AutoNation, Inc.

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 speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to turn the call over to Rob Quartar, 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 Lauer, 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. And now I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Thank you. Thank you. Good morning, everyone. Thank you for joining us today. WaterNation's third quarter results were the best ever in the company's history. We reported an all-time record quarter adjusted EPS for 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 we're 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 variables 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 prior year. With our continued focus on our We Will Buy Your Car initiative, we're more than double 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'll 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's long-term success. These efforts, combined with our strong gross profit growth, grow significant SG&A leverage in the quarter. Adjusted SG&A as a percentage gross profit was 64.4% in the third quarter of 2020, representing a 800 basis point improvement compared to the third quarter of 2019. We are committed to operating below 68% SG&A as a percentage gross profit on a long-term basis. Our AutoNation USA stores delivered another profitable quarter. The continued growth and strong execution at these stores solidify 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 opened 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 to open in Austin and San Antonio in 21. These stores will continue to leverage the AutoNation brand and its proven processes for competitive advantage. With this expansion, we have set the long-term goal of selling over 1 million combined new and used retail units per year, Additional information regarding our AutoNation USA stories mansion 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 two cents 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 continues 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 source through our We'll 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 costs, and as Mike highlighted, adjusted SG&A as percentage of gross profit was 64.4% for the third quarter, which represents 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% STNA 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 details 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 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 rate. 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 to 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 we're the largest and most recognized automotive retailer. We will capitalize on our strategic advantages, and we look forward to now taking your questions.

Ladies and gentlemen, to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Rajat Gupta with JP Morgan. Your line is open.

Hey, good morning, everyone, and thanks for taking my questions, and also congrats on a very strong quarter. Thank you. Yeah, I just had a question on the gross margins, just to start with that. I mean, clearly, like, these levels do not seem to be sustainable, you know, 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, like, middle of next year or post-quarter next year? Any clarity on that would be helpful.

Absolutely. Absolutely. So there has been a significant shift towards individual mobility as a result of the pandemic and shelter in place. And this has increased demand across the board from pre-owned through new in every segment. This individual retail demand is lasting. and will continue for the next several years. We do not have the inventory on the new side or on the pre-owned side to meet the demand that's out there. So we've adjusted pricing to balance the situation. Now, we expect availability to improve next year. Fourth quarter, we don't see any improvement in the pipeline whatsoever. But I think First quarter into the second quarter next year, I think it will happen. However, the way to think about it is we're leaving at the moment a significant volume opportunity that can't be realized because of inventory restrictions. Therefore, we adjusted pricing. So then we'll manage it as it goes the other way, that when availability improves, I fully expect – this individual demand to still be there. Interest rates are going to be supportive of auto sales and housing industry for the next several years. I don't see any change there. So we're bullish and optimistic about overall auto retail. The key word there is auto retail within the total auto industry. I'm not commenting about fleet and what happens over there. So That's not my specialty, but I can tell you when it comes to auto retail and people buying individual cars, both pre-owned and new, the demand is exceptionally strong in outstripped supply, and therefore our volume opportunities are restricted, and therefore we adjust it on the pricing side, and we will just, when that day comes, we will just manage it back in the other direction, but we will be selling more units.

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

I think that's fair. It's not going to be what it is right this moment. But just like on the cost side where we've – with our digital efforts have gotten to a new cost basis, and that's a couple years, several years underway. And we've publicly committed to run below 68%. So there's, for this foreseeable future, there's higher retail demand, there's lower interest rates, and we're on a better cost basis, and we're more productive and efficient. Got it. Within that, there's certain shifts that we'll have to manage. And we will.

Right, right. Just as a follow up, you know, on the Ordination USA plan, the details in the slide deck is really helpful. So you talk about, you know, achieving a 2.4 million initial run rate. Could you give us a sense of like, what you're expecting these stores to run at, you know, just from a maturity perspective? what's the long-term potential within these individual stores? I'm assuming it's higher than the $2.4 million. Any color on that would be helpful.

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. And 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. So 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.

Got it. Got it. That's helpful. Sorry, just one last one from me here on the SG&A side. You know, just looking at like the dollar amount of the SG&A, it went up significantly from the second quarter to the third quarter. And it looks like it's only slightly down year over year, if you see like a couple of percent. But based on what you've announced in the past, you know, around like three and a half to 4,000, you know, per minute, reduction, it seems like the dollar number for the SG&A should have been a little lower than that. I'm just curious as to like, if like all those, if this is like a good runway to use or there's still more cost cutting measures that are in place that are fully not reflected on the SG&A side yet. That'll be all.

Thanks so much. Yeah. Of course, the issue is that total gross is significantly higher than a year ago, and we are a commission-based system. So just without 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 SD&A is a percent of gross to go down. I don't want to restrict. improving or increasing total amount of gross. So why don't you give a little call on that, Joe, please?

Sure. Thanks, Mike. So when you think about that, and to kind of elaborate what Mike said, so you had $105 million improvement year-over-year in gross and actually a reduction in SG&A of almost $5 million. So you generate 800 basis points of improvement year-over-year. And if you look, you talked about heads, and heads are about 15% lower than they were at the beginning of the year. That flows through compensation, obviously, and compensation is down, if you break down that 800 basis points, compensation was down about 330 basis points year over year. Advertising continues to work down, down about 120 basis points year over year, and store comp and overhead, so the three buckets I outlined last quarter, down 360 basis points. We've continued to leverage digital capabilities in the sales process that, as Mike said, with a significantly higher growth and elements of variable pay, despite having 15% fewer employees, you are going to see some pressure on SGA total dollars, but as a percentage of growth, dramatic improvement. And Rajat, just to go back to your question on growth, there are two other elements I just want to highlight as you think about that. You talked about vehicle pricing, but recognize another significant contributor is CFS, which has continued to prove year over year. And the second component I'd highlight is fixed gross, which is still recovering on an adjusted basis down just 2%. But I do believe as people continue to increase usage of vehicles, we'll continue to see that recover, and that should be a tailwind on a comparative basis.

Understood. Thanks for all the color and good luck. Thank you.

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

Good morning, Rick. Thanks. Good morning, Mike. Just to follow up on the last discussion, as we look out to 2021, as supplies normalize, you give back on GPU. SG&A, you know, presumably widens. Do you think you can grow in an environment like that? And if so, what would be the growth drivers?

You know, you've done a lot of work on that.

Yeah, so when you say growth drivers, you're talking about top line, correct?

Are you talking revenue or what? in terms of earnings, but kind of move down the income statement.

Yeah, so let's start with gross, I think. And from a gross perspective, I think we've just addressed, I think you are gonna see a rebalancing, which we recognize and we'll 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 cost, so now you get down into the cost lines. And with the commitment to keep the headcount low, again, I mentioned we're 15% down at the beginning of the year. I see 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 comes to the cost of floor plan, which has been a benefit. And I think, as Mike highlighted earlier, we see interest rates staying low for some sustained period of time. And 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 increase in 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.

Gotcha. Thanks. That's helpful. So the GPUs that we're seeing here in 3Q, do you think those carrying into the fourth quarter? I know seasonally you do more premium luxury. which bring higher GPUs, but on a like-for-like basis, do you think they maintain?

Rick, we see no change in inventory levels or the demand level in the fourth quarter. I think we're into next year before inventories start to move.

That's our sense. Great. Okay. And then finally, if I could ask on the AutoNation USA side, the big change in the 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 interesting. 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. And 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 USA, standard AutoNation, which we use. And it made it 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, gives us a great deal of confidence to go forward. Within all that, you also have what I talked about before, that there's 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. So 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 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, guys. I just had a first question, Michael, on strategy. I mean, and when we look at the line in the press release of retailing over a million new and used units ultimately as the goal. I'm just curious. It seems like you're not doing a lot of new dealership acquisitions at the moment. So if we kind of hold that reasonably static and assume you get to one-to-one on new and used in your dealerships, it looks like AutoNation USA would be about a third of your volume. So it's almost like new is about a third of that volume. used in your dealerships is about a third of that volume, and the Automation USA stores are about a third of the volume. I'm just curious, that's about right, and if we think about how you position the used units in your franchise stores versus what's in Automation USA, how do you differentiate those two, and are they kind of competing forces, and how does that work over time as it gets very big?

They're very different in the sense that in a new vehicle store, even though 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. And 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 alternation Chevy store, the USA store is universal. We sell everything at a different price point. And the other thing we've learned is on we'll buy your car, the 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. And 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 that we have a centralized shared resource center in Texas makes all that possible, that we're able to do that at a lightning speed. Again, it's part of our technical capability. So as far as growth for the future, I mean, it's really a capital allocation journey. I mean, 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. And so if you put all those together, it's a pretty compelling vision and strategy going forward. Joe, you're chief strategy officer also. Did I miss anything in your story?

No, I think you communicated it very effectively, and it's a balanced approach that we're taking to it and very positive.

Well said. Maybe if I could just follow up, though, as you do more retailing online, as the customer gets more comfortable with that, I mean, 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 or wider offering to the customer?

It is. We're there already. Correct, Joe?

Correct.

Yeah, that's done. That's done. You go to AutoNation.com. Yep. It's all there.

Got it. Punchy question, variable. I mean, everybody's talking about SG&A, but, you know, what portion of it is variable just so we can, you know, is there a rough rule of thumb we can use there to go forward? We can maybe estimate that better.

Maybe half. Maybe half is probably if you're using 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 improvement. stickiness to this demand recovery. And I'm just curious, you know, as you look at, you know, the release of some of the pent-up demand from the crisis months of, you know, that we've actually been through for a while now. But the last couple months, you know, if 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 the rebates and the cycle really takes off? Or do you think we're in takeoff mode for the cycle for the next three to five years is kind of what it seems like?

Yeah, I don't think this is a pent up demand from the shelter in place, although there's probably some of that there someplace. But this is really a fundamental shift in demand towards individual mobility. Now, you have to be careful when you focus on the total SAR that includes fleet, because that number is going to be impacted by the fact that people aren't traveling, the rental car business is down, how there's various businesses, what they're doing with their fleet. So I'm not talking about the top line SAR. I'm laser focused on the retail selling rate. And that is significantly restricted at the moment due to availability. And, um, as availability improves in first quarter, second quarter of next year, you'll see that number be positive. So I think we're past the whatever you want to call it, snap back, turn up demand. No. And here's the way to think about it. I know everybody says, well, what's with the overall economy? What's happening here is a reorientation and prioritization of of the household budget okay and what they're what the american people are saying and doing is you know what i want to move away from density i want more space at home i may be working more at home in the future than i thought i would be and by the way i want to be i i love the independence of deciding when i move around and high how i move around and I'm not real excited to get back on public transportation. And this is a cost all price points from a $5,000 pre-owned car up to a premium luxury car. We are hearing this all day long. Now, I'll fully say the fact that we have very attractive interest rates is a multiplier effect on this reorientation of the household budget. But That's the priority in the households today. So there are a lot of things they're not spending money on, and two things they're definitely spending money on is spending more time in the home and where that home is and how it is and how they get about. And so for auto retail, those are two very positive, optimistic developments for the next several years.

Completely agree. Thank you very much for the time. Excellent.

Thank you. Your next question comes from Adam. Join us with Mark and Stanley. Your line is open.

Hey, Mike. I have a question about your digital fulfillment. Can you tell us either, and I assume the number is very, very low, but what percentage of your used vehicle sales, for example, are completely digitally fulfilled, meaning little or no touch at all between the consumer and a dealer? And our retail location.

It's a low percentage. And that's where the consumer is happiest. They want to choose to do as much as they want digitally, and then at a certain point they want to engage with a delivery center or we deliver to the home. So we assume less than 1%?

I want to say slow single digits. Slow single digits. Okay. And I'm just curious, Mike, I'm sure you have, but I'd love to know, assuming that you've used the Carvana website to buy a car or to see how it works. What do you think of that user experience? It's not a question about the business model or the valuation or anything like that. I'm sure we'd all like their multiple. But what do you think of their user experience for used car purchase and or sale? And as you roll out AutoNation USA, kind of how is this going to be different?

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. So we have a great experience, and we found the right line, and we let the consumer decide where that line is. So 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. And we give them a fabulous experience from that crossover. And they can move seamlessly back and forth. And our reputational scores and our net promoter scores. So 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 strong. 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 and 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. We like the customers, sell a lot of vehicles, and make money. And so that's a harder – for 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. And just one last one from me on kind of culture and incentives between the digital initiatives that you're investing heavily and accelerating in over the years to come, and then the kind of legacy stores or the legacy operation where you're your investment in people and systems were more on the brick-and-mortar side. So to the extent that you moved to omnichannel, how do you overcome what could be some conflict between the corporate digital initiative for omnichannel to get the returns for shareholders in the same store and all those efficiencies? How do you incentivize the GMs at the brick-and-mortar stores to be truly channel agnostics so that they kind of don't care about whether you come in and generate a commission in an in-store sale versus if it's totally touchless online. Thank you.

Yes, it was a huge, complex cultural challenge for us to go through to create an automation experience with an omni-channel. So we've went through a significant investment period. As I announced, we went through a significant brand extension period. As I announced, it was difficult, disruptive, painful, and required perseverance to get through it, and we paid our tuition, and we climbed a mountain, and now we're on the other side of the mountain, and it's a great place to be. And some of the tells of what we really did is if you look at the fact that we one-priced all pre-owned across the entire enterprise, and we don't care whether it's in a traditional new car dealership or in a USA store. It's one price. It's appraised, acquired by the company, and priced centrally. We built the technical capability to one price all our inventory for pre-owned across the entire enterprise. So that's an example of how we've dealt with this issue. And now running a USA store within the AutoNation management system is something that people aspire to do, whereas before it was the glamour new car business, still important to us, but now just as important is the excitement of running an AutoNation USA store. So I'm happy to say that while we will continue to invest in digital and technical capability, It will not require the same level of investment and cost that we've had in the past years because we've built it, it works, and now we just enhance it from this time forward. But we have a central understanding of 9 million customers, that is, you're taking your daughter off to school and you buy her a car in California and then the following week you're back here in Miami and you walk into one of our dealerships we know exactly what you did the previous week with your daughter out in California and if you come into service in New York and then you have a house in Florida we know exactly we know the entirety of your relationship and your history with AutoNation and everything that happens what your preferences are, and what is the likelihood of what you're going to buy next and think is next, and we proactively market to that. And it's completely changed our marketing costs. It's completely changed the productivity of our salespeople. And so we're really on a new basis. And I guess the key point, we did it on an enterprise basis. It's not two cultures. It's not two companies. It's one company, one brand. Thanks, Mike. Thank you.

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

Hey, good morning, guys. Morning.

Morning.

On the we will buy strategy, I guess 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. Okay. 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, you know, folks not coming in to sell you their car because they want to keep them?

Joe, you want to take that?

Sure. So from a procurement standpoint, I generally think of – From a use standpoint, between 60, depends on the franchise or a USA store, I'd say between 60 to 75% of our cars, and I'll get into more detail, are acquired from customers. So we have a much lower dependency on auctions and whatnot. If you look at, we'll buy your car, it ranges from 10 to 20%. It's higher in USA, so almost 20% of our cars at USA. are procured from We'll Buy Your Car. That's a lower percentage, understandably, and the franchise is probably 10%. But that gives us a significant advantage from a procurement standpoint. If you compare it to the peers, I don't see anyone close to that percentage of customers actually, pardon me, cars acquired from customers, which clearly is a benefit to us when we think through the value proposition we can offer our customers. Does that help kind of understand the difference?

And I guess are you seeing any trends that negative equity is preventing people from selling to you when they want to?

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

We continue, sorry, month over month, we continue to find continued growth in the program, so we haven't faced that obstacle.

Okay. And then I guess the question on mobility demand, are you seeing, and I guess maybe this question to Mike, as you see this, spike in demand for personal mobility do you see that flowing more to used versus new in 21 and maybe if you've got a thought for where retail czar is in 21 that'd be helpful um at the moment it's it's so much across the board and it the demand is so strong that when you when we customer can't get exactly what they want in

new at the moment, we're able to show them something in pre-owned and they are willing to make whatever trade-off that requires. And so that's how you get this additional demand in pre-owned. So now as availability improves on new, it's very hard to predict exactly what will happen. And also, I have to say, I'm reluctant at this point to put out a retail SAR for next year because I still truly don't understand exactly how and when these plants and shipments come through so certainly we've had of course running conversations with the manufacturers since the spring and every target's been missed as what we've been told we would be shipped it simply did not happen so I'm like, okay, this is – now we're in – when I see it, I'll understand it and I'll be able to predict it. So as I already said, I don't see any change in the fourth quarter from what I understand is coming through. And so now we're into the first quarter, best case. When I see that they're able to consistently achieve their shipping targets, then – Okay, now we can talk about what you can sell new. The demand is there at retail. It's very interesting. I'm not worried about the demand. And on the demand, we'll either get it through the volume or we'll get it through pricing. So we're pretty good at balancing that. I just can't tell you when the exact crossover moment comes, so it's very hard to predict what retails are for next year under the circumstances. Thank you. Thank you.

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

Thanks. Good morning. It's first on new vehicles. The ASP is up. The 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 the higher ticket versus mixed shift light trucks and the inventory shortage giving you pricing power.

Joe, you want to take that?

Yeah, I can't give you the 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 see that trend continuing. Frankly, it's one of the areas that we have the tightest inventory supply, and so many ways here we are restricted by supply, not demand. And I don't see anything right now that's likely to change that trend, particularly given what's happening with cash prices, et cetera.

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 the USA stores, acquisition of new vehicle franchises, and share repurchase. I don't really see a change from that. Do you, Joe, your views?

So I think we have too many good opportunities in front of us. The returns are too attractive. But 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 startups wanting to get into this very high-end industry. of the electric pickup market, including now your VM 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?

So the shift to electrification is underway. There's no turning back. We're excited to sell them. And the investment is there across the industry. It's just tremendous. Execution still matters on the actual product. You just got to get it right. So I have to admit, the Hummer announcement last night put a smile on my face. Oh, my God. If you want a metaphor for old General Motors versus new General Motors, just look at the Hummer. What a fantastic vehicle. I mean, in my personal view, they nailed it. And they used a name which you literally had to pull the plug on some years ago to relaunch at the pinnacle of the technical capability that General Motors possesses today today. And I think it's going to be a great success. Now, obviously, with that price point, you can make good money, but there's only so much value you can do. But I think it shows a spirit and an understanding of what you have to do for an electric vehicle to be a success. It's not enough just to drop some batteries in there and put an electric motor in there. That's not going to get it done. And I think General Motors is to be congratulated, and GMC, and Hummer. It's just put a smile on my face. I think it was just a great moment. It's a great video. And that thing where that craps across the trail, I almost fell out of my chair. Oh, my God, who thought of that? It's exciting to see from General Motors. It really is. I couldn't be happier, babe, my night.

I agree.

I love the earnings this morning, which made me feel good. Also very good. So I'm having a good day. Between the Hummer and our earnings, I'm having a good day. All right. 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.

Yeah. 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're brothers. We fully agree, and we're completely different places, and boom, there we are. And let me make a point. We sell them. I'm very excited about that.

Yeah, I look forward to hearing more about it as they're on sale.

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. And 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. 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, very good job. And our speed to market is excellent. And I think our big advantage is that 75% of what we retail we acquire from consumers either through trade or direct purchases. And this puts us in a very good position on the gross profit side. 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. And then just in the customer care performance, were there, you know, kind of remains down year over year, you pointed to the continued decrease in vehicle miles driven. Are there any pockets of strength or weakness in different geographies across your footprint? And, you know, maybe some that might show a picture or two. you know, when you expect this segment to return to maybe at least flat year over year.

Thanks. Joe, can you take that, please?

Sure. So within customer care, probably not surprising, an area that's down a bit is collision, which is 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 customer 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 look the last couple of months, month to month to month, it has been a continued improvement. So 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 through 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 is, of course, 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.