Q3 2024 AutoNation Inc Earnings Call
Good morning, My name is Harry and I'll be your conference operator today at this time I would like to welcome everyone to the Autonation in cooperation with <unk> 24 earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by the number too.
Thank you I would now like to turn the call over to Derek Fiebig, Vice President of Investor Relations you may begin.
Okay.
Derek Fiebig: Thanks, Terry and good morning, everyone welcome to Autonation third quarter 2024 conference call lead.
Speaker Change: Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom <unk>, Our Chief Financial Officer. Following their remarks, we will open up the call for questions.
Speaker Change: Before beginning I'd like to remind you that 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 Securities Litigation Reform Act of 1095, such forward looking statements involve known and unknown risks that may cause our actual results.
Speaker Change: 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 today and in our filings with the SEC.
Speaker Change: Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call reconciliations are provided in our materials and our website loaded located at investors Autonation dot com with that I'll turn the call over to Mike.
Mike Manley: Thanks, Eric and good morning, everyone. Thank you for joining us today.
Yes.
Speaker Change: Slides.
I think this quarter once again shows the resolve deal it's a nice team and what was that challenging environment and notwithstanding the well known headwinds in the quarter.
Speaker Change: We are pleased to report a number of highlights across our business.
Speaker Change: New vehicle sales, we increased our market share unlocking all of the flow through benefits generated by new vehicles.
Speaker Change: Welcome to the <unk> performance.
We experienced at the end of June as a result of demo systems outage in used vehicle sales as we discussed on our last call. We came into the quarter disadvantage by the impacts of the CDK incident on our used vehicle inventory and resulting sales run rate Atlanta, Montana Mountain, we consistently build our inventory back to acceptable levels.
Speaker Change: <unk> maintained our focus on turn rates and deliver strong margins.
The sales team continued to deliver great growth and achieved an all time record gross profit of 9% congratulations to the team and thank you for the work.
Speaker Change: You put it on a daily basis.
Speaker Change: Now on the cost side the organization demonstrated continued discipline all while navigating multiple operational challenges with July being the most impacted.
Speaker Change: Talking about operational challenges the CDK outage was not fully resolved until well into July impacting our performance by approximately 21 per share in the quarter.
Speaker Change: As we all know that.
Speaker Change: Our country was hit by significant devastating weather events, which in turn influenced the temporary closure of approximately 50 stores and Additionally, we had to navigate an unusually high number of Eylea and <unk>, which were concentrated in our premium luxury brands.
Speaker Change: Despite all of this during the third quarter on new unit sales outpaced the overall industry with same store units, increasing 2% reflecting growth in all three segments premium luxury and pool.
Speaker Change: Let's stick.
We also believe that new car margins, while continuing to moderate on a stabilizing the sequential decline during the third quarter and new PBR was largely in line with our experience in the second quarter.
Our sales of used units decreased from a very strong third quarter last year, but increased on a sequential basis as I mentioned earlier. This is where the CDK outage. This hot which left us with a limited he used unit vehicle inventory to start the quarter.
Speaker Change: These days the demand remains stable and through the efforts of our commercial teams, we were able to maintain relatively strong use television.
Speaker Change: At around $6800 per vehicle.
Speaker Change: We're encouraged to see a forward ability improving with a notable shift to used vehicles priced under $20000.
Now switching to customer financial services, which is comprised to protect.
Protection products and one.
Speaker Change: <unk> products. The quality was another case of sequential improvement by the end of September our product attachment rates on the <unk>.
Speaker Change: Head of my record setting levels in.
Speaker Change: In addition, we continue to grow our am finance business and year to date, we have now originated under $700 million of new loans.
Speaker Change: <unk> is now exclusively focused on our merchandise and customers and currently funded by the 10% of our finance transactions.
Speaker Change: And for our shareholders. This means a shift to a model that on a lifetime basis is two and a half to three times more profitable than that of the traditional third party finance off site. While this focus can have a near term impact on <unk> cash flow.
Speaker Change: Greatly enhances long term value creation and agenda is more regular contact with our customers.
Speaker Change: From an after sales perspective, we continue to grow and.
Speaker Change: Expand margins and enhance our customer satisfaction and I'm encouraged by our ability to hire retain and develop technicians.
Speaker Change: Recurring revenue portion of our business is a key part of our customer retention efforts.
Speaker Change: Mentioned that.
Speaker Change: So SaaS team delivered a record performance in the quarter and just to put that into perspective, our annual gross profit from off the south has grown by more than half a billion dollars since 2019, and if I just look at the last two years same store after sales price is growing by over 15% and that growth has been delivered during.
Speaker Change: Your time on the service parts dealerships has been reducing.
With that level of strong growth. It is not a surprise that the comps get harder, but it doesn't benign the significant progress we have and continue to make office hours now represents nearly half of our total credits.
Speaker Change: It.
Speaker Change: Finally, as you saw in today's release, we divested seven domestic schools and one input from the portfolio during the quarter generating more than $150 million of proceeds.
Speaker Change: Looking value and providing us with a capital reallocation opportunities.
Speaker Change: Underlying these pruning decisions with the opportunity to defect on portions of our portfolio.
Speaker Change: Recognize that the window for elevated asset pricing is closing rapidly and we moved to take advantage of the attractive valuations that are still available in the market that Tom will take you through more details of the transaction. So you can clearly see the benefits to our shareholders.
Speaker Change: In Poland, we see moderation in seller expectations for franchise store evaluation and look forward to putting more capital to work on acquisitions that give us the opportunity to generate high returns on the capital we deploy.
Speaker Change: Of course, we're way these opportunity opportunities against other capital allocation.
Speaker Change: Opportunities, including share repurchases, which remains a cornerstone of our approach to generating very attractive returns for our shareholders.
Speaker Change: With that I'm going to hand, the call over to you to take him through the results. Okay. Thanks, Mike I'm turning to slide four to discuss our third quarter P&L. Our total revenue for the quarter was $6 6 billion a decrease of 4% from a year ago. Now this was expected as our used vehicle unit sales decline.
Speaker Change: Selling prices on both new and used vehicles moderated since last year gross profit of $1 2 billion increased 2% on a sequential basis led by <unk> and after sales growth, but was down from 2023, primarily relating to normalization of new vehicle P V R's.
Speaker Change: The gross profit margin.
Speaker Change: Of 18% of revenue was unchanged from the second quarter.
Adjusted SG&A reflected a consistent sequential run rate and decreased 3% from a year ago, reflecting our disciplined cost control efforts and lower revenue base commissions adjust.
Speaker Change: Adjusted SG&A was 67, 4% of gross profit a bit higher than our ongoing expectation as we battle the inefficiencies related to the CDK outage.
Speaker Change: Adjusted operating income was stable from the second quarter at just under 5% of revenue.
Speaker Change: Below the operating line, our third quarter results were impacted by higher interest expense, mainly from floor plan debt and we benefited from lower income tax expense for the third quarter Floorplan interest expense of $61 million was up $22 million from a year ago as expected a reflection of higher inventory levels as a reminder.
Speaker Change: <unk>, we reflect floor plan assistance received from Oems and gross margin. This assistance totaled $38 million up $7 million from a year ago.
Speaker Change: So net of these OEM incentives new view net new vehicle floor plan expense totaled $20 million up nearly $17 million from a year ago going forward, we expect that the 50 basis point reduction in the federal funding rate announced in the second half of September we will improve our net floorplan expense.
Speaker Change: The gain from our eight franchise store divestiture divestiture was offset by other items, which are detailed in our financial tables improved our reported net income by $24 million for the quarter. Our adjusted net income excludes the impact of this game.
Speaker Change: And just to add what Mike mentioned on the franchise store divestitures. This was a case of optimizing shareholder value. These stores were consistently not achieving the returns on capital that we require for franchise stores, often because they're geographically.
Speaker Change: Apart from our markets are scale benefits were not being realized. Additionally, we realize an aggregate multiple on these divestitures that was significantly higher than the auto nation trading multiple allowing us to redeploy capital to more attractive opportunities.
Speaker Change: All in this resulted in adjusted net income of $162 million compared to $244 million a year ago.
Speaker Change: Total shares repurchased over the past 12 months decreased our average shares outstanding by 8% to $40 3 million shares in the third quarter of 2024. This was a benefit for our adjusted EPS, which was $4 <unk> for the quarter.
Speaker Change: These third quarter results were not adjusted for the approximate 21 EPS impact from the lost revenue and margins during the quarter caused by the CDK outage.
Speaker Change: Step back from the details I view the $4 <unk> is quite strong when you consider the 'twenty one impact from the CDK outage as well as the stop sale effect, which we estimate at eight to nine.
Speaker Change: Plus were transitory and growth impacts are.
Growing our Autonation finance portfolio.
Speaker Change: <unk> itself created a year over year negative EPS impact of about 25.
You can appreciate the real performance, we delivered in the quarter.
Speaker Change: Let me move to slide five for some more color on new vehicle performance for the quarter, New vehicle unit volumes were strong point for the quarter recovering well from the CDK impact in increasing both on a year over year and sequential basis, reflecting strong supply.
Speaker Change: Better incentives and good performance by our commercial teams on a on a same store basis unit sales increased 2% with all segments, improving including our domestic segment, which overcame large declines by a number of brands within the portfolio.
Speaker Change: We are encouraged by the relative stabilization of our new vehicle gross profit <unk>, which were $2800 for the quarter on average new vehicle unit revenue decreased 2% in the quarter, while new vehicle unit cost increase around 1%, resulting in a moderation of new vehicle gross profit PBR.
We expect the fourth quarter, PBR moderation to be lower reflecting the normal seasonal shift to premium luxury brands.
Speaker Change: The new vehicle supply dynamics have significantly improved new vehicle inventory levels were at 46000 units at the end of September down slightly from the end of June which represents 52 days sales also roughly in line with the days sales at the end of June.
Speaker Change: After adjusting out the adverse CDK impact and up from 44 days supply at the end of March.
Speaker Change: Looking ahead, the fourth quarter, New vehicle unit sales and overall <unk> will benefit from the seasonal strength of the premium luxury brands, helping to offset the impacts from the ongoing PDR normalization.
Speaker Change: We are off to an encouraging start to October and expect total unit sales will be up.
Speaker Change: In the months.
Speaker Change: Turning to slide six and used vehicles, we had modest sequential unit growth from the second quarter attract lower from.
Speaker Change: Q3, 2023, reflecting a difficult performance comparison and CDK related inventory constraints unit sales were down nearly 8% from the prior year.
Speaker Change: Demand for lower price vehicles remains resilient total unit sales of vehicles priced under $20000 increased by nearly 4% from a year ago unit sales of mid priced vehicles and vehicles priced over 40000 were down double.
Speaker Change: Digits year over year, some of which was attributable to Oems taking actions to improve the affordability of new vehicles.
Speaker Change: Supply availability is also continue to be a challenge, particularly for the mid and higher priced tiers consistent with the past few quarters driven by lower new vehicle production. During Covid. These trends create a composite 6% adverse selling.
Speaker Change: Price mix shift for used vehicles year over year.
Speaker Change: The mix impact was also felt in used vehicle PBR, which was down approximately 9% year over year, what is holding in sequentially.
Speaker Change: Yeah.
Speaker Change: Looking ahead with ample inventory interest rate reductions and improved affordability. We expect used unit sales were performed well in the fourth quarter and increased slightly from a year ago.
Speaker Change: I'm now on slide seven customer financial services in August and September our CSS operations recovered well from the CDK outage as our commercial associates were able to present product menus to customers in a normal fashion and get back to attaching to products to each vehicle sold.
Speaker Change: This enabled a 10% sequential cfos PBR growth from June to September that Mike mentioned.
Speaker Change: Our captive finance company and finance has originated $700 million of loans year to date meeting our full year expectations in nine months and becoming Autonation largest lender, we expect approximately $1 billion of originations for the full year.
Speaker Change: As a reminder, and finance has tightened underwriting requirements focused on building a prime portfolio and has eliminated third party originations in the third quarter. The average FICO score was over $6 80.
The AAN finance P&L performance continues to improve and the delinquency rates on the business underwritten since the acquisition has continued to meet our expectation.
Speaker Change: We're also finding that and finance is deepening the relationship we have with our customers.
Speaker Change: Going forward, we expect continued strong performance in CFS and continued growth of an finance also as it and finance portfolio continues to grow and season, we expect to ship its funding from a combination of warehouse lending plus autonation equity, which is today is roughly a 70, 525% split.
Speaker Change: <unk> to funding that is based primarily on become becoming an ABS prime issuer.
Speaker Change: The AAN finance portfolio is rapidly approaching $1 billion.
Speaker Change: Up from $400 million at the start of the year.
Speaker Change: While currently generating losses approaching 20 per share per year.
Speaker Change: For year to date, principally relating to the upfront life of loan credit provisioning, which is a noncash charge. This growth is generating significant scale and efficiency will lead to profitability by the end of 2025.
Speaker Change: Moving to slide eight after sales representing over one half of our gross profit. It continued its revenue and margin momentum growing gross profit by more than 3% for the year over year led by warranty and customer pay and overcoming the headwinds from the CDK outage, our tech efficiency and productivity were both higher than a year ago.
Speaker Change: On a sequential basis as we are now fully recovered from the CDK outage.
Speaker Change: We continue to develop and promote our technician workforce, which has led to year over year to date increases in our master and certified technician head count.
Speaker Change: Our total store gross margin rate once again increased reaching 47, 7% up 50 basis points from a year ago, reflecting improved parts and labor rates Tech efficiency technology innovations productivity and higher value orders and looking ahead, we expect our after sales business will grow roughly mid single digits each year.
Speaker Change: To slide nine we continue to see consistent.
Speaker Change: Consistent.
Speaker Change: Cash flow conversion adjusted free cash flow year to date through September was $467 million compared to $850 million a year ago with the change in line with the change in earnings along with approximate $75 million impact from the CDK outage.
Speaker Change: While the quantum of free cash flow is normalizing in line with new vehicle <unk> and profits the efficiency for our cash generation is measured by the conversion of net income into free cash flow has been consistently greater than 90%.
Speaker Change: Capital investments were slightly below 2023 levels with an expectation of approximately $300 million in capex for the full year and comparable annual amounts going forward consistent with the expansion and finance our auto loans receivable related to the loans originated at our own stores increased by $588 million in the first nine.
Speaker Change: Months of the year, we expect continued growth in this portfolio.
Speaker Change: Moving on to slide 10 on capital allocation, we consider capital allocation and opportunity to either reinvest in the business and this is in the form of Capex funding may and finance portfolio or M&A or return to capital to our shareholder owners via share repurchases Capex.
Speaker Change: Capex is mostly maintenance related compulsory spending typically around $300 million, a year and fairly linear over the course of the year.
Speaker Change: The AAN finance portfolio currently requires 25% to 30% equity funding, which for 2024 will require approximately $100 million.
Speaker Change: Capital allocation as the portfolio seasons and were able to establish a regular.
Speaker Change: Funding cadence this required equity funding should come down to 10% or less we expect to implement an ABS program sometime in the first half of 2025.
Speaker Change: We continue to actively explore M&A opportunities many on the franchise store side, where competitive buyers, where we're confident in achieving a year three return greater than our weighted average cost of capital for core franchise opportunities.
Speaker Change: That hurdle is a bit higher for non franchise opportunities.
Speaker Change: The colt to predict the timing of M&A of course, and so far we have not identified opportunities in 2024 and meet these return requirements, but as Mike knows the landscape seems to be improving and we're starting to see a more regular flow of opportunities.
Speaker Change: Share repurchases have been and will continue to be an important part of our playbook the third quarter alone.
Speaker Change: Purchase spend looks light, but is simply a reflection of higher than normal.
Quarter free cash flow and lower than normal third quarter free cash flow caused by the shift of outgoing payments from the second quarter to the third quarter as a result of the CDK outage.
Speaker Change: Looking at the year to date figures tells the full story the repurchase spend relative adjusted free cash flow. So we compare.
Speaker Change: Repurchase spend to adjusted free cash flow.
You get about a 76% ratio this year last.
Speaker Change: Last year, it was 85% so fairly consistent a little less due to the higher Autonation finance.
Speaker Change: Folio equity funding that I talked about.
Speaker Change: So our capital allocation Decisioning, we continually consider our investment grade balance sheet and the associated leverage levels at quarter end, our leverage was two five times EBITDA in line with our two to three times EBITDA long term target.
Speaker Change: Now, let me turn the call back to Mike before we address your questions.
Mike Manley: Thank you Tom as you can imagine we are pleased with the various events that we have faced over the past two quarters behind us despite.
Mike Manley: Despite that our diverse portfolio of brands and geographic footprint enabled strong new unit growth in the quarter, which outpaced the overall market. We delivered steady used vehicle margin as I discussed earlier, which was in what is continuing to be very competitive environment.
Mike Manley: And we delivered after sales growth that.
Mike Manley: New record for our company and I look forward I'm encouraged by a number of trends obviously reduction in interest rates have created affordability and improving affordability will progressively lift demand for both new and used vehicles.
Mike Manley: We're also seeing actions by a number of our OEM partners to balance demand and production either through actions to make makes more affordable increased expenditures for example, or adjusting inventory levels by moderating production and these actions are what I would say internally, we continue to develop SaaS sourcing capabilities, who used vehicles, which ultimately.
Mike Manley: They have to maintain and improve our margin performance.
With that I'm going to open the lines to take your questions. Thank you.
Speaker Change: Thank you if you would like to ask a question. Please dial star followed by one on your telephone keypad now if you change your mind. Please dial star followed by two to exit to Keith and finally, when preparing to ask your questions. Please ensure that youll phone is on mute locally.
And for our first question today will be from the line of John Murphy with Bank of America. Please go ahead. Your line is open.
John Murphy: Good morning, guys.
John Murphy: Just a first question.
Mike on the parts and service side, you made a comment that comps get tougher but.
John Murphy: Tom mentioned you guys are still looking for mid single digit same store sales growth, but I'm just thinking it is.
John Murphy: As you think about that business, there's a tremendous amount of warranty work it seems to be popping up from stop sales.
John Murphy: It ranges across automakers doesn't that presents a potential opportunity here in the near term and maybe even over the next couple of years to maybe outstrip that and sort of.
John Murphy: The other side on the customer pay.
John Murphy: How are you measuring retention levels. So some of those those comps it might get tougher on the customer pay side my by E might be eased by holding on to the consumers for a few years longer.
Speaker Change: Yeah. Thanks, John.
Speaker Change: So let me just focus on the customer pay phase to begin with and we talked about this before so we look very closely our penetration of the vehicle and each of the areas we represent.
Speaker Change: Three years, three to seven years and seven years above.
Speaker Change: Yeah.
Speaker Change: Depending on the franchise.
Speaker Change: For premium luxury a little bit lower from the domestics.
Speaker Change: <unk> thousand 50% to 55% penetration of zero to three years. That's obviously influenced by the number of vehicles that are sold outside of the immediate vehicle part, but it shows you that there is opportunity on the customer pay side to grow in <unk>.
Speaker Change: <unk> penetration that we have another penetration, but in line with industry on three to seven years I think that's a huge opportunity for us and frankly.
Speaker Change: Most of our OEM partners are now laser focused on that as well and they are very much looking at the content required to win some of those customers back to the franchise network. We're involved with many of them are developing plans. There. So I think we can go out of that and I also I believe we are entering a period now where are we going to start to see some ground within the vehicle Park that has typically been entered.
Speaker Change: By franchise dealerships after two to three years now of reduction in the $3 70, a vehicle park, we're going to begin to see the three year potbelly as we get into next year and he'll be followed by the 70 products. So I think there are a number of positives available for us to continue to grow that business.
Speaker Change: And we are very very focused on it.
Speaker Change: As I think about Tom's comments I agree with what he said, but clearly what he's doing and he takes a more cautionary approach in terms of what's available in the business and the discussions that I have at my team a very different focus.
Speaker Change: Tom Tom I think does a phenomenal job.
Being realistic hi, Jamie I think different Jonathan and targets that I think a very ambitious somewhere in between we will probably end up and what happens with stop sale hopefully they get pretty aggressively reduced with improved quality as we've seen over many years because of that can't be a strategy for growth.
Okay.
Speaker Change: Got it helpful. And then just a real quick second question, Tom you talked about doing your first ABS deal sometime next year, what does that mean for the relative cost of funding.
Speaker Change: For automate Autonation finance and what's the opportunity what's the opportunity there to lower the cost significantly and a 10% sounds a little bit high even on the equity side, I mean could that be closer to 5% of what you might need to put into deals ultimately overtime.
Speaker Change: I mean.
Mike Manley: Mike said I'm conservative so maybe you're right on the on the equity funding.
Speaker Change: But I think we have to.
Speaker Change: First get a portfolio is seasoned enough to get some ABS activity going and then hopefully we can drive some good interest and get get good funding levels.
Speaker Change: I do think it will be a benefit to the overall.
Cost of the portfolio compared to our warehouse lines.
Speaker Change: Im not entirely sure what what number I would put on it until we get a little bit closer to those events, but it should be should be positive relative to them.
Speaker Change: Funding costs for the portfolio.
Tom maybe just a follow up on that.
Speaker Change: When do we hit run rate on <unk> finance about like when we get beyond sort of the stress or the sort of the weight of the seasonal reserves and get into sort of a normal funding is that is that more 'twenty six 'twenty seven maybe you just kind of Directionally, where do we get to steady state on this business maybe cost of funding and then get beyond the seasonal reserve.
Yes.
Speaker Change: Yes.
Speaker Change: It's a good question John.
Said, we're funding about 10% of the overall finance business comes through the captive.
Speaker Change: We'd like that to be higher and we're trying to drive that higher. So I think we'll continue to see really good origination growth.
Speaker Change: In the next year 18 months.
Speaker Change: But like I said I.
Speaker Change: Do expect.
Speaker Change: US to get to a run rate profitability by the end of 2025 on the portfolio even with that.
Speaker Change: Continued growth.
Speaker Change: Great. Thank you.
Speaker Change: The next question today will be from the line of <unk> Gupta with J P. Morgan please.
Speaker Change: Please go ahead your line is open.
Speaker Change: Yeah.
Great. Thanks for taking the question.
I just wanted to follow up on the capital allocation commentary.
I think Tom you mentioned.
Speaker Change: 70% to 75%.
Speaker Change: Free cash flow.
Speaker Change: Is that an indication of the rule of thumb you should be applying.
Speaker Change: Going forward in terms of you know.
Speaker Change: What's your thinking for buyback.
Speaker Change: I'm just curious.
Speaker Change: Mike also mentioned a lot about.
The deal environment and I'm curious I guess this could also mean that we could start to see a pull.
Speaker Change: Got it.
Speaker Change: Two more allocation towards M&A versus buyback given Reds languages, just given where valuations are.
Speaker Change: I had a quick follow up.
Speaker Change: Yes.
Speaker Change: I'll give you my thoughts I know, Mike has had some thoughts on it as well.
Speaker Change: When you look at the overall capital allocation for 2024 year to date compared to 2023 I think we are.
Speaker Change: Comparable relative levels of.
Speaker Change: Share repurchase as I said.
Speaker Change: It does comprise.
Speaker Change: Fairly high percent of our adjusted free cash flow in both years. So.
Speaker Change: And Thats a continuation.
Speaker Change: Our pattern.
Speaker Change: As we look at the <unk>.
Speaker Change: Reason for that certainly.
Speaker Change: We look at the intrinsic value of our shares and see opportunity there to put capital in.
Create shareholder value.
Speaker Change: That's also been in the backdrop of an M&A environment that has been.
Speaker Change: The challenging in the last.
Speaker Change: Two or three years, you have a lot of the potential targets that we look at that are working off of P&L.
Speaker Change: Were inflated by the environment that they're operating in and with Covid.
Speaker Change: We try and look through those.
Speaker Change: And we're trying to normalize those as a result as a result, we had a hard time finding.
Speaker Change: <unk> to create value for our shareholders at the purchase prices it would've been required.
Speaker Change: I do think we're seeing a bit of a bit of thawing in that.
I'm happy to say that we took advantage of that environment.
Speaker Change: Store sales.
Speaker Change: What we talked about.
Speaker Change: But I think as we as we move forward.
Speaker Change: I do think we will have more opportunity.
Speaker Change: So I wouldn't.
Speaker Change: Think on the exact ratios that we've we've talked about it on a <unk>.
Go forward basis, we're always going to make our decisions based on where we think we can create.
Speaker Change: Best.
Shareowner value.
Speaker Change: I think it's good.
Speaker Change: I think fundamentally the business demonstrates that we continue to demonstrate good cash generation, which brings a lot of opportunity for us I think specifically Tom commented on the share repurchase.
Speaker Change: The very important to us and our shareholders.
Arms of <unk>.
Speaker Change: I think two things really.
Speaker Change: A change either lost over the last few years firstly.
We've looked very closely at our market presence and understand I think very very clearly what acquisitions fit into our operating model, but equally what acquisitions fit into our density model, where other businesses that we have and we've been developing add additional synergies over and above the synergies we bring to the actual operation of the dealership.
Speaker Change: So that means that we can create value.
Speaker Change: Above what would be a normal.
Speaker Change: Acquisition of <unk>.
Speaker Change: Onshore business. So long as it is in markets, we have identified and in a cost to that we've identified and then secondly, we are already beginning to say.
Speaker Change: Prices dropped not necessarily because multiples have changed dramatically because they haven't obviously trailing 12 months profitability has changed the combination of those things I think mainly are in a very good position to assess what I think will be a good set of opportunities as we come through the balance of this year and into next year.
Speaker Change: Understood understood. That's very clear just one follow up on the used car business.
Speaker Change: I know July was impacted.
Speaker Change: Bye bye CDK up pretty significantly.
Can you give us a sense of how.
Speaker Change: Things have trended to.
Speaker Change: September maybe October in that business as well I think Tom you mentioned total units were up in October.
Speaker Change: Im not sure like how your usual within that but just any more color on the recovery.
Speaker Change: Would be helpful. Thanks.
Yes, the way I would ask you to think about this and I'll give you my view just look back at the quarterly performance in terms of some of the things that we've been focused on we then focus on.
Speaker Change: <unk>.
Speaker Change: <unk>.
And developing I'll use terminology, we had a lot of discussion earlier this year, but we're also focused on the inventory turn that we achieved in all used vehicle so that we get that momentum.
Speaker Change: Working capital flow into that part of the business.
Speaker Change: With a focus on that you can see the direct link.
Speaker Change: Inventory levels, and our pricing position in the marketplace to allow Poland and therefore.
Speaker Change: My view.
Speaker Change: Used car numbers in the quarter.
Speaker Change: Heavily skewed on the fact that we came into it.
Speaker Change: Much lower retail.
Speaker Change: Inventory than I would like I think the team has done a good job building that through the quarter, we've come into Q4.
Speaker Change: A different position and as a result of that we are seeing improvements in terms of our used car run rate.
Speaker Change: And I think if we continue to do a good job in sourcing and I mentioned that as part of my earlier comments.
Speaker Change: And if the market's available we'll be well positioned to get our share of it.
Speaker Change: And really that's been the focus.
Speaker Change: We've talked before about the different channels to rapidly build used car inventory.
We have a very very disciplined approach to some of those channels because youll feel good for a couple of days because you have significantly added inventory youll portfolio, but just may after 45 to 60 days, you're going to feel a little bit less good as you say that those types of vehicles. The age of the margin dip into negative territory. So.
Speaker Change: We're very disciplined about how and where we look to build our used car inventory and thats why it isn't something that's an on off switch for us it's more progressive as a as a process is taking place.
Speaker Change: The summary to your question is progressively all used car performance improved throughout the quarter. We came into Q4 in a better position than we came into Q3.
Okay.
Speaker Change: Got it.
Speaker Change: Thanks for all the color and good luck.
Speaker Change: Yeah.
Speaker Change: Next question.
Speaker Change: <unk> is from the line of Michael Ward with Freedom capsule. Please go ahead. Your line is open.
Speaker Change: Thank you good morning, Mike.
Speaker Change: Mike I think you mentioned that you had 50 stores.
Speaker Change: We are affected by the storms.
Speaker Change: Maybe maybe not reading this right but.
Speaker Change: It doesn't sound like there was severe damage to the storms and even if some sales were postponed the service side, it's probably affected more is that correct.
Speaker Change: Can you quantify that at all.
Mike Manley: Yes, Michael you're quite right I mean, as we know.
Speaker Change: South side of the business recovers unusually recover strongly because unfortunately all of the damage has been done to Jose.
Speaker Change: Nichols the service side as leasing angling lingering effects of that and it did impact us in the quarter on the service side and obviously there was some carryover into Q4.
Speaker Change: The good news is that <unk>.
Speaker Change: Our after sales teams too.
Speaker Change: Add additional hours into the businesses, where they are affected.
Speaker Change: But even the adding of additional hours means that you felt fully recover everything because there is a large amount of vehicles that will come into your business totaled.
I don't have Im sure will tell me without a specific breakout of the of the residual impact is difficult to coal of course, because how do you actually attribute a new vehicle or used vehicles sales specifically to install them not just a normal purchase because you can't use traditional market share in territory numbers to do that but if I look specifically at the run rate.
Speaker Change: Used vehicles, obviously, we had down days.
Speaker Change: We were fortunate very fortunate firstly, what are people not withstanding. The fact that caused some issues in terms of their pulse I would say, but fortunate that they came straight physically okay and we're pleased about that that was our number one concern.
Speaker Change: Blake the damage that we had.
Speaker Change: Largely cosmetic a couple of the businesses have more heavy damage, but we were able to open them as power recovery came back home. So the downtime for after sales business.
Within the older I would say ranging from two days to a maximum of four to five days.
Speaker Change: And the team have been working hard to catch that up.
Speaker Change: Sales side.
Speaker Change: I think everything that.
Speaker Change: That was lost.
Speaker Change: That should be recovered over a period.
Yeah.
Speaker Change: The other thing Mike. So if you look at the just.
Speaker Change: Go ahead I'm sorry.
Speaker Change: I was just going to say.
Yes.
Speaker Change: It's tough to exactly as Mike said.
Speaker Change: The impact, particularly on vehicle sales, we are confident that.
Our shares in the markets we're serving.
Speaker Change: Non impacted in fact marginally probably improved a little bit.
Speaker Change:
Speaker Change: Overall.
Mike said it was a short term duration events.
For us in each of the cases.
Speaker Change: So if we look at the parts and.
Speaker Change: Services.
Speaker Change: Two 6% same store growth.
If you exclude the storm affected my guess is it's two to 300 basis points higher.
Speaker Change: Probably that mid single digits that you're referring to is that safe to say.
Speaker Change: Yeah, I don't think I'd put I don't think I would put that.
Speaker Change: Much on it be honest with you Mike.
Speaker Change: Yes.
Speaker Change: Like I said, it's a tough.
Speaker Change: A number to put your finger on it but.
Mike Manley: 100, 200 basis points.
Speaker Change: The impact on growth in the periods, we're talking about.
Speaker Change: Yes, alright.
Speaker Change: Michael.
Derek Fiebig: Hey, Mike. This is Derek in addition to that we did have the CD TDK callouts that we mentioned the 21 wanted to share right now.
Mike Manley: Part of that part of that is after sales so you'd want to have that in your number you are looking at it on a same store basis I am guessing thats those are that was exactly right.
Mike Manley: It wasn't.
Mike Manley: It was a third and that's that's a good point.
Mike Manley: Okay.
Mike Manley: Right.
Speaker Change: Medical and Carryout.
Speaker Change: Next question.
Speaker Change: Both of them.
Speaker Change: No.
Speaker Change: I was just going to point out it seems like the after sales strength was much more than it appears on just the numbers that were printed.
Speaker Change: But.
Speaker Change: From my point of view that is a correct statement.
Speaker Change: Hi.
Speaker Change: That's why I reference that you need to look at the combination of.
Speaker Change: Where we've come from over the last two years.
Speaker Change: Plus some of the impacted us in the marketplace frankly is as we discussed.
Speaker Change: <unk>.
Speaker Change: The question there is more opportunity available for us we added technicians in the quarter, but we did not at the rate that I wanted to be able to add some.
Into the business place them.
Speaker Change: Okay.
Speaker Change: Growth in technicians, although it's been good over the last two years in the quarter, we probably grew that while it may be 3% and I think that there is more that we need to do it in that area. So notwithstanding the actual number itself you can take into account the things that we've talked about.
Speaker Change: I think the fact is that as our as our teams continue to add technicians. We continue to work on attrition rates increase the results that we've got.
Speaker Change: There is further opportunity for us. So yes, we did go out in the quarter, we did hit a record for us.
Now 50% of gross profit as we have said good momentum, but theres more that we can unlock it just takes time to do it.
Speaker Change: Thank you.
Speaker Change: The next question today will be from the line of Jeff Liquid Stephens Inc. Please go ahead. Your line is now open.
Speaker Change: Thanks for taking my question, Mike I was hoping to tap into your OEM experience background. So like the few tumor me here I have a bit of a deeper dive one winded question.
Speaker Change: Just thinking about the path, new Gpus as well as vehicle affordability and the potential implications. This has on the used vehicle business.
Speaker Change: It seems if we stay on this path of high 15 to 16 million Saar. This has big implications for the economics and the dynamics of the used vehicle bids and then also new affordability. So.
Speaker Change: When you look at the <unk> inventory levels that just ended here for the major Oems on a day supply basis.
Speaker Change: All the way back relative to the 2019 with the exception of until Yoda, and Honda, which aren't really.
Speaker Change: More than half or around half or more.
Speaker Change: Less so and it's interesting that Toyota and Honda are the two biggest market share losers three Q. So series of related questions. Here first do you think Toyota and Honda are willing to sacrifice market share long term in favor of unit profitability and then second how do you think about industry dynamics between new.
Speaker Change: With us totally.
Speaker Change: Total unit profitability in the us and the two distinct paths, one being the 16 million Saar environment, where kind of.
Yes.
Speaker Change: And then where it's more of a focus on affordable.
Unit profitability versus market share and then the.
Speaker Change: There would be a more market share focused higher SAR more consumer friendly and affordable vitamin.
Speaker Change: I'm just curious how you think about that and then there would be great.
Speaker Change: Based on your knowledge, how would you handicap, which one of those two outcomes going forward is more likely.
Speaker Change: Well, firstly I don't think until I don't know Andre in a position where they have to make a sacrifice in terms of that profit to increase that volume I think that that current supply and demand equation.
Speaker Change: It's still very much in their favor and even if they are able to increase global supply.
Speaker Change: And I think they can bring more inventory to this market place and still maintain good margins and I think that the dealerships in that in that.
Speaker Change: Partnerships as being a big partner with them.
We will continue to benefit from that as you get into 2025 and beyond and I think they're working very hard to increase production.
Speaker Change: <unk>.
Speaker Change: In terms of the <unk>.
Speaker Change: Terms of the dynamics.
Speaker Change: Talk a little bit about my view on it and then you can redirect and ask some more questions but.
Speaker Change: You're talking about the total the total saw if you look back and actually strip out the retail Saar.
Speaker Change: All right all the way back to 2022, it's been bouncing around 12 12 to 13.
Speaker Change: But really some very minor growth throughout that period of time.
Speaker Change: And that I think is driven by a number of things. Obviously, we've seen average MSRP is continue to increase we have seen significant increases in interest rates and we still see very suppressed incentives and still the leasing channel, but those dynamics are changing because we've begun to see now the moderation of average MSR. Please in the marketplace.
Speaker Change: They are falling quarter over quarter, and I think that that will continue to moderate down.
Speaker Change: We are seeing the beginning of interest rates dropping that's already seen and if you have a new car buyer.
Speaker Change: It will save through slower if you will or used car buyer, but that environment is improving but it's still very elevated compared to where we were in 'twenty. Two so in terms of the retail side <unk> seen retail saw slow progressive increases notwithstanding the fact to sustained high MSR pays and significant increase in interest rates.
Speaker Change: That's been partially offset by.
Speaker Change: MS manufacturer incentives I think going from about $1000 to 20 520 <unk> hundred.
Speaker Change: Youre going to see the return to $3000 plus incentives in Q4, and you Havent seen that since Q1 2021 from memory and I think that will progressively also add to the demand equation. So my view is that because of that youre going to see the <unk> continue to improve back end of this year and into next year, which will feed.
Speaker Change: In more favorably than to use cost under the pressure in used cars and I apologize for taking so much but there was a lot of questions packed into what you said, but one of the clashes in used vehicles.
Speaker Change: Why does the year over year comps in used vehicles that stood out as those people that were buying.
Speaker Change: $40000 plus used vehicles that camp that.
Speaker Change: Traditionally new car buyers that I think will continue to return to the new car environment, but I do say that.
Speaker Change: New car sales continues to improve its gone add benefits in the used car market I don't think it will necessarily.
Speaker Change: I have a dramatic effect on used car margins because of the law used cars are bought and sold they always float within.
Speaker Change: Abandoned and have done that and you can see that level of consistency and that will continue so I view that as being as being positive into the future.
Speaker Change: One of the things that remains as is.
Speaker Change: The point that has had some discussion, but it's impacted margin and has also impacted growth has been the relative imbalance between supply and demand of the various powertrain options to diet industries still sits with inventory levels of battery electric vehicles that are higher than the demand and I think you'll see Oems work very hard in the next.
Speaker Change: Two quarters to clear those out that will impact pricing and you're also seeing the inverse.
Speaker Change: On <unk>, where the market seems to be gravitating towards that and the Oems are beginning to build more of those so.
Speaker Change: Those impacts I think.
Speaker Change: Having implications for some continued moderation of margin on the new car side, partially offset by continued increases in new vehicle inventory industry, which will ultimately help.
Abuse vehicles and supply these vehicles, particularly for franchise dealers.
Speaker Change: And if I missed any.
Speaker Change: No.
Speaker Change: Quick theoretical follow up as it relates to could you see a scenario where.
Speaker Change: The late model used cars are just in shorter supply and that drives up the value of those relative to new higher residuals, where for a short period of time, we just we see a real push.
Speaker Change: Even greater than usual into leasing.
Speaker Change: Well I mean listen it's still <unk> to just over $20 Assembly historically, it's been 30%. So I think youll see an increase in leasing anyway.
Speaker Change: I think it's just a natural progression and that's what will also fuel increase and an OEM incentives.
Speaker Change: I think the pace of leasing percentages on battery electric vehicles. I also think the six 7% market share is where it's going to be for a period of time. So any increase in leasing is going to come through other powertrains, which I think has great benefits for us and franchise dealerships I don't think that it will result necessarily.
Speaker Change: An increase and a strong increase in light years residual values, because I think what's going to happen as a result of all of that those leases will be 12 to 24 months that progressive is going to be released in the marketplace. So I think yes.
Speaker Change: Yeah, we used to use this term, but I'll say normal levels of depreciation depreciation movements are more likely in the future rather than changes to what's been our historical pattern.
Speaker Change: Great I appreciate you.
Speaker Change: Give me the.
Speaker Change: We're going to take there.
Speaker Change: The next question today will be from the line of Colin Langan with Wells Fargo. Please go ahead. Your line is now open.
Speaker Change: Oh, great. Thanks for taking my questions.
Speaker Change: Just wanted to clarify on the 'twenty one CDK impact is that just an impact on what you think are the lost sales I think in the past you took like.
Speaker Change: Compensation items and special charges.
Speaker Change: And I thought last quarter. There was some hope that they would actually be maybe some catch up I guess that catch up was more than offset by continued pressure in the quarter.
Speaker Change: Yes, Thanks Colin.
Speaker Change: Yes, so youre recalling the second quarter charge.
Speaker Change: This was comprised of two things one was the <unk>.
Speaker Change: One time payments.
Speaker Change: We had incurred a onetime cost we incurred mostly.
Speaker Change: Payments to our associates.
Speaker Change: And secondly was the impact of the lost sales across.
Speaker Change: New use.
Speaker Change: CFS impact as well as on the aftermarket.
Speaker Change: In the third quarter.
Speaker Change: The impact is really just limited to the loss of business.
Speaker Change: It's split evenly between.
Speaker Change: Use the after sales in CFS and on the used side as Mike Mike talked about we came into the.
Speaker Change: You had a quarter with significantly lower inventory.
Inventory levels than we're normally.
Speaker Change: Looking with and as a consequence, the July used car business and the CFS Thats impacted.
Speaker Change: Uh huh.
Along with those sales.
Speaker Change: Yes.
Probably two thirds of that impact and the rest was just on this on the service side.
Speaker Change: CDK capability.
Speaker Change: For the various service.
The disciplines and processes was really not fully restored until.
Probably 253 weeks into the end of the month of July so.
Speaker Change: That impacted our ability on the service side as well, so probably an even split between the three of you.
Speaker Change: CFS.
Speaker Change: And that service.
Got it.
Speaker Change: Classification.
Just.
Speaker Change: All up I guess, it sort of relates to pricing, but any update on where you think new Gpus eventually stabilize that I mean, do we get back to.
Speaker Change: Historic.
Speaker Change: Percent margin historic dollar new Gpus and.
Looking at the data.
Speaker Change: And actually it looks like at least for your overall domestic looks kind of back to where things were pretty.
Speaker Change: Pre COVID-19 so have we.
Speaker Change: We've seen some brands or any kind of hit.
Speaker Change: Their historic levels.
Speaker Change: P M.
Speaker Change: Yeah.
Speaker Change: Yes, I think ill.
Try to speculate I can comment where margins are going to go I think as we've said.
Speaker Change: The reduction in margins is motivating we will see a reduction in Q4.
Speaker Change: Some of what we've seen is as I alluded to.
Ben: It's Ben.
Ben: Driven by <unk>.
Ben: A mix impact between powertrains.
Ben: <unk> margin.
On the surface seem to be material, but when the 7% to 10% annual volume with battery electric vehicles, the relative margin of that vehicle for the OEM and the rates ILEC compared to.
Ben: And in our hybrid engine is very very significantly different I think that that element.
Ben: Now we move from the market place because I think broadly we'll make some margin effect were seeing there is a bit more staff in the system.
There are a number of Oems that are all the way back to 2019.
Ben: There's no doubt and some of them are struggling and I think has been widely reported in the press.
Ben: But there is still a lot of Oems that I think.
<unk> on what I, what I consider to be a sustainable colas or improved margins.
Ben: Demand for them and for us So I don't say, a complete return to 2019 margins peso across across the business, but as I mentioned as we came into this year my expectation was that as we exit this year our margins are going to look largely like 2019.
And we've had discussions about that it's not that I'm planning for that to.
Ben: <unk> that it will happen I think they'll probably be elevated to that as we've seen them develop through the year, but my view is that and we're beginning to see inventory levels.
Ben: Returning back actively and in some instances however in 2019 will have an effect on our margins.
Ben: Some of the items of remove production some Oems are looking to reduce their inventory levels in Q4.
Ben: Thank those elements will remain as we come into 2025 that will be more stability I think youll see some downward pressure in this quarter.
Speaker Change: Got it alright, thanks for taking my questions.
Speaker Change: The next question today will be from the line of Douglas <unk> with Evercore ISI. Please go ahead. Your line is now open.
Speaker Change: Hi, Yes, hi team. Thanks for taking my question here.
My first question is just going to be on hurricane Milton It sounds like there's some store closures. There for however, temporary that was do you maybe have some early estimates on the effects of both operations and perhaps any incremental capex, that's going to be needed to refresh. These rooftops after the hurricane from what we've read on store closures it seems like even.
Speaker Change: In Q4 might not be clean.
Speaker Change: So just curious on the bogey there.
Speaker Change: Yes.
Speaker Change: As you can imagine I mean for mountain were fairly fresh off of it.
Speaker Change: I myself have been.
Speaker Change: Amazed that the.
Speaker Change: The resilience of our operations.
Speaker Change: Both the preparation for what was coming in as well as.
Speaker Change: The ability of the team to get back online fairly quickly.
Speaker Change: There'll probably be a modest impact.
Speaker Change: When you look at our insurance deductibles.
Speaker Change: Four store damage.
Speaker Change: Mostly like facade type stuff, but.
Speaker Change: The vehicle damage was fairly limited.
Speaker Change: So we're really fortunate.
Speaker Change: <unk> on that part as well as the safety of our employees.
Speaker Change: And.
Speaker Change: It would probably be a modest callout in the fourth quarter once we finalize the.
Speaker Change: The impact, but I wouldn't say it's.
Speaker Change: I wouldn't call it anything close to the devastating on the on the operation and from a Capex perspective, I don't see significant incremental capex as a result of this.
Speaker Change: Okay, great. Thanks, Tom and then I'll just ask one more here.
<unk> on Gpus sequentially into Q4, as I think there was some trading of profitability or margin for volume.
Speaker Change: In Q3 in the wake of CDK in early July.
Speaker Change: Again, just trying to think about what a clean quarter. It looks like given the CDK has been mentioned in all walks in the presentation, but is there a world where.
Speaker Change: Gpus are flat to up before continuing sort of the downward normalization trend in early 'twenty five.
Speaker Change: Q4.
Speaker Change: Not in my opinion.
Speaker Change: I think youre going to say you are going to see the normal seasonal lift in Q4 in terms of our premium luxury Brian.
Speaker Change: That is going to happen I think the environment that I talked about is guiding to a more positive if you're guiding to say increased incentives in the marketplace. I think Oems are thinking about many of the Oems that talked about thinking about Q4, as an opportunity to get themselves in a great shape for 2025.
Speaker Change: And I view that I view that positively, but as we have said I think you will see lower but some downward impact on margins in the quarter, partially offset by the mix change that we know that we normally see.
Speaker Change: I am thinking positively even in that context about the new vehicle and industries. We finished as we finished the year, though but I do think youre going to say as we've said in many of our <unk>.
Speaker Change: Competitors have said you are going to see a lower <unk>.
Speaker Change: Joost overall, new GP it, yes, I would add to that Doug that.
Speaker Change: When you look at the.
Speaker Change: The way, we've quantified and articulated.
CDK impact you'll notice I didn't mention.
Speaker Change: New vehicles.
Speaker Change: We were transacting at.
Speaker Change: Of the gate.
Speaker Change: While the business was not.
Speaker Change: Not perfectly back to normal I don't think there were significant impacts on unprofitability cosmetic CDK and unit profitability on new so I don't think Theres a snapback.
Speaker Change: <unk> and <unk>.
Speaker Change: In Q4.
Speaker Change: Okay that makes a lot of sense. Thanks for the detailed answer guys.
Speaker Change: Okay.
Speaker Change: Thank you and this will conclude the Q&A session for today's call and I would now like to hand, the call back over to Mike for some closing remarks.
Mike: Well first thank you for joining us on the call today I think we covered allowed us allowed to topics and I. Appreciate your I appreciate your questions and I Hope you got it right.
Speaker Change: Is that that you were looking for.
As we've gone through the quarter and we've talked about the various impacts and I stand back I am pleased with the results that we delivered.
You can see them stand out in terms of our cost performance on new vehicle, New unit growth and a record after sales gross profit and again, thanks to the team so that and looking ahead is that as I told you about and we've had discussions on I think there are many things in the environment.
Speaker Change: Whether it's moderating interest rates OEM actions that will drive improved affordability of new vehicles that in my mind will will lead to a continuation of that slide by progressive increase in.
Speaker Change: Retail side. So I think that's you know that's a positive that's opposed to that outlook.
Speaker Change: I think the all of the things that we have talked about I've had their impact on the business.
Speaker Change: Yeah.
Apart from some minor things that Tom mentioned, we're into what I'm, hoping is going to be a much cleaner quarter from us from that perspective. So again. Thank you all and look forward to talking to you in the near future.
Speaker Change: This will conclude the Autonation incorporated <unk> 24 earnings call.
Speaker Change: You to everyone, who was able to join US today you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yeah.