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Edited Transcript of AN earnings conference call or presentation 1-May-18 3:00pm GMT

Q1 2018 AutoNation Inc Earnings Call

FORT LAUDERDALE May 3, 2018 (Thomson StreetEvents) -- Edited Transcript of AutoNation Inc earnings conference call or presentation Tuesday, May 1, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cheryl Scully Miller

AutoNation, Inc. - Executive VP & CFO

* Lance Iserman

AutoNation, Inc. - Executive VP of Sales & COO

* Michael J. Jackson

AutoNation, Inc. - Chairman of the Board, CEO & President

* Robert Quartaro

* Scott Arnold

AutoNation, Inc. - EVP of Customer Care & Brand Extensions

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* David J. Tamberrino

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Hyong Lim

Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst

* James Joseph Albertine

Consumer Edge Research, LLC - Senior Analyst of Automotive & Managing Partner

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Michael David Montani

MoffettNathanson LLC - Senior Research Analyst

* Nicholas Todd Zangler

Stephens Inc., Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning. Welcome to AutoNation's First Quarter 2018 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. And if you have any objections, you may disconnect at this time.

Now I will turn the call over to Robert Quartaro, Vice President of Investor Relations for AutoNation. Sir, you may proceed.

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Robert Quartaro, [2]

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Thank you. Good morning, and welcome to AutoNation's First Quarter 2018 Conference Call and Webcast. Leading our call today will be Mike Jackson, our Chairman, Chief Executive Officer and President; Cheryl Miller, our Chief Financial Officer; Lance Iserman, our EVP of Sales and Chief Operating Officer; and Scott Arnold, our EVP of Customer Care and Brand Extensions. Following their remarks, we will open up the call for questions. Chris, Kate and 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, including economic conditions and changes in applicable regulations 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 in 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.

And now I'll turn the call over to AutoNation's Chairman, Chief Executive Officer and President, Mike Jackson.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [3]

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Good morning, and thank you for joining us. Today, we reported record first quarter earnings per share from continuing operations of $1.01, a 4% increase as compared to earnings per share from continuing operations of $0.97 for the same period in the prior year.

First quarter 2018 revenue totaled $5.3 billion, a 2% increase as compared to the same period in the prior year. Same-store revenue for the quarter was $5.2 billion compared to $5 billion in the year ago period, an increase of 3%. Same-store gross profit was $825 million for the quarter compared to $800 million in the first quarter of 2017, an increase of 3%. We're seeing significant results from our comprehensive brand extension strategy in several of our business sectors. The growth in our pre-owned business is largely due to continuing acceptance of our One Price strategy within the marketplace.

Same-store used vehicle gross profit was $82 million for the quarter, an increase of 9%. Same-store used vehicles retailed during the quarter were 60,300, an increase of 3%. Same-store customer financial services gross profit per vehicle retailed was an all-time high, $1,779, an increase of 8% compared to the same period a year ago.

Over the last 6 months, we believe we have nearly doubled the growth rate of our peer group average in customer care gross profit on a same-store basis due to the successful implementation of our brand extension initiatives. On a same-store basis, customer care gross profit was $378 million, an increase of 5%, led by a strong performance in customer pay, partially offset by headwinds in warranty due to difficult year-over-year comparisons in warranty and recall.

Customer pay gross was $158 million, up 8% year-over-year. Warranty gross was $79 million, up 2%, and collision gross was $33 million, up 6%. In the month of April, we opened 3 additional AutoNation Collision Centers in Texas, and we're also set to open an additional AutoNation Collision Center in Columbus, Georgia, by the end of May. This will bring our Collision Center network count to 80 nationwide, keeping AutoNation among the largest collision providers in the country. In May, the majority of our collision repair network will have access to the AutoNation Collision Parts. Our expanded offering allows us to better serve our internal and external customers as well as our insurance partners.

We'd also like to provide an update on our AutoNation USA stores and AutoNation Auctions. In March, we opened our fifth AutoNation USA store located in our Las Vegas market. The Phoenix store has ramped up relatively quickly. In April, its fourth month open, it has turned profitable and sold approximately 140 units.

We believe our brand and One Price strategy, single associate digital selling process and strong customer care capabilities will continue to position us for success at our AutoNation USA stores. We also opened our fourth AutoNation Auto Auction in Atlanta, Georgia, completing our wholesale network from coast to coast. The auctions provide a cost-effective outlet for our used vehicle operations.

Today, we announced the award of 4 Jaguar Land Rover add points, representing 8 Premium Luxury franchises, to be located in Florida, California, Texas and Maryland. The combined anticipated annual revenues of these 4 locations are approximately $400 million once all are fully operational. We continue our commitment to be the retail automotive industry leader in innovation, brand awareness and customer experience.

I'll now turn it over to our Executive Vice President and Chief Financial Officer, Cheryl Miller.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [4]

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Thank you, Mike, and good morning, ladies and gentlemen. For the first quarter, we reported net income from continuing operations of $93 million or $1.01 per share versus net income of $98 million or $0.97 per share during the first quarter of 2017, a 4% increase on a per-share basis. In the first quarter, revenue increased $121 million or 2% compared to the prior year, and gross profit grew $23 million or 3%.

SG&A as a percentage of gross profit was 74.4% for the quarter, which represents a 180 basis point increase compared to the year ago period. As discussed in our fourth quarter 2017 earnings call, the increase was largely driven by our brand extension investments, including our new aftermarket collision parts business, and the timing of stock comp expense as compared to the prior year.

Costs associated with our aftermarket collision business were comprised of both launch-related and ongoing supply chain costs, on which we expect leverage as selling increases throughout the year. For the full year 2018, we continue to expect SG&A as a percentage of gross profit to be roughly flat with full year 2017. That said, we expect the normalization of the rate to occur mostly during the back half of the year.

The provision for income tax in the quarter was $33 million or 26.1%, in line with our previous guidance, reflecting the benefit of the Tax Cuts and Jobs Act. Nonvehicle interest expense increased to $32 million compared to $29 million in the first quarter of 2017, driven primarily by higher average interest rates, partially resulting from the paydown of lower cost debt with the issuance of our senior notes issued in the fall of last year.

The negative impact of interest expense from the issuance of our senior notes is temporary, as lower-rate commercial paper was used to repay $400 million of 6.75% senior notes which matured on April 16, 2018. While our November 2017 bond offering resulted in a short period of higher average rates, the transaction effectively refinanced our 6.75% notes with lower-rate notes having a blended coupon of approximately 3.6%. At the end of March, we had $2.6 billion of nonvehicle debt, a decrease of $60 million compared to December 31, 2017.

Other operating income was $10 million in the first quarter of 2018 compared to $20 million in the prior year. Other operating income included net gains related to store and property divestitures in both periods, and the first quarter of 2017 also included payments received from certain manufacturers related to legal settlements and for the waiver of certain franchise protest rights.

During the first quarter, we repurchased 550,000 shares for $27 million at an average price of $48.38 per share. As announced in our press release today, our board authorized an additional $250 million for share repurchase, which currently gives us a total of approximately $314 million of remaining authorization. As of April 27, there were approximately 91 million shares outstanding. This does not include the dilutive impact of certain stock awards.

Capital expenditures were $79 million for the quarter compared to $74 million in the prior year. Capital expenditures are on an accrual basis, excluding operating lease buyouts and related asset sales.

Our leverage ratio was 2.8x at the end of the quarter, unchanged from the end of the fourth quarter of 2017. Our quarter end cash balance was $58 million, which, combined with our additional borrowing capacity, resulted in total liquidity of $1.4 billion at the end of March. AutoNation remains well positioned for long-term success due to our brand, scale, financial strength and disciplined capital allocation strategy.

I'll now turn the call back to Mike Jackson, our Chairman, Chief Executive Officer and President.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [5]

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Thank you, Cheryl. We continue to expect the industry vehicle sales to be approximately 16.8 million vehicles in 2018, with a significant shift between cars and trucks and with growth in the pre-owned market. With that, we'd be happy to answer any and all of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bret Jordan with Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [2]

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(inaudible) in the Texas market, whether the energy cycle is improving there.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [3]

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We missed most of the question, unfortunately. Could you repeat it please?

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [4]

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So yes. Could you talk a little about what you're seeing on a regional basis, what you're seeing maybe in the Texas, California, Florida markets and whether the energy cycle is improving Texas?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [5]

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Lance, why don't you discuss that please?

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Lance Iserman, AutoNation, Inc. - Executive VP of Sales & COO [6]

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Yes, I think, in general, we're seeing improvement in Houston. So that's our big energy market. So it's definitely improving. And I think we're past the hurricane effect. So we're seeing normalized business and we're seeing good growth there in Houston and Corpus Christi.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [7]

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Okay. And then I guess, you talked about the parts availability in collision in May. Are you doing mechanical parts for the AutoNation USA service now too?

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Scott Arnold, AutoNation, Inc. - EVP of Customer Care & Brand Extensions [8]

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So this is Scott Arnold, and yes, we are.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [9]

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Okay. I guess, just a follow-up question on that. How have you seen service contract sales in AutoNation USA on the used side? Does it look like you're going to be driving much volumes through those bays?

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Lance Iserman, AutoNation, Inc. - Executive VP of Sales & COO [10]

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In terms of the sales -- this is Lance. In terms of the sales of service contracts, we're seeing penetration levels that match or beat our traditional stores, and Scott will answer the question on...

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Scott Arnold, AutoNation, Inc. - EVP of Customer Care & Brand Extensions [11]

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Yes. So this is Scott again, and yes, we will see that transition into our service bays there as well as our maintenance that we are doing on the vehicles, too.

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Lance Iserman, AutoNation, Inc. - Executive VP of Sales & COO [12]

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Yes. We also give -- in our USA stores, we also give the -- with each purchase, a -- maintenance basically for the first 3 months, so that we help drive our customers back to our AN USA stores. So that includes oil changes, tire rotations, et cetera.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [13]

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Okay. Have you decided how broadly you're going to stake the parts business? I mean, how -- I guess, maybe talk about maybe inventory that you're committing to the collision and mechanical parts and how broadly staked -- what kind of inventory turns you think you're going to see in those parts businesses?

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Scott Arnold, AutoNation, Inc. - EVP of Customer Care & Brand Extensions [14]

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This is Scott again. So inventory to support the aftermarket collision parts is approximately $15 million. And we think that once we build up the momentum as we currently have in OE, that we'll see similar trends to the OE parts and very comfortable with that.

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Operator [15]

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Our next question is from Chris Bottiglieri with Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [16]

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I want to talk a little bit about SG&A. Maintained previous guidance calling for SG&A growth to be flat with the decel in 2H. So you're reiterating a pretty torrid pace, I would say, significant greenfield growth, albeit closing some underperformers. But how much of the deceleration in the back half to the 1 half is tied specifically to the launch-related costs, supply chain costs?

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [17]

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Yes. There's a couple of things there in SG&A. So if you remember, first, the timing of the stock comp expense was loaded into the first quarter versus the second quarter last year. So that's a drag to Q1. We certainly have sort of ramp costs related to the Collision Parts initiative, which will increase on a sell-in basis as you head to the back of the year. And as you guys know, seasonally, Q4 is always the best SG&A quarter. So we feel comfortable that the full year will still be flat with last year at about 72.5%, but certainly back-end loaded for those reasons.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [18]

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Got you, okay. And then on greenfield growth, can you maybe just provide us an update on -- I just can't remember the number on top of my head, but what's the pace of opening for AutoNation USA, Auctions and Collision Centers over the next, call it, 1 to 2 years?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [19]

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So on the USA stores, we have 5 up and running. And we always said that once we had 5 up and running, we would have a pause period where we define the ramp to profitability to decide which additional stores to open when. We do have additional sites located, purchased, permitted, but that will be a decision later this year at -- when we greenlight those stores. We're certainly very pleased with Phoenix that we took all the lessons learned from the first stores that opened in Texas, although it was very disruptive with all the hurricanes to really come to conclusion, but they were all applied in Phoenix and it did show a very quick ramp to profitability of 4 months. But we have to see if that can also be done in the other stores and, ultimately, what happens with the Texas stores. So I think it's later this year that we decide when and how many additional USA stores to build.

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Operator [20]

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Our next question is from Rick Nelson with Stephens.

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Nicholas Todd Zangler, Stephens Inc., Research Division - Research Associate [21]

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This is Nick Zangler on for Rick. Want to discuss the used -- or the unit sales cadence. Some peers had talked about a weak January and February performance, with strength then materializing in March and maybe accounting for 60% to 70% of earnings. Did you see a similar thing here? And if so, did you make operational adjustments during the January and February period that may have boosted performance in March or was that just an industry phenomenon?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [22]

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I think it's pretty much just an interesting industry phenomenon. January and February are always quirky months every year, and it's really Presidents' Day that is the opening of the annual sales that you can really make a judgment as to how the year is going to go. And we had a very strong period from late February through March, but that is absolutely traditional and expected. Business has remained fine for us into April. We have new vehicle sales plus 2% in April.

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Nicholas Todd Zangler, Stephens Inc., Research Division - Research Associate [23]

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Great. And then on the used vehicle side, obviously, used vehicle margin, pressured a bit in the quarter as expected. But with the impacts of the hurricane replacement demand well behind us now, can you kind of frame the outlook on the used vehicle backdrop for the rest of the year? And should we expect those GPUs to normalize on a go-forward basis?

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Lance Iserman, AutoNation, Inc. - Executive VP of Sales & COO [24]

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Yes, Nick. So I think that if you look at March, our used car margins were improved fairly strong from January and February. And as we talked about in Q4, we had some cleanup to do with oversupply in Houston, which is one of our biggest markets. So we oversupplied that market with used vehicles. So clearing that inventory impacted us slightly in January and February, but we had a very good improvement in March. And we -- so I think that's what we'll see going forward.

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Nicholas Todd Zangler, Stephens Inc., Research Division - Research Associate [25]

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Great. And then finally, just on F&I, I mean, another record level here, up $100 from your 2017 average and $200 from your 2016 average. Can you just talk a little bit about what's working here and where there's additional opportunity for further expansion?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [26]

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Yes. As discussed often, we felt the new vehicle market was going to be difficult. As far as gross margin production in new vehicles, it's very competitive. So hence, the brand extension. And that applies also to our customer financial services, where we developed AutoNation products, branded -- designed by us and branded AutoNation, and the customer acceptance has been excellent. And it's simply a higher percentage of consumers choosing our products. We haven't raised prices in any sense whatsoever. It's just a very good value with a product that they trust that's put us in an industry-leading position. And because it's based on a brand with a product that has tremendous value, we're very confident that we'll continue to be able to put up this excellent performance.

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Operator [27]

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Our next question comes from John Murphy with Bank of America.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [28]

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Just a first question, Mike, here on cap allocation. I mean, it seems like these -- the used stores are ramping pretty quickly. I mean, profitable at the fourth month is impressive. Is there a chance that this $500 million number that you kind of put out there when you started the initiative could potentially be significantly higher? And is that kind of a cap? Or is that just kind of the starting point, and if this is really successful, you keep going after it?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [29]

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Yes. That is like a first tranche that we're willing to invest in brand extension. That includes body shop, infrastructure for the parts business and the entire comprehensive effort and the auctions. And so on the USA stores, it includes 20, 25 stores, something like that.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [30]

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Yes.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [31]

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In -- within that $500 million. But as I discussed earlier, we will make a decision later this year on how far and how fast to go with the additional stores. Obviously, if we're willing to greenlight 25 stores, that would be a real indicator that we have it totally figured out and we have a high degree of confidence to deploy the capital. So we sort of have like 2 checkpoints, the first one being where we are exactly at the moment. We really want to understand the ramp in the different stores, with different locations, with different approaches, all lessons learned, (inaudible) to all stores, get all stores moving in the right direction, then begin building additional stores. And if all that goes according to plan, then you can really just continue open ended.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [32]

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And I think that's another reason it's great to have $1.4 billion of liquidity, so that if the opportunity is there, we'll certainly be ready to seize it. But as Mike points out, some of that ramp beyond the first 5 is already baked into the $500 million that we originally called out. And keep in mind that divestiture proceeds are also being used to fund that. So we're being very prudent with the way that we're looking at our portfolio overall.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [33]

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That's exactly as we said in -- when we declared the $500 million, we thought we'd have underperforming assets that could basically cover that $500 million, and that's proven to be the case with what we've done already and what we will continue to do in 2018, with little or no impact on EBITDA while having raised $500 million to redeploy in brand extension.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [34]

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It's encouraging. A second question around sort of the supply chain for AutoNation-branded parts. I mean, how are you operating? I understand the $50 million (sic) [$15 million] is where you're sort of targeting inventory. But where are these parts coming from? What's the relationship with the suppliers? How are terms with them? Will you gain leverage over time as you grow this business? Just trying to understand the supply chain on that side.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [35]

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Yes. Scott will give you some details. But I think we're in a unique position when we talk to vendors and suppliers, whether it's on service contracts or collision parts, that we have the scale to negotiate very good pricing. We understand the quality that we want, and the suppliers and the vendors are absolutely thrilled and happy to talk to us. They're looking forward to doing business, and there's great acceptance of the AutoNation brand on the consumer parts. So all of that's going extremely well now. We have, of course, execution issues as it's complex to make this all work. And Scott, why don't you talk a little bit about what's going on there?

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Scott Arnold, AutoNation, Inc. - EVP of Customer Care & Brand Extensions [36]

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Sure. As I stated earlier, the inventory level for ACP is about $15 million, and we did set up supply chain coming out of Taiwan, where most of the aftermarket collision parts are generated from, certainly lining ourselves up to meet the insurance industry's demands on those parts and set up the supply chain and infrastructure to distribute those into our OE parts wholesale that we do today, both to -- outside of -- our outside customers as well as our internal customer, our Collision Centers. And so as stated earlier, we believe it's a complement to our OE sales that we do today.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [37]

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And John, just to be clear, I think you might have said $50 million. Scott was saying $15 million. So just to be clear, it's $15 million of inventory currently.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [38]

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Thank you for that clarification. That's a big one. And then just lastly, on floor plan assistance, it looks like it was kind of flat year-over-year. It seems like that kind of makes sense generally, what the business is doing. But just curious, as rates rise, is there any flex in that floor plan assistance, anything that would be rate sensitive? And also, just in general, sort of the -- in that same vein, what is the relationship with like the -- with the auto makers at this point? I mean, is the industry is getting a little bit tougher? The plateau is kind of there, but it's actually declining a little bit. Just curious in general what the relationship is with the automakers, if it's better, worse or same as usual?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [39]

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This is Mike Jackson. So the minus 2% at retail is exactly what we expected, and I can't really forecast what the manufacturers are going to do on the fleet side and how fast everybody's going to turn their fleets. So inventory, I think we can do more to come down, and we will. We have not seen any additional assistance from the manufacturers on floor plan thus far. And we have some manufacturers that perennially push high inventory that really is not justifiable as these rates have begun to move. The free inventory is over, and so we are going to work on that the balance of this year.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [40]

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But John, if you look at net floor plan, it's about a $6 million headwind year-over-year in the quarter. But certainly, we've been expecting that. So we've always put into our forecast expected increases in rates. We'll continue to manage the inventory tightly. We also continue to work to negotiate spreads down, and we'll look carefully at floor plan providers and make moves where we need to, to make sure we minimize that spread. But to Mike's point, a lot of it is in the inventory management as well. And as rates rise, we continue to be extremely focused on that point.

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Operator [41]

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Our next question is from David Tamberrino with Goldman Sachs.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]

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Mike, towards the end of your comments, you kind of reiterated your expectations for that 16.8 million. I know we kind of just covered a little bit. But we're running a little bit faster than that so far through at least the first 4 months of the year. Incentives haven't really been layered on this year just yet from the OEMs. What gives you the confidence that you're going to see this sort of kind of back half decline or drift downwards to hit that 16.8 million?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [43]

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So you think the 16.8 million is optimistic? Is that what you're saying?

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [44]

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No, no. I'm just saying, so far for the year, we're at 17.1 million, 17.2-ish million, and the OEMs have barely spent on increased incentives to really juice the sales.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [45]

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Yes. So the variable is fleet. So the forecast on what's happening at retail, which is the world we live in, is spot on. Minus 2% is where the industry is through the first 3 months. I don't have April sales yet. I already told you our figures. They were good for April, plus 2%, but I have no idea where the industry is in April. So that's why I don't want to take the 16.8 million up because in the real world, retail is down 2%. And I can't predict what the manufacturers are going to do on fleet, and I can't predict what the rental car companies are going to do on fleet. So that is a variable. It -- there is a scenario where it could end up being 17 million because of fleet. Doesn't really help me, though, to say it's 17 million because that's not the world we live in. So that's how I see it.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [46]

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Okay, that's fair. I mean, we all end up having our opinions on this and get proven right or wrong. What have you seen from the retail consumer for the first couple of months and really in this March and April time period following tax reform, following folks getting their tax returns as well? Has there been any increased activity that's coincided? I think we talked about -- or you talked earlier about what the cadence looked like. Has that been the driving force behind some of that? Or just what are you seeing from that customer today?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [47]

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You have this -- you have to view it overall very positive when you consider that passenger car sales are down 10% and truck-based sales are up 10%. And the transaction price difference in our volume business, Cheryl, is how much per car? $6,000, $7,000?

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [48]

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Yes.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [49]

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$6,000, $7,000 a car difference.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [50]

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Higher in certain brands.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [51]

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Higher in certain brands on that shift. So if you put it in dollar terms, that's a very bullish statement on the part of the consumer that you have this shift going underway where the consumer is selecting a vehicle that, on average, is $6,000 more than a passenger car. So -- and then you have the substitution effect with all these nearly new leased vehicles, which the mix is beginning to reflect much more SUVs in that mix that's coming off lease, which is very attractive to consumer on a value basis. So you put it all together, it's a pretty positive story. I just think it's unrealistic to say that vehicle sales at retail are going to grow on top of all that.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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Got it. And maybe just lastly, I'll follow up on the -- with the point you just made. The mix of off-lease vehicles coming back is a little bit more skewed towards your crossovers and your SUVs this year. Do you expect to see any pressure from the new vehicle sales as you have some diversion away from new, if there's that nice late-model used coming off lease?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [53]

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That is the explanation for the minus 2%. Absent the off-lease vehicles, new car sales would still be growing. That is the issue with new vehicle sales and I said it 4 years ago. When leasing went over 30% of the mix, I said, "Be careful what you wish for. These things are all going to come back in record numbers, and it's going to offer the consumer a new choice." So if you combine the total market of new retail and pre-owned retail, the market is still growing. But you have a substitution effect or a cannibalization effect away from new into pre-owned because you have a nearly new segment in record numbers.

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Operator [54]

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Our next question is from Michael Montani with MoffettNathanson.

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Michael David Montani, MoffettNathanson LLC - Senior Research Analyst [55]

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Just wanted to ask, if I could, first on the Tax Cuts and Jobs Act. It's interesting you mentioned demand obviously started picking up in the back half of February because that's when a lot of the payroll tax withholdings would have shifted. So I'm just wondering if there's some incremental color you all can share on the new and used side in particular, either by regionality or by kind of consumer income levels, in terms of how that behavior may have changed or shifted.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [56]

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Well, the Premium Luxury business was excellent. So the high end is doing well. Even though the German manufacturers are -- the majority of their mix is passenger cars, they've done a great job of expanding their offering with SUVs and getting them to the marketplace in improved numbers, although we're still asking for more of a shift, even from the German manufacturers. But Premium Luxury has been very strong. And I don't know if I have much new to add geographically. Lance, can you think of anything?

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Lance Iserman, AutoNation, Inc. - Executive VP of Sales & COO [57]

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No, I don't think so, Mike. You covered the March effect. That's pretty universal. So whether that some of that's attributed to taxes, increased paycheck, et cetera, it's hard to tell because we've seen this dramatic increase in March over January and February historically.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [58]

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Yes, historically. And it really kicks off with Presidents' Day weekend still in February, runs strong through the end of March. Then you have a pause around everybody filing their taxes. You feel like you're never going to sell another car again. Then it takes off again in the middle of April, and we had a very good last 2 weeks of April, and now we're in the official spring market that will run into the summer.

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Michael David Montani, MoffettNathanson LLC - Senior Research Analyst [59]

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Okay, great. Just one housekeeping one. On the corporate and other line, there was an increase there, it looks like, of about $30 million. Just wondering if you all can give some additional color and clarity on what drove it and how to think about that the next couple of quarters.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [60]

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Yes. So that was really the AutoNation USA stores because that's where they fall in from a P&L perspective.

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Michael David Montani, MoffettNathanson LLC - Senior Research Analyst [61]

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Okay, understood. And then if I could, just can you provide any updated thinking around the Waymo partnership? I believe they did announce some incremental vehicles that they would be pursuing and some expansion. I know it's still early days, but anything you all can share there?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [62]

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We have a great relationship with Waymo. I did a fireside chat with John Krafcik at the National Automobile Dealers Association Convention in Vegas. You can YouTube it, and everything you want to know about autonomous, sharing, electric, John and I go through it. I wouldn't waste your time. I think it's very worthwhile. The relationship is strong. We have an iterative process where we find -- where we have added value for them. And the experience thus far is that we take on more and more. Everything is proceeding as we hoped. Cheryl, do we have additional -- any additional news to announce? We're very active in Phoenix.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [63]

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Yes. We're very active in Phoenix. We think, obviously, we have a great partnership with Jaguar, who's one of the manufacturers that Waymo recently announced a partnership coming out on the I-PACE list. So we're excited about the work we're currently doing and look forward to some potential additional future opportunities.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [64]

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So we hope to grow with Waymo. The relationship is good and we're pleased with it thus far. We're learning a lot, they're learning a lot and we think Waymo is the right partner.

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Operator [65]

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Our last question is from Armintas with Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [66]

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The share buybacks have historically been somewhat lumpy, but the stock is approaching levels where you did quite a bit of buybacks back in the third quarter of last year. Can you refresh us on your thought process around share buybacks and how we should think about that going forward?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [67]

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Yes, I like lumpy. That doesn't sound like a complementary word, but...

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [68]

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Opportunistic.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [69]

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I'm very proud on our lumpiness on our share repurchase. If you go back and look at it over time, I think the lumps are in the right place. That's the whole key. When we like the price, we've been known to buy aggressively. I would say, our first call on capital, of course, is the existing business and our brand extension. That is our priority. When the stock is particularly attractive though, we don't hesitate to purchase aggressively and opportunistically. We like being investment grade on the balance sheet. So we're very aware of that and would like to preserve it, if at all possible. And I think, Cheryl, you announced, our share count is down to 91 million, something like that.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [70]

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Yes, it's down to 91 million. And as many of you know, we've repurchased 80% of our shares back over time. Proud to say the average price of that is still under $20 a share. So we're -- continue to have the capacity. So we refreshed the authorization. We now have over $300 million in available authorization for the right opportunities. And as you know, we'll continue to monitor and put it in the context of our broader capital allocation strategy.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [71]

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My philosophy has always been that there's going to be periods of time where the stock price does not reflect the value that we believe is in the company and it can often be for understandable reasons, but we have a different point of view. In this case, like last summer, we (inaudible). We believe in brand extension. If you look at the results in the fourth quarter and the first quarter as far as how we are able to drive improvement in gross profits, it's quite compelling. And if that's not reflected in the share price, then that's a buying opportunity that we haven't hesitated to take advantage of.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [72]

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Okay. And then on the used car stand-alone business with AutoNation USA, you're not the only ones making a push into the business. And intuitively, it makes sense given where we are in the cycle and the defensive characteristics around used cars. But what's different today versus when you tried this before? What are some of the lessons learned that you've been able to apply and improve on?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [73]

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Yes. So that was back in '97, '98, '99, when I arrived. Unfortunately, the scale of the -- and pace of the rollout of the original AutoNation USA stores, back in the day, if you will, was completely wrong and completely unmanageable and unsustainable. While there were many aspects that absolutely had customer appeal, as far as running it profitably as how they did it, it was not -- there was no path to profitability. So we took all the lessons learned from those days, have changed the size of the store, the layout of the store, what's going to happen within the store. And the fact that we have one of the early stores already profitable means we've really done something very different than what happened back in '97, '98. My recollection is that business was never profitable with the way it was done. So -- but a lot of the other reasons are still the same. It's -- to round it off, it's pre-owned, it's -- at retail, it's a 40 million unit a year marketplace, that if you have a brand and a better customer experience and a better offering, you can take significant share in the pre-owned market from what the competitive choices are out there. And so we are not repeating the mistake of '98, '99, where you have a great idea and a great concept, but you move so fast that you don't have time to adapt and make adjustments and changes to figure out how it's all going to financially work. So we're going through that period right now in a very disciplined way. And I assure you, when we start moving faster, we will do it with a high degree of confidence. But for 5 stores now, that's the number we need to come to all our conclusions. We have indications of things that are very good. We have other stuff to work on, which we are. And when we get through all that, we'll give you an update and that we're moving to the next tranche of stores.

Thank you, everyone, for joining us today. There's a few more?

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Operator [74]

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We have a question from James Albertine with Consumer Edge.

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James Joseph Albertine, Consumer Edge Research, LLC - Senior Analyst of Automotive & Managing Partner [75]

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Mike, at least twice going back in history, you've had some very prescient, remarkable calls in preparation for what was coming. Pre-recession, obviously, in terms of the portfolio and scoping and getting out of certain brands. And then 3 years ago or so, calling sort of the peak margins in new vehicles, and we've seen continued erosion in that environment since. So with that in mind, as you sculpt this brand extension strategy and the sort of new vision for your portfolio, what's the vision for EBITDA margins? Because they clearly seem to have peaked 3 years ago or so with your margin commentary on grosses for new. And we want to get a sense for is this brand extension strategy about replacing what's been lost and getting back to 5-ish-percent? Or is this some vision where we can conceivably get somewhat higher than that in the long run?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [76]

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Well, there's no question that the revenue, gross margin, profit opportunities in the brand extension field are tremendous, absolutely much more compelling than anything we've ever done before in the history of the company. Now that's not to say it's easy to do and it's going to happen from one day to the next. But we are absolutely convinced that the strategic move was the right one, that branding was essential and that all the steps we are taking today in brand extension in all these different fields of business will open the doors to do even more. And we expect -- our vision is to be a player in the "do it for me" marketplace to the greatest extent possible. It's big, it's complex, but we have expertise, we have scale, we have brand and we are well on our way to bringing it to life within our own business first, and then moving to fields of opportunity beyond that. So we wouldn't have taken the pain and the risk for brand extension if we didn't feel that it was absolutely necessary in order to have a future where we can grow this business without being dependent upon the cycle and without being -- having this headwind on new vehicle front-end margins on the vehicle itself, which is like World War I trench warfare, and every year, you're going to give up another step in it. So we needed something that not only neutralizes that challenge, but at the end of the day, it puts us in a position to grow this business significantly despite that headwind. That's what we're doing. We're very optimistic and confident. We understand that we will have to demonstrate and show everybody over time, but this is not something that is a 1- or 2-year journey. This is something that's open ended in a 5-, 10-year horizon. So that's the strategic significance.

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Operator [77]

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Our next question is from David Lim with Wells Fargo.

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Hyong Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [78]

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Of the 5, Mike, did you say only one AutoNation USA store is currently profitable?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [79]

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That is correct.

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Hyong Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [80]

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And also, I know you get to see the product plans.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [81]

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By the way, that's quite something. I mean, to have one that's already profitable that was our latest store that -- within 4 months, that has all the learnings of the earlier stores, we'll take. Believe me.

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Hyong Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [82]

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So when will -- when is the outlook for the other 4 stores to become profitable? Will that take a little longer?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [83]

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I think sometime in the fall we'll have a better idea.

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Hyong Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [84]

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Got you, in the fall. And then I know also you get to see the product plans from your OEM partners way before the investment community. How would you characterize the robustness of the electrified product portfolio from like Mercedes, BMW, et cetera, relative to Tesla? And how much will you need to invest to retrain your technicians to work on this new wave of electrified vehicles.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [85]

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So I could not be more bullish on German Premium Luxury business. As you know, I have experience there, coming up on 45 years, and have been on product development committees with those companies. And I think they have the best pipeline I've ever seen. They are in a massive pivoting shift away from diesel investment into electrification in both pure electric and plug-in hybrid. And the vehicles I've seen are far superior to anything Tesla has, in my humble opinion. And they'll be arriving in the marketplace in the next year or 2 years and you will begin to see. If you look at just probably one of the closest one -- if you look at the Porsche, the Mission E, I mean, it is a spectacular vehicle that will have great success in the marketplace. Now as far as what it means to our customer care business, I think there will be far more plug-in hybrids than there will be pure electrics. And actually, the complexity on a plug-in hybrid is significantly higher than internal combustion engines, pure internal combustion engine. So it actually will enhance our business. So if I run the numbers out just say to 2030 and look at the vehicle-in-operation fleet in 2030, there will be more internal combustion engine/plug-in hybrids which also have internal combustion engine than there are today. So strategically, the units in operation that are ideal for our expertise on complex vehicles will be higher 10 years from now than it is today. Of course, maybe 10% of what's sold in 2030 is pure electric. And there, the maintenance requirements will be somewhat less. But then again, who can work on them will be fewer and fewer. So I'm very confident that there is no strategic threat whatsoever, and that as far as our ability to compete with Tesla, I think our position gets stronger starting in 2019 and it's open ended. And by the way, we also have very good electric vehicles from the volume manufacturers. The next-generation Leaf is excellent. The General Motors Bolt is absolutely first rate. So you can see that the OEM's pivot and commitment to electrification is irreversible. And I would say, if you add it all up, with everything that's going on, it's $150 billion of investment of the manufacturers in electrification over the next 5 years, something like that. So there's no turning back, and the vehicles are absolutely outstanding.

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Operator [86]

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We do have a follow-up now from Michael Montani from MoffettNathanson.

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Michael David Montani, MoffettNathanson LLC - Senior Research Analyst [87]

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Just wanted to ask on the Tax Cuts and Jobs Act. Initially, you all had mentioned retaining somewhere in the range, I believe, of 80% to 90% of that. Is that still the right way to think about it? And what have you seen from a competitive response in terms of new vehicle GPU and also on the used side since that's taken effect, if anything?

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [88]

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So this is Mike Jackson. So the competitive pressure on front-end margins purely associated with the vehicle, not counting our customer financial services, which we're using to counterbalance that pressure, has been in place for several years. It's nothing new. It's continuing. It's a combination of the transparency in the shopping tools that the customer has, combined with how the manufacturers structure the programs. I don't expect anything to change there, but I don't really see any new dynamic with the arrival of tax reform on that issue. Everything is an issue.

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Cheryl Scully Miller, AutoNation, Inc. - Executive VP & CFO [89]

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Yes. And keep in mind that the private caps, the majority of them are structured as pass-through entities. So they don't have the same direct benefit that we did as a public company based on the way we're organized. So keep in mind that the playing field for them didn't improve as dramatically as it did for us.

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Operator [90]

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Our last question at this time is a follow-up from Chris Bottiglieri.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [91]

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Just want to follow up from my earlier question. I'm trying to understand the balance between the excitement of [AutoNation USA] and just wanting to prove the concept. So I guess, can you tell us like how long it takes to open a USA store and an Auction, respectively? And since you're slowing this down to kind of fall to kind of reach this conclusion, how does it affect the pace of the 2025 openings? And maybe the answer is you already have this permitted and that you're flexible there, but just wanted to hear your thoughts.

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Michael J. Jackson, AutoNation, Inc. - Chairman of the Board, CEO & President [92]

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So within our whole brand extension portfolio and effort, our most mature is in customer financial services. And so therefore, I'm most excited about that because I have all the results in, and you see where the numbers are going and they continue to grow. Next comes -- in the sense that the gratification and the return comes so much faster. Then I look at the whole Collision Center effort and the parts effort, and that's extremely exciting in that I make investments in infrastructure and inventory. But we see the sales and we see the improvement in gross margins. We see the win-win. So there's a lot of instant gratification in that entire effort. Then I look at the Auctions and they turn profitable very quickly, but it's more a structure to run the entire pre-owned business. Then I look at brand extension in pre-owned, and I look at improved volume with improved gross margin and the additional capabilities [that takes]. So then I come to the USA stores. And we had the question earlier, I want to make sure before I build a lot of these that I have it figured out and that we do it right. So there, I want a more patient, disciplined approach and it's really -- and I can take that disciplined, patient approach because of everything I said before. So all the other brand extension is underway. It's paying off. It's going to be a benefit to this company. Before the year is over, it's going to be evident what it means to us and in the years ahead. And therefore, on the USA stores, where there's a lot of capital involved in [a sunk] facility, I really want to have it correct and know the sight line to profitability and whatever other issues are there before we move faster. So that's our approach. And I think it's -- I think that's a good plan. I think it makes a lot of sense.

All right. Thank you, everyone, for joining us today. Appreciate the conversation. Thank you.

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Operator [93]

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This concludes today's conference. Thank you all for joining.