothing out of the ordinary. Nothing out of the ordinary.

But we continue to find growth in the program month over month, so we haven’t faced that obstacle.

Okay, so regarding the question about mobility demand, are you noticing the increase in demand for personal mobility leaning more towards used vehicles rather than new ones in 2021? Additionally, if you have any insights on where retail sales are headed in 2021, that would be helpful.

At the moment, demand is very strong across the board, and when customers can't find exactly what they want in new vehicles, we can show them pre-owned options, which they are willing to consider. This is driving additional demand in the pre-owned market. However, it's difficult to predict what will happen as availability of new vehicles improves. I'm hesitant to provide a retail SAR for next year because I'm still trying to understand the timing of plant operations and shipments. We've been in continual discussions with manufacturers since spring, but every shipment target has been missed. Therefore, I will believe it when I see it, and only then will I be able to make predictions. As I mentioned, I don’t expect any changes in the fourth quarter based on what I understand about upcoming deliveries, which leads us into the first quarter at best. Once the manufacturers consistently meet their shipping targets, we can start discussing new vehicle sales. I'm not concerned about demand; we will fulfill it either through volume or pricing, and we're good at balancing that. The timing of when we will see that crossover is uncertain, making it difficult to predict the retail SAR for next year under the current circumstances.

Right, thank you.

Your next question comes from David Whiston with Morningstar. Your line is open.

Thanks, good morning. I guess first on new vehicles, the ASP is up, unit volume is down, and I was just curious how much of that ASP increase and ultimately the increase in new vehicle gross profit is due to that higher ticket versus a mix shift to light trucks and the inventory shortage giving you pricing power.

Joe, you want to take that?

I can’t give you exact numbers, but clearly it’s been well documented - you’ve seen the shift going to trucks and SUVs. It has had a modest impact on the increased price per vehicle, and we clearly can see that trend continuing. Frankly, it’s one of the areas that we have the tightest inventory supply, and so in many ways here we are restricted by supply, not demand. I don’t see anything right now that’s likely to change that trend, particularly given what’s happening with gas prices, etc.

Okay, and on buybacks, if down the road you were to-basically buybacks were to be very difficult due to your float getting too low and whatnot, and some institutions not wanting to get rid of their shares, would you want to at that point start a dividend or would you prefer M&A?

I think our capital plan, the most likely capital plan is what I discussed earlier - investment in USA stores, acquisition of new vehicle franchises, and share repurchase. I don’t really see a change from that, do you, Joe? Your views?

No, I think we have too many good opportunities in front of us, the returns are too attractive, that until we feel we’ve exhausted those, I think the priorities that you’ve set, Mike, are the exact right ones.

Okay, and just one last question on products. As you know, GMC unveiled their Hummer pickup last night, and there’s a lot of automakers, legacy and start-ups, wanting to get into this very high end of the electric pickup market, including now you’re OEM partners with GM. That Hummer starts at $112,000 for the performance model. I’m just curious, one, your reaction to the product that you saw last night and that whole niche getting carved out, do you think that will ultimately be a really successful market because there’s just a lot of wealthy customers that want that type of vehicle?

The shift to electrification has begun, and there's no going back. We're thrilled to sell these vehicles, and the investment in the industry is impressive. Execution on the actual product remains crucial. You really need to get it right, so I have to say the Hummer announcement last night made me very happy. It’s a perfect example of the transformation from old General Motors to new General Motors. The Hummer is an amazing vehicle. In my opinion, they did an excellent job, reviving a name that was once discontinued to reintroduce it at the height of General Motors’ technical capabilities today. I believe it will be very successful. Of course, with that price point, you can earn good profits, but there are limits to the volume you can achieve. Still, it demonstrates the spirit and understanding needed for an electric vehicle to succeed. It’s not enough to simply incorporate some batteries and an electric motor; that approach won’t work. General Motors deserves commendation, especially GMC and Hummer. It genuinely made me smile. It was a memorable moment. The video showcasing the vehicle navigating the trail was astonishing—who came up with that idea? It’s exciting to witness this from General Motors, and I couldn't be happier. It truly made my evening.

I agree.

Then of course, we announced our earnings this morning, which made me feel also very good, so I’m having a good day between the Hummer and our earnings. I’m having a good day. You’ve got to admit, it’s a grand slam. It’s a grand slam for the company, it’s a grand slam for the brand, and customers will go nuts.

Yes, in 13 years, I’ve seen a lot of product unveilings, and I’ve never been more excited and enjoyed a video or unveiling as much as what I watched last night.

There you go! We’re brothers. We fully agree. We’re in completely different places, and then boom, there we are. And let me make a point - we sell them. I’m very excited about that. So here’s my point - we have great products coming from the manufacturers around electrification, whether it’s from the Taycan to the Hummer, and volume products that are getting better and better that we are excited to be in the electrification business, and our digital platform in the not-too-distant future will unveil the full range of electric vehicles that AutoNation has available and coming to the consumer. You just go to our site and you’re going to push on electric, and it’s all there from A to Z, including pre-owned Teslas. We’re excited.

All right, great. Well, thank you. Always appreciate your opinion.

Thank you.

Your last question comes from Stephanie Benjamin with SunTrust. Your line is open.

Hi, thanks for squeezing me in here.

Hey Stephanie.

I wanted to talk a little bit about used vehicle volumes. I know we talked a lot about where we stand with the new vehicles, but how are you feeling about your current used vehicle inventory levels, given it’s a pretty hot market, where you’re positioned now and going forward on the used side?

We’re actually doing a very good job and our speed to market is excellent. I think our big advantage is that 75% of what we retail, we acquire from consumers either through trades or direct purchases. This puts us in a very good position on the gross profit side and it’s very sustainable. Now do we think we could have sold even more if we had them? I think so, and that’s an ongoing discussion within the company. But of course, as we increase our footprint with USA stores, we’ll get significant growth there, and hence you put it all together and we feel ultimately AutoNation as a company and a brand will retail over a million vehicles in the U.S.

Got it. Regarding customer care performance, it continues to decline year over year, which you've attributed to the ongoing decrease in vehicle miles driven. Are there specific areas where you see strengths or weaknesses across your markets? Also, do you have any insights on when you anticipate this segment might return to at least a flat year-over-year performance? Thanks.

Joe, can you take that please?

Sure. Within customer care, probably not surprising an area that’s down a bit is collision, with just fewer people driving. What’s an interesting dynamic, though, is the average ticket really across the customer care portfolio has increased, so we’re seeing in general folks spending a little more money when they’re in. We’re seeing collision recover, but that has been a slower area to date, again just I think really driven by the miles. But if you looked the last couple of months, month to month to month, it is continued improvement, so that down 2% for the quarter, again if you think through the sequential improvement, the business is recovering and we do believe collision will be that final straw, if you will, as people continue to increase driving this fall and into the winter. That really is probably the only area that has just continued to lag a little bit versus our expectations.

Got it, thanks so much.

All right everyone, thank you for joining us today. We very much appreciate all your questions and inputs and ongoing discussions. Rob of course is available if you have any follow-up questions, we’ll try to get the answers for you. Thank you for joining us today.

This concludes today’s conference call. You may now disconnect.