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Executives

Cheryl Scully – Treasurer and VP, IR

Mike Jackson – Chairman and CEO

Mike Maroone – President and COO

Mike Short – CFO

Analysts

Archambault – Goldman Sachs

Rick Nelson – Stephens

Matt Nemer – Wells Fargo

John Murphy – Bank of America

Ravi Shanker – Morgan Stanley

AutoNation, Inc. (AN) Q4 2010 Earnings Call Transcript February 3, 2011 11:00 AM ET

Operator

Thank you for standing by and welcome to AutoNation's fourth quarter and full year 2010 earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I now will turn the call over to, Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma’am, you may begin.

Cheryl Scully

Good morning, and welcome to AutoNation's fourth quarter and full year 2010 earnings conference call. Leading our call today will be Mike Jackson, our Chairman and CEO; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our Chief Financial Officer. Following their remarks, we will open up the call for questions. I will also be available by phone following the call to address any additional questions you may have.

Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve risks which may cause the actual results or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. Reconciliations are provided in our press release, which is available on our website at www.autonation.com.

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

Mike Jackson

Good morning, thank you for joining us. Today, we reported adjusted EPS from continuing operations of $0.45 for the fourth quarter, a 55% increase on a per share basis as compared to $0.29 for the same period in the prior year.

Fourth quarter 2010 revenue totaled $3.2 billion compared to $2.8 billion in the year-ago period, an increase of 16% driven primarily by stronger new vehicle revenue. In the fourth quarter, total US industry new vehicle retail sales increased 6%, based on CNW Research Data. In comparison during the same period, AutoNation’s new vehicle unit sales increased 15% or 12% on the same store basis. For the full year adjusted EPS from continuing operations of $1.56 was a record up 36% over prior year. Revenue for the full year was up 17% over prior year.

This morning we reported our January new vehicle retail sales which increased 24% continuing to demonstrate at the auto industry recovery is solidly underway. The January seasonally adjusted annual rate was $12,600,000 which was a highest since Lehman Brothers bankruptcy in September of ’08 excluding cash for [indiscernible]. We continue to see strength in domestic sales which were up 40% in imports increased 23% and premium luxury was up 5%.

During the downturn our aggressive cost reduction and asset management strategies resulted in a lower cost structure of more recession inventory management. We continue to invest in our stores and our share service center where we centralized our store level accounting administrative activities. We also selectively added to our portfolio by acquiring several new stores including our announcement today that we’ve entered in to an agreement to acquire one of the country’s largest Toyota store Ft. Myers Toyota on the west coast of Florida.

AutoNation has an optimal brand and market mix that position us we’re strong performance in new vehicle sales as the market rebound. We have been consistently demonstrating our ability to perform in what we expect to be a multiyear recovery in auto retail.

Thank you very much. Turning it over to Mr. Short.

Mike Short

Thank you, Mike. Good morning, ladies and gentlemen. For the fourth quarter reported adjusted net income from continuing operations of $68 million, or $0.45 per share, versus $50 million or $0.29 per share during the fourth quarter of 2009, a 55% improvement on a per share basis.

During third quarter 2010 conference call we mentioned that we expected to earn approximately $20 million in performance based manufacturer incentives over the next two to three quarters. Primarily related to premium luxury vehicles previously sold.

In Q4 operating income was favorably impacted by approximately $11.8 million due to the recognition of these incentives. We expect to recognize an additional favorable impact of approximately $9 million in operating income related to these incentives over the next two quarters.

Our fourth quarter 2009 results excluded the favorable tax adjustment of $12.7 million or $0.07 per share and there are no adjusting items in the fourth quarter of 2010. For the full year our adjusted EPS was $1.56 compared to a $1.15 in the prior year. Adjustments for that the net income are included in the reconciliations provided in our press release.

Fourth quarter revenue increased $452.2 million or 16% compared to the prior year. Gross profit improved $71.4 million or 15%, while SG&A was up $32.5 million or 9% for the quarter. SG&A as a percentage of gross profit was 72.1% for the quarter, this benefited from an improved gross profit due to manufacturer incentives previously mentioned. Excluding that impact SG&A as a percentage of gross profit would have been in line with third quarter of 2010 an approximately 240 basis points lower than Q4 of prior year.

Net new vehicle floor plan was a benefit of $2.8 million for the quarter, a decrease of $1.5 million from $4.3 million benefit in the fourth quarter of last year due primarily to higher average floor plan balances during the quarter.

Non-vehicle interest expense was $16.3 million for the quarter, up from the $10.2 million we reported in the fourth quarter of 2009 due to our refinancing which closed in April 2010.

Our percentage of fixed rate debt was 33% prior to issuance compared to 47% at the end of the fourth quarter. Refinancing also increase the pricing under our revolver and term loan facilities from LIBOR plus 87.5 basis points to LIBOR plus 225 basis points.

During the quarter paid down $30 million under our revolving credit facility resulting in $118 million of outstanding borrowings on our revolver at the end of the fourth quarter.

Our fourth quarter non-vehicle debt balance was $1.349 billion an increase of $236 million compared to the fourth quarter of 2009, but a decrease of $32 million compared with the third quarter of 2010. LIBOR rates are relatively flat compared with the fourth quarter of 2009.

Provision for income tax in the quarter was $41 million or 37.7% this reflects the benefit of certain favorable tax adjustments. During the fourth quarter, we repurchased approximately 731,000 shares for $17 million at an average price of $23.38. For the full year we repurchased 26.6 million shares for $524 million at an average price of $19.70.

We ended the fourth quarter with the 148.4 million shares outstanding and $233 million of bond authorization remaining for future share repurchases.

Capital expenditures for the quarter excluding operating lease buy-outs were $72.7 million resulting in full year 2010 capital expenditures of $150 million net of operating lease buy-outs as we continue to invest in our facilities.

For 2011 we expect CapEx to be approximately $140 million excluding proceeds from related asset sales. Floor plan that was approximately $1.9 billion at quarter end up approximately $233 million from September 30, 2010, and in line with inventory levels.

Our balance sheet continues to be industry leading and we remain well within the limits of our financial covenants. Our leverage ratio was 2.41 times at the end of the quarter compared to the limit of 3.25 times. Our quarter end cash balance was $95 million which combined with our additional borrowing capacity resulted in healthy total liquidity of over $550 million at the end of December.

Our cash flow generation combined with our strong balance sheet and streamline cost structure position the company to continue to benefit from the improving are to maximize the value of the company and shareholders returns.

Let me now turn it over to our President and Chief Operating Officer, Mike Maroone.

Mike Maroone

Thanks Mike and good morning everyone. Our entire team is committed outperforming the market the economy recovers and in 2010 we did that just that. We are very proud of our strong operating results for both the fourth quarter and the full year 2010 that netted in an impressive 4.1% operating margin for the quarter and an industry leading 4% operating margin for the full year.

Our performance was achieve with elite levels of CSI, increased associate productivity in the lowest associate turnover in the company’s history. In the quarter, we grew new vehicle unit volume 15% on a total store basis and12% for same store comparing favorably to the industry which according to CNW was up 6%. Performance was also impressive for used vehicles we are in the quarter we achieved growth of 21% for total stores and 19% for same stores.

Contributing to the lift in volume was strong performances in our three largest states of California, Texas and Florida. Where our brand mix, locations and operating teams execution were a clear benefit.

Looking at segment performance, we did $122 million total segment income for the fourth quarter grew 42% or $36 million compared to the period year ago. Segment income for the domestic segment increased $30 million or 55% to $37 million premium luxury increased $70 million or 36% to $66 million, and import segment income increased $5 million or 11% to $46 million. For the full year 2010 total segment income of $454 million was up $82 million or 22% compared to 2009 with year-over-year growth in all three segments.

As I continue, my comments will be on a same-store basis unless noted otherwise. In the fourth quarter AutoNation retailed 52,000 new vehicles, an increase of 5,500 units or 12% compared to the period of a year-ago, the domestic segment accounted for just over half of the unit increase driven primarily by Ford where new unit sold increased 30%. The import segment accounted for about 40% of the new unit increase and premium luxury accounted for the balance of the increase in volume.

Gross profit for new vehicle retail increased $129 or 6% to $2,416 per vehicle compared to the period of a year-ago. Gross profit as a percent of revenue increased 30 basis points to 7.2%. Excluding the special performance-based manufacturer incentives in the quarter gross profit for new vehicle retail was $2,163 up $124 or 5%. And gross profit as a percent of revenue was up 50 basis points to 6.4%. We attribute primarily to year-over-year margin compression in the import segment due in part to increased inventory compared to the post cash for clunkers period a year-ago where import inventory was completed.

Sequentially, from Q3 to Q4 again, excluding the special performance-based manufacturer incentives we are pleased to increase PVR by $168 or 8% with all three segments contributing to the growth. At December 31st our new vehicle day supply was 63 days comparing favorably to the industry at 68 days and with 48,500 units are yearend inventory represented what we consider a more normalized level.

Turing to used vehicles we delivered a strong 19% growth in the used units retail for both quarter and the full year, focusing on Q4 retail used vehicle was up 22% on the sale of 38,000 used vehicles with revenue per vehicle up 2% to 17,500.

Gross profit for vehicle retail of $1,572 increased $80 or 5% which gross profit as a percent of revenue increasing 20 basis points compared to the period a year-ago.

Our used to new ratio in the question was 0.74 up from 0.70 a year-ago and at December 31st our used vehicle day supply was 42 days. I would like to provide a quick update on our value vehicle outlets or VVOs where to address industry supply constrains and meet market demand we are retailing value priced vehicles that we would have traditionally wholesale.

In the fourth quarter VVO sales accounted for 6% of our used vehicle volume a then average selling price of $7,800. Today we have 19 VVO locations in operation we have five more schedule to open in the current quarter.

Our part service and collision business drove growth in both revenue and gross profit in the quarter revenue up $546 million represented an increase of $32 million or 6% with customer pay revenue warranty and internal all contributing factors. We are very pleased to recognize a 4% increase in customer pay revenue compared to the period a year-ago our strongest performance in three years. As well as an 8% increase in warranty and a 19% increase internal.

Service parts and collision Q4 gross profit of $236 million increased $11 million or 5% compared to a year-ago driven by an 11% increase in warranty related the large scale recalls that we’re announced earlier in the year and a 13% increase internal.

Our F&I team turned in strong results with F&I gross profit for vehicle retail of $1,164 an increase of $36 or 3% compared to a year-ago. Our preferred lender network OEMs service contract alliances strong product penetration and strong store level execution continue to drive our performance in F&I.

In the quarter we relocated Mercedes Benz of Miami, Mercedes Benz of South Bay in Southern California, and BMW MINI of Dallas to brand-new large facility. We also open Audi Peoria a lightship Audi store in [indiscernible] Peoria Arizona.

At December 31, our store portfolio was 206 stores and 242 franchises in 15 states. To reconcile the accounted at the end of Q3 during the fourth quarter we divested one store and three franchises and terminated seven [indiscernible] franchises.

This action represented a combined annual revenue run rate of 77 million and as now you know we have an agreement to acquire Ft. Myers Toyota on the west coast of Florida the 35 largest Toyota store in nation in 2010 ranked by new vehicle unit sales. We expect this transition to be completed by the end of the first quarter and look forward to welcoming this store to AutoNation and to our Florida region.

I like to note that we have 16 major facility projects waited for completion this year, six are new stores needed for additional points awarded to us by manufacturers and the remaining 10 will significantly upgrade existing stores or be Greenfield sites. Looking ahead we continue to seek acquisition opportunities that meet our market brand and return on investment criteria.

Inclosing we are very proud of our performance in 2010 and thank each of our 19,000 associates for their contributions, our formula for success remains continues improvement of our best practice processes, intense focus on retaining our low cost base and investment and training and developing our people. We believe these efforts and our store portfolio position us well to take advantage of an improving market.

With that I’ll turn the call over back to Mike Jackson.

Mike Jackson

Thanks Mike. If we look at 2011 we believe that the gradual improvement in new vehicle sales will continue, our planning assumption for 2011 industry new vehicle unit sales is 12,800,000 units and retail selling rate of 10,200,000 both of which would represent a 11% improvement over 2010.

With that I’d be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is coming from Patrick Archambault – Goldman Sachs.

Patrick Archambault – Goldman Sachs

Hi, good morning.

Mike Jackson

Good morning Patrick.

Mike Maroone

Good morning Patrick.

Patrick Archambault – Goldman Sachs

A couple of ones. Can you give us an overview of how the competitive environment is playing out in new, your gross is there came in, I guess ahead of our expectations, even – and I guess part of that was, I don’t actually know, actually may be the incentives were probably in SG&A books, they might not have impacted gross, but that seem to be pretty strong there, nonetheless, and I know that in the past, you’ve talked about trying to take share in that environment which have impacted margins a little bit and it seems like a number of other large dealers were following. How has that changed since last quarter, has the behavior there become a little bit less aggressive on the discounting side?

Mike Jackson

Patrick, it’s Mike Jackson. If you look at our sales that we definitely in our big state California, Texas and Florida where for the industry the retail increases in low single digits we had double digit increases. So we had an excellent performance from our store on the volume side which we very satisfied with we told you in the third quarter that we would make an effort on the front end margins Mr. Maroone report please.

Mike Maroone

Well, if you exclude the special performance-based incentives we increased our PVRs by $175 and it was a focus throughout the company, we really felt there was more opportunity in new vehicle margins and frankly we see the margin stabilizing going forward. So I think Q3 was a little bit of an abrasion. But we drove the improvement in Q4 and I think going forward we will have a stability in margins.

Patrick Archambault – Goldman Sachs

Okay, great. And I wanted to focusing on parts and service, that was I think another area where you did better than I think a lot of expectations with that growth rate. Could you, may be just give us a little bit of overview of how you expect those three sub-segments to trend on a go forward basis in 2011?

Mike Maroone

Patrick again it’s Mike Maroone. We have put a lot of time and effort in resources behind the customer pay and really feel that that’s the key, that’s the one that most in our control. So we had positive growth in the quarter, it’s our best performance in three years. And I think going forward I think we can expect to see somewhere between 3% and 5% revenue growth in customer pay. Internal as you know that clearly moves with volume in an improving market I think you will see continued strength there, and hopefully double digit strength. And the warranty is a little bit of a wildcard, because there was a fair amount of recall especially on the Toyota Lexus side that we’re certainly an influence in the warranty. But we’re not seeing that double digit decline in warranty that we’ve seen in the past. So again, I don’t know that we can make predictions on what the recall environments going to be like, so our efforts really focused on customer pay.

Patrick Archambault – Goldman Sachs

Okay

Mike Jackson

This is Mike Jackson on recall for the industry there was about 20 million last year which is the third highest ever, the peek is 30 million recall second highest is 25. So considerable level of recalls, I don’t have any idea of whether that level would repeat this year or not. And overall quality still gets better. Mr. Short, you want to add something?

Mike Short

Yes. Patrick, I just want to go back your earlier question because I think there it sound like the other question about where incentives are booked. Those special incentives that we received from the manufacturers the $20 million that we called our last quarter the benefit of that is booked in gross profit. When you do the ratio obviously because gross profit goes up and there is not much expenses associated with those incentive dollars. You do see a corresponding life, improvement in the SG&A as a percentage of growth.

Patrick Archambault – Goldman Sachs

Okay great. Thank you very much and congratulations on the good quarter.

Operator

The next question is coming from Rick Nelson – Stephens.

Mike Jackson

Rick, good morning.

Rick Nelson – Stephens

Thank you, good morning Mike. Congratulations as well.

Mike Jackson

Thank you.

Rick Nelson – Stephens

Greetings from snow in Chicago. The industry sold 3 million actual units in the fourth quarter. AutoNation made $0.45 in the fourth quarter if we annualize both of those numbers, would employee $1.80 in a 12 million units environment. Is that the right way to look at our earnings power, do we need to make adjustments for these incentives that came in the fourth quarter.

Mike Jackson

I think we’ve been very clear that the fourth quarter include $0.05 of special additional incentives of which there is still another $0.03 to $0.04 to come in the first and second quarter. And then after that there will be a normalized run rate on front end growth along the lines of what Mr. Maroone called at.

Rick Nelson – Stephens

Okay. Thank so much. The OEMs are talking about higher commodity and other cost, if they raise prices to offset those higher cost. How do you see that playing out for the dealer?

Mike Jackson

I don’t see it as a serious issue. The consumers demonstrated willingness to pay for more content and we don’t hear anything from the manufacturers about significant precipitous price increases. To me if I look at the year the wildcard is gasoline prices. If we have a spike in gasoline prices up above $4 a gallon, well, I think the industry is well prepared this year to handle than it were ’08, it something that if it is up for couple months and but I think inventories are so much lower and every manufacturer has to [indiscernible] vehicles. And I think the freak-out point for the customer is higher than it was in ’08 I think we’re better able to handle but I think to me that’s the wildcard for the year, not pricing.

Rick Nelson – Stephens

Thank you. Also for used car accounts have been terrific or stunning even it gets anniversary and something really tough comps a year ago when do you see had customer switching from used to new and I think how suitable do you think that used car growth?

Mike Maroone

Rick, it’s Mike Maroone. I think that there is a portion of the customer base that moves from certified pre-own to new. Today certified pre-own is about 30% of our mix. But there is strong demand on the used vehicle side we haven’t seen that fall off at all the real issue on use is supply, and we’re working really hard on the supply side we’re very optimistic that we can continue to grow at used at lease in line with the new may be more and we’re very pleased with our value vehicle outlet is performing I think at high level and is incremental business to the company. So I think there is still more opportunity in used and we’ve got a great used car team is working very hard at it.

Rick Nelson – Stephens

Okay. Thank you so much and.

Mike Jackson

Hey Rick just to make sure. Lets one of follow up on your question on EPS. I think [indiscernible] if we believe that there nothing happens until you sell a car, right. I think it might be a little bit over simplistic to say that you can look in to hard number or extrapolated out to what that necessarily means for EPS remember that our fixed operations gross profit represent half of the overall gross profit stream for the organization. So I would just probably, I think we can gets some rough ideas generally about that but I would tempered with obviously the level of modeling that you typically do in a lot more detail.

Rick Nelson – Stephens

Okay. Thanks Mike.

Operator

The next question is coming from Matt Nemer – Wells Fargo.

Matt Nemer – Wells Fargo

Good morning everyone.

Mike Maroone

Good morning.

Mike Jackson

Good morning Matt.

Matt Nemer – Wells Fargo

My first question is I guess more of housekeeping question. But can you just remind us, what’s different about this luxury incentive program versus the typical stair step program? And should we expect that, we might see more of these going forward or do you think this is really one time, I’m trying to figure out whether we should take this out of the model?

Mike Jackson

Because it was a multiyear commitment over a very extended period of time that I had many performers thinks on it before you would earn the money, and you didn’t know for sure until you started every eye across every Ts that indeed you would get it. Therefore, it’s going to be recognized even though was over extended period of time. And there are no manufacturer program in place that mere the programs at the moment that I would sit here and say well if I look at 2012 this is going to occur again. So in that sense I can’t say we got another one of these things in progress. So these programs are coming to their completion and they have not being reformulated by the manufacturers.

Matt Nemer – Wells Fargo

Okay. So typically a stair step program would, even though you may not know you are going to hit your target until the following quarter you do…

Mike Jackson

Yeah.

Matt Nemer – Wells Fargo

Approved for that?

Mike Jackson

This is not stair step.

Matt Nemer – Wells Fargo

Okay.

Mike Jackson

So its performance, other performance metrics will always no region to take you through it, it’s not stair step but it is retro in the sense that you have to achieve all these performance targets and we see the money that you earned over an extended period of time.

Matt Nemer – Wells Fargo

Got it, okay. And then turn in to the used vehicle business. Should we expect that as the outlets become more successful and as there are more of them out there, that your average price per vehicle sold will go down a little bit and your gross profit per vehicle sold will also see some pressure obviously offset by higher units?

Mike Maroone

Yeah, Matt, it’s Mike Maroone. I think that’s correct. The average selling price of our VVO units is in the $7,500 range. It probably has an impact of about $50 diminishment of gross margin, but again, we look at is all incremental and on top of the gross margin you see there is reconditioning profits and there is finance profits. So we think they’re important of the business and I think it’s going to be growing part of the business and we’ll see how far it goes, but so far so good.

Matt Nemer – Wells Fargo

And then lastly, I’m just wondering, if you can comment on what you are seeing in terms of floor traffic that might be impacted or mix it might be impacted by higher crude, higher gas prices and the weather that we are seeing around the country?

Mike Maroone

Nothing, yet. If you at January sales no impact on truck vehicles whatsoever. Even though we have had a $0.15 increase in the price of gasoline over the 90 to 120 days breaking through $3 a gallon we’ve seen no change in consumer behavior.

Mike Jackson

On the service side, first of all, we’re primarily sunbelt so we’re probably less affected than some. That we’ve seen the catch up the sales side after the disruption in the service side you do lose a couple of days here and there, but I think don’t think it’s going to be a major impact on the quarter for us, and again, it’s a sunbelt operator we’ve been fairly immune to that, although we have been affected in a couple of markets.

Matt Nemer – Wells Fargo

Okay, great. Congrats on a great quarter.

Mike Jackson

Thank you.

Mike Maroone

We are sitting in the Florida, 72 degrees watching the weather channel and make you feel a very smart. I’m not saying you are smart, but it can make you feel smart.

Operator

The next question coming from John Murphy – Bank of America.

John Murphy – Bank of America

Mike sitting in the New York that’s kind of mean comment to us. We were sitting in the top environment here, so I’m no t feeling so smart, we’re looking at the smell outside. First quarter for you, on California, Florida and Texas, you mentioned that you have outperformed those markets. Those are strong markets, but you also outperform the markets. And we are seeing pretty strong gross is coming from you, across the board on new vehicles. I’m just trying to understand, how you’re gaining market share and improving gross margins at the same time, are we just blindly seeing the benefits of the consolidation in the dealer base coming through or this just a much stronger fundamental level of demand that is allowing you to rise gross. I’m just trying to understand how those two factors are working in unison?

Mike Jackson

Yeah, John, I would say, first as an overall statement and I said this before but may be now a significant of it is coming out. We are in very defensive past year ’05, ’06, ’07, ’08 I mean we really more concerned that it was more downside than upside and in that sense you have to manage everything assuming things when it get worst. And then when they got worst you have to assume you are get even worse. So that really changes how you approach the market. As soon as we saw of that the worst was over that would have been June of ’09 we switch from defense to offense where our risk profile changed on every category from inventory levels to marketing to an initiatives. And that combined with throughout that period, we always invested in our initiatives around process and technology, but if you combine, compare those initiatives now with a lean forward past year, you could see the pay off. So Mr. Maroone, want to add.

Mike Maroone

I just think that we’ve got a very experienced team out there. We’ve got great stability and have really focused on execution. And I think Mike early said it, we continue to invest in people and technology in the downturn although we are conservative in certain parts of the business and I think we’re now seeing the pay off.

Mike Jackson

Now we don’t always get it right. If you look at the third quarter we said we are unhappy with our front end growth and that we would address it. What the fourth quarter says is that when we give direction, we can achieve it at the store level, and we’ll make these constant refinements as we go forward and see where the opportunity is in the marketplace, but by and large we think we are going to outperform in the marketplace.

John Murphy – Bank of America

And then the second quarter, I’m just trying to score a two factors again. Inventory levels seem to be fairly lean at this point yeah there is being a lot of concern in January the GM may have ramped up incentives and other automakers may have ramped up incentives and it sounds like Toyota is on the verge of ramping up incentives even further. I’m just trying assume, are you seeing these incentives at the dealer level as really a net change or increase in incentive spending by the automakers, or they just refocusing and reshifting their old what their previous incentive dollars around and it more effectively advertising those. We’ve just seen Audi they are going to ramp up incentives with inventory so low.

John Murphy – Bank of America

Now John, if it door number two you’ve got it right. We don’t see anything significant in the marketplace has different than first quarter or even different form a year-ago. At the constant refinement process but there is no significant change in the level of incentives that we see at the store level. The only incentive that we think and we always believe there will be incentives and taxable incentives are find the only incentives that we dislike intensely or stair step program which create the lot of chaos and mistrust in the marketplace. And really don’t have a place in today’s internet world where basically stair steps we’re telling to customer unless they shop to death [ph] they may not find where the stair step is hidden and that has no place in today’s marketplace. But other than that I think the manufacturer incentives are pretty much inline and it’s more a repackaging and re-communication than anything that’s really change significantly.

John Murphy – Bank of America

Got it, that’s helpful. And then just lastly the 16 major projects that you have underway mean as we think about those six new stores ramping up and then the 10 upgrades and anniversary and I mean is this more first half event, second half event, I mean how should we think about it in the context of full year 2011?

Mike Maroone

John, it’s Mike Maroone. It’s really spread out over the full year there is a lot of big project both be at stores and import stores, domestic stores. It goes right across the board and is spread throughout the year. I think what it really say is that we’re really believe in this business and we continue to invest aggressively and we hope invest in the right spots.

John Murphy – Bank of America

Thank you very much.

Operator

The next question is coming from Gary Balter – Credit Suisse.

Mike Jackson

Hi Gary welcome to the call. You are sitting in Boston, are you?

Unidentified Speaker

It’s actually [indiscernible] sitting in New York. But it actually in equally sunny spot I think so.

Mike Jackson

Okay.

Unidentified Speaker

I’m actually in San Diego. [indiscernible] how are doing Gary. Fine. Congratulations on the quarter.

Mike Jackson

Thank you.

Unidentified Speaker

Just one quick one, I’m just following up on that incentive question. I was going to actually get your prognostication on whether you think that may be influence the manufacturers to may be intensify some incentives in the next several months. He kind of answered but I wanted to hear your thoughts again.

Mike Jackson

You mean, am I advocating for more incentives?

Unidentified Speaker

No. I don’t think you have problem of advocating, but do you think GM's actions may spread some of the other manufacturers to…

Mike Jackson

That I really don’t, I don’t see, I don’t see GM‘s droving down [indiscernible] but I would describe the GM improvement this way. GM launched some very exciting products in the last year and dramatically misjudge the demand and supply equation. So GM is trying not to over produce and they dramatically under produce vis-à-vis the demand have created for these new products. Now the production is much more in line with demand, and you are seeing that in their sales and I view the incentives as tweaking nothing really that dramatic. Mr. Maroone, do you see it any different?

Mike Maroone

No I see at a same way. I think it is their just tactical tweaks and we have a lot of confidence that they understand that, the old push system dead, we don’t have a lot of pressure to buy unwanted inventor I think they found the right balance and I don’t think incentives will be a bigger part of the industry.

I think made one a regular basis, with Alan, Ackerson and Sergio and this is the most remarkable thing I see at the top of these companies, there were feeling of never again, these are smartweed businessman they were in this together return on the capital, and produce sustainable profits and they know they have to produce vehicle the people actually want to buy for that to happen. So I am a completely convinced that this is a new business model and I assure you when we see behavior that is not alignment with that we will speak out and really the last legacy of production force is stair step, it has no place in this new world it unleashes the worst behavior it loss for the manufacturer, loss for the dealer, loss for the consumer. That’s the last thing that has to be stand out, and it’s ironic Detroit is not the practitioner of stair step, [indiscernible] there. So I think Detroit is in great shape.

Unidentified Speaker

Thanks for that. And second on operating leverage. We spend a lot of time trying to figure out, how much you will get and how much you’ll brought to the bottom line. And I think the third quarter, you may have created some skepticism out there with regard the aggressive stands on what that may mean for 2011? This quarter clearly is back, but I’m curious how you measuring those returns. I guess it sounds like this quarter you’re pleased with both the market share again and operating leverage that you’ve got, but are going to get incrementally more aggressive. I guess it depends on the market, but what is the pasture there in general?

Mike Jackson

I think in terms of the overall cost structure. We did a lot of heavy lifting in the end of ’07 and early ’08 timeframe to take out the structural of cost. We [indiscernible] invest in productivity enhancing initiatives our share service center being probably the best example of that. And we’re going to continue to do that. So overtime we look for continued opting leverage in the business. We have an SG&A as percentage of gross profit below 70% at point in the past and there is easy go for us out there in the future.

Unidentified Speaker

Okay, thanks.

Mike Jackson

There is time for one last question.

Operator

Our last question is coming from Ravi Shanker – Morgan Stanley.

Ravi Shanker – Morgan Stanley

Thanks guys. Just a quick question on the SG&A. it looks like seasonally you have a pretty big spike in SG&A to gross in 4Q. And this quarter even if you adjust from the incentive approvals, it was flat to up slightly. Can you tell me understand what’s going on? Was it just 3Q being unusually high or was it just the profitability in 4Q being better, or do have any programs going on right?

Mike Jackson

So Ravi, just to make sure. I communicate the number correctly. The SG&A as a percentage of gross for the quarter was 72.1% which is a significant improvement versus what we have seen in the past. And when you extract out the manufacturer incentives that we’ve discussed that number is in line with where we’re on last quarter. So I don’t see type of erosion that you described.

Ravi Shanker – Morgan Stanley

No that exactly my point. That typically in previous years and in 4Q your SG&A to gross goes up versus 3Q. When it did not this quarter. So I’m just wondering if there something fundamental in the efficiency in the SG&A or if it something related timing versus 3Q of that?

Mike Jackson

Well, I pointed the comment I made a semi about the continued focus on productivity initiatives improvements it just part of the D&A here. And we’ll continue to see that play out over the next several quarters.

Ravi Shanker – Morgan Stanley

Very good, thanks guys, great quarter.

Mike Jackson

Thank you everyone for joining us today. We very much appreciated. All the best.

Operator

This will conclude today’s conference. All parties may disconnect at this time.

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