Operator: Thank you for standing by, and welcome to AutoNation's Second Quarter 2013 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. Today's conference call is being recorded. If you have any objections you may disconnect.
I will now turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, you may begin.
Cheryl Scully - Treasurer and VP, IR: Good morning and welcome to AutoNation's second quarter 2013 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our Chief Financial Officer; and Jon Ferrando, our Executive Vice President, responsible for M&A. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have.
Before we begin, let me read our brief statement regarding forward-looking comments 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 result or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K.
Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release, which is available on our website at investors.autonation.com.
Now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.
Mike Jackson - Chairman and CEO: Good morning, and thank you for joining us. Today, we reported an all-time record quarterly earnings per share from continuing operations of $0.73 in the second quarter, a 11% increase as compared to adjusted EPS of $0.66 for the same period in the prior year. Second quarter 2013 revenue totaled $4.4 billion compared to $3.9 billion in the year ago period, an increase of 13%, driven by stronger performance in all of our business sectors.
In the second quarter, AutoNation's new vehicle unit sales increased 11% and used vehicle unit sales increased 13%. Our coast-to-coast branding rollout unifying over 200 franchises, which began in February has been completed on time and on budget. Incremental branding cost was $0.06 in the second quarter and $0.09 year-to-date. AutoNation is well-positioned to capitalize on the continued auto recovery with an optimal brand and market mix and a disciplined cost structure. We continue to drive strong results during the multi-year recovery in auto retail.
Over the previous 12 months, AutoNation has acquired 10 franchises and has been awarded four new franchises by manufacturers. For 2012, annual revenue for the 10 acquired franchises together with the anticipated annual revenue of the newly awarded franchises once the stores are fully operational is approximately $1 billion.
Now I'll turn the call over to our Chief Financial Officer, Mike Short.
Michael J. Short - EVP and CFO: Thank you, Mike. Good morning, ladies and gentlemen. For the second quarter, we reported net income from continuing operations of $90 million or $0.73 per share versus adjusted net income of $82 million or $0.66 per share during the second quarter of 2012, an 11% improvement on a per share basis. There were no adjustments to net income in the second quarter of 2013. Adjustments to net income in prior periods are included in reconciliations provided in our press release.
In the second quarter, revenue increased $522 million or 13% compared to the prior year. Gross profit improved by $68 million or 11%. SG&A as a percentage of gross profit was 71.0% for the quarter which represents a 121 basis point improvement compared to the year ago period.
As part of our AutoNation rebranding initiatives, we incurred approximately $11.5 million or $0.06 per share on incremental SG&A expense during the second quarter of 2013. Excluding these expenses our SG&A as a percentage of gross profit would have been 69.3%. We do not anticipate any additional material rebranding expenses in future periods.
Net new vehicles floorplan was a benefit of $10.7 million, an increase of $2.5 million from the second quarter of 2012, primarily due to higher floorplan assistance. Floorplan debt increased approximately $200 million during the second quarter to $2.7 billion at quarter end, as we increased our inventory levels due to increasing sales volumes.
Non-vehicle interest expense decreased $22 million compared to the $22.5 million in the second quarter of 2012 due to lower debt balances. At the end of June, we had $400 million of outstanding borrowings under the revolving credit facility and total non-vehicle debt balance of $1.9 billion. This was a decrease of approximately $21 million compared to March 31, 2013.
Provision for income tax in the quarter was $56.5 million or 38.5%. During the second quarter of 2013, we repurchased 65,000 shares for $2.7 million at an average price of $42.01 per share. AutoNation has $314 million on remaining Board authorization for share repurchase.
As of July 17, there were approximately 121 million shares outstanding. This does not include the dilutive impact of stock options. That's continued evidence of the strength of our cash flow generation capability, our leverage ratio decreased from 2.6 times, at the end of Q1 to 2.5 times at the end of Q2 even after acquiring three stores in the quarter. The leverage ratio was 2.4 times on a net debt basis including used floorplan availability and our covenant limit is 3.75 times.
Capital expenditures were $32 million for the quarter, we expect CapEx to be approximately $180 million for the year. Capital expenditures which include construction in process are on an accrual basis excluding operating lease buyouts and related asset sales. Our quarter end cash balance was approximately $70 million which combined with our additional borrowing capacity resulted in a total liquidity of $864 million at the end of June. Our strong cash flow generation and best-in-class balance-sheet positioned us to continue to invest in the business and effectively allocate capital to maximize shareholder returns.
Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.
Michael E. Maroone - Director, President and COO: Thanks, Mike, and good morning. In the second quarter AutoNation delivered a 4.1% operating margin, with solid growth in sales and customer care. We noted continued strong recovery of our important Florida and California markets where combined we had a 12% increase in new and used vehicle sales on a same-store basis and in June we completed the rebranding of over 200 franchises under a unified AutoNation name.
As I continue, my comments will be on a same-store basis and compared to the period a year ago unless noted otherwise. Starting with sales, we are pleased with our overall performance, where on a year-to-date basis and for the quarter total gross profit for variable operations, which combines new vehicle gross, used vehicle gross and finance and insurance gross was up over 7% and new and used unit volume was also up over 7%. This was driven by continuous improvement in the new vehicle sales pace that also generated more used opportunities. Underneath that, we experienced new vehicle margin compression that was offset by a very strong overall performance in used vehicles and finance and insurance, both for the quarter and year-to-date. I'll provide more detail, as I continue.
Looking at new vehicles in the quarter, new vehicle revenue increased $202 million or 9% to $2.4 billion on new vehicle sales volume of 71,700 new vehicles, an increase of 4,700 vehicles or 7%, with increases across all three segments. At $33,450, revenue per new vehicle retailed was up $668, with increased average selling prices across all three segments.
New vehicle gross profit of $143 million was off 2% or $2 million in the quarter and at $1,996 gross profit per new vehicle retailed was off $176, with compression largely in the Import segment primarily attributable to the whipsaw effect of changing stair-step incentive programs, as well as intensely competitive midsize cars where there is heavy volume.
Turning to used vehicles, retail used vehicle revenue of $920 million was up $90 million or 11% in the quarter on 50,400 used vehicles retailed, an increase of 4,100 vehicles or 9% with increases across all three segments. Revenue per used vehicle retailed of $18,250 increased $313. Retail used vehicle gross profit of $81 million was up $6 million or 8% and gross profit per used vehicle retailed of $1,606 was off just $18.
Relative to inventory, both our new and used vehicle inventory are in good shape. At the end of the quarter, new vehicle days supply was 67 days or 64,600 units compared to 60 days and 49,200 units a year ago, and our and used vehicle days supply was 30 days in line with the year ago.
Rounding out the variable side of the business, our finance and insurance team recorded another F&I gross profit per vehicle retailed record of $1,381 in the quarter, and increase in PVR of $99 or 8%. Total F&I gross profit of $169 million increased $24 million or 16% compared to the period a year ago. We attribute ongoing strong performance in F&I to AutoNation's commitment to process supported by training and rigorous associate certifications.
Next, customer care or parts, service, and collision where we were very pleased with our performance in the quarter with total customer care margin expanding 50 basis points to a solid 42.6%. The business continued to grow across the board for customer pay, warranty, internal wholesale parts and collision for both revenue and gross profit.
Overall for the second quarter, customer care revenue increased $36 million, or 6% to $638 million and customer care gross profit increased $19 million or 7% to $272 million. Continuing the positive trend, customer pay gross increased 5% in the quarter, making this the 12th consecutive quarter-over-quarter increase the customer pay gross.
Our customer care team remains focused on operational improvement, margin improvement and driving sales effectiveness. This coupled with industry, increasing industry units and operation will continue to support solid customer care growth at AutoNation.
At June 30, our store portfolio stood at 265 franchises and 224 stores in 15 states, representing 32 manufacturer brands. In a moment I'll turn the call over to Executive Vice President, Jon Ferrando, who will share an update on our corporate development activities.
In closing, as I mentioned earlier, we proudly completed the branding of over 200 of our domestic and import franchises in June. As we rolled out the brand, Mike Jackson and I traveled across the country and were met with an outpouring of enthusiasm from our 21,000 plus Associates about uniting under a common brand. I'd like to thank all of our Associates for their commitment to delivering on our brand promises and fulfilling our mission of delivering a peerless customer experience, as well as their contributions to delivering another record quarterly EPS.
With that I'll turn the call over Jon Ferrando.
Jonathan P. Ferrando - Executive Vice President, General Counsel and Secretary: Thank you, Mike. During the second quarter of 2013, AutoNation completed the previously announced acquisitions of Don Davis Toyota Scion in Dallas and SanTan Honda Superstore and Hyundai of Tempe in Phoenix. These acquisitions align with our strategy of offering our customers all of our core vehicle brands in our key markets and enhance our brand mix in our Dallas and Phoenix markets. The closings were well executed and acquisition integrations are on track. The stores are now operating as AutoNation Honda Chandler, AutoNation Hyundai Tempe, and AutoNation Toyota North Arlington.
Also during the second quarter Mercedes-Benz awarded new franchises to AutoNation in the Atlanta, Georgia and Tampa, Florida markets. We expect to complete construction and open these Premium Luxury stores by early 2015. Mercedes-Benz franchises will be excellent additions to our platforms in these markets. Over the last 12 months, AutoNation has completed the acquisition of 10 franchises and been awarded four new premium luxury franchises by the manufacturers. The 2012 annual revenue for the 10 acquired franchises together with the expected annual revenue of the newly awarded premium luxury franchises, once the new stores are fully operational, is approximately $1 billion.
We continue to actively look for acquisitions and new store opportunities with a focus on adding new brand representation within our existing markets. We will continue to be selective and prudent with our capital with a focus on investing to produce strong returns and long-term stockholder value.
I will now turn it back to Mike Jackson.
Mike Jackson - Chairman and CEO: Thank you, John. During the second quarter, we saw continued strength in the auto industry sales as the auto credit environment remained strong and consumers continued to benefit on the outstanding vehicle quality and selection available today. In addition, the customer care business will benefit as industry units and operation begin to recover in 2013. We are at the beginning of a broad-based recovery for the economy in auto retail. As we look at the rest of 2013, we believe that the improvement in new vehicle sales will continue and continue to expect new vehicle sales to be in the mid-15 unit level.
Thank you, and with that, we'd be happy to take questions.
Operator: James Albertine, Stifel Nicolaus.
James Albertine - Stifel Nicolaus: The first thing I wanted to delve into, it seems like you or your engineering had somewhat of a transition as it were from a capital allocation standpoint. Hearing a lot more about M&A, new franchises, awarded points. Can you help us understand sort of how you're thinking about SG&A? We noticed a little bit more deleverage this quarter than we anticipated and just kind of want to think through the process over the short and quite frankly longer-term?
Mike Jackson - Chairman and CEO: This is Mike Jackson. You know our capital allocation strategy has not changed at all in 14 years. It's pretty straightforward. We first look at the opportunities within the existing business both the needs to maintain the standards and the investment opportunities are there, and you can see we have a 14-year track record of investing in the existing business. Then quite frankly, we look at on an opportunistic basis between buying stock, what's available in the marketplace as far as acquisition and at times we have even found debt to be the most attractive thing to buy. And I think if you look at the performance over that coming up on 14 years in September for me. It's – you can see the discipline that's been applied and the shareholder value that's been created. So, depending on what period of time you're in and what is the balance in the opportunities, there you see the behavior. Clearly in '08, '09 and '10, very few acquisitions got done because the gap between what sellers were willing to take and what buyers were willing to pay was too big. So, you now have a backlog of the natural arrival in the marketplace each year of deals, so there's a lot of people to talk to and the gap on price is much closer, so you are able to get to a finished line on more transaction. So, we're in discussions with a lot of sellers out there whether they will result in deals or not, you never know. You have to keep your discipline on the price side, so that remains to be seen. But, at the moment – looking backwards we've been in a phase where the opportunity on the acquisition side has been there and we have acted on that. Going forward I can tell you the philosophy will be exactly the same and what actually happens there will depend on how negotiations go and where the stock goes in price and other variables. On the costs side, I think it's important to keep in mind that we've included in our results here, the one-time cost of re-branding the Company. We didn't hesitate to make this investment. We think it's a great investment. It's 0.09 so far year-to-date, $0.06 in the second quarter. You could almost double our growth in earnings per share if we hadn't rebranded the Company but we did and I think it's the right decision for the long-term. If you look at our leverage ratio without that cost it's below 70%, but I would ask Mr. Short to give more insight on the cost side.
Michael J. Short - EVP and CFO: Just to echo what Mike said in the quarter, our headline number was 71%. If you back out the rebranding costs that takes you down to 69.3%, which as I have indicated on previous calls, our intent is to operate below 70%, so absent those rebranding costs that's where we were. I do think that there were some headwinds we faced in the quarter. Mike called out some of the PBR pressure that we had on our new vehicles that creates challenges with some of the flow-through on the SG&A side. Of course with acquisitions there always are integration costs that you incur in the first few months of an acquisition that over the long term pay off in very strong returns. But you do have those startup costs. So those were the dynamics that we faced during the quarter and I think at 69.3% adjusted number is in line with where we want to be given the acquisitions that we completed during the quarter.
Operator: Rick Nelson, Stephens.
Richard Nelson - Stephens: I wanted to ask you about market share on the new car side. The 7% unit growth, how do you think that compared to the overall industry and how you fared maybe by (indiscernible), whether strength was by brand or weakness and geographically as well?
Michael E. Maroone - Director, President and COO: Rick, it's Mike Maroone. I think from a share perspective, I think we competed strongly. The numbers reported for retail vary tremendously, but I think we're very satisfied with 7% especially in the midst of rebranding 200 franchises. I think that in terms of who is strong, who is weak; I think we were very strong with Ford on a unit basis. We had great growth with Chrysler on a unit basis, with Nissan, with BMW. We are very satisfied with our performance across all three segments.
Richard Nelson - Stephens: I'd like to ask on the F&I side too, have you seen any changes in pricing there as a result of the CFPB, some other comments?
Mike Jackson - Chairman and CEO: My position remains the same that, indirect lending as it's called has tremendous added value for all the constituencies; the customer most importantly, the lender, and we get an appropriate origination fee. We are able to provide a very competitive rate to the customer often much better than what they could get in the marketplace and we're able to originate loans for the finance intuition at a cost lower than what they could do directly. So, when you have a situation like that, it's very sustainable. I would say that even the regulators acknowledge that there's tremendous added value from dealers in indirect lending and that they do an appropriate compensation for that. I would say the focus is on of course despaired impact and a broad range. I think with the big public companies which have had caps in place and procedures in place for a decade, it's not much of an issue, and if lenders were to transition to some sort of flat fee, I don't think for the big public companies there would be much of an issue. However, if you are a retailer where your model is dependent upon a wide range of markups then you're going to struggle with the transition. I don't think it's an issue for us from everything I've heard.
Richard Nelson - Stephens: Can you tell that did we see any effects of it yet, that (indiscernible) a unit, quite strong.
Mike Jackson - Chairman and CEO: Yeah, but you have to look at how we do it. We do it with excellent penetration to begin with. Mr. Maroone, I think it's 70% to 75% of the units we sell?
Michael E. Maroone - Director, President and COO: That's correct.
Mike Jackson - Chairman and CEO: 70% to 75% of the units we sell, we arrange the financing for that almost $9 billion worth of loans. We originated for instance in 2012. Our average margin on that is about 120 basis points, which seems to be quite reasonably for all the value that just we just limited and by the way there is no discussion with the banks and the regulators said that that is unreasonable compensation for what we generate. The number you referred to is only for one-third of that is for the financing, the other two-thirds is for products that we generate and Mike you can call out a list of the type of products that consumers buy from us. What's interesting to note of course is that we only show you the commissions on that the revenue does not go through on our books. So it shows as 100% margin but that's because we don't recognize the revenue because we are acting as an agent to originate those products. But they are high added value for the consumer. We have very narrow reasonable margins on it. So when you have high added value for the consumer and reasonable margins it's sustainable. So Mike, why don't you talk about some of the products that we sell?
Michael E. Maroone - Director, President and COO: Well, Rick as you know, the primary product that we focus on is vehicle service contracts and we think it provides excellent value to the customer. It also drives more business into our service departments and allows us to focus on retaining customers in both sales and service. The other product we feature is prepaid maintenance and just to give you an idea of how the industry looks at that, more and more manufacturers are now including that with the vehicle and we are very happy to see that. Toyota being the leader along with premium luxury BMW, VW and most recently General Motors is introducing it. So those are the products that we focus on. There is other products like gap insurance and others that have a lesser impact. But as Mike said 65% of our F&I revenue comes from those value added products, our compensation plans are heavily skewed to promote those products and we are very confident that we can sustain this level of performance or even get better.
Mike Jackson - Chairman and CEO: So Rick, there can be, in principle, a debate about the disparate impact, whether it's applied to housing, autos or other things and whether that's an appropriate regulatory step or not. I think someone other than us will discuss that. Certainly, for large companies and large financial institutions that have had caps in place for decades, the differences are so narrow and so tight that I really don't see an issue there, and if there is a transition to a different compensation system, I think it'll be manageable for us.
Operator: John Murphy, Merrill Lynch.
John Murphy - Merrill Lynch: Just a first question on SG&A, just a follow-up, and I just want to make sure we get this straight, so I think we didn't comprehend this as well as we should have in our estimates for the second quarter. There is fully no more expenses coming through in the second half of the year for rebranding, and it would be safe to assume that your SG&A to gross could operate at a similar level to what the adjusted number would've been in the second quarter, meaning in the 69% to 70% range. Is that a fair statement?
Mike Jackson - Chairman and CEO: John, you are absolutely correct, and maybe we didn't make it clear enough going into it, that there was a surge of cost and spending around the rebranding that would be fully expensed and fully completed by the end of the second quarter. So, it's not even right to say it was front-loaded. It was all expensed in that period of time and all completed in that period of time, and will not – this $0.09 that I'm calling out, will not reoccur in the second half of the year let alone talking about next year. It will not reoccur starting in the third quarter. So, maybe we could have been clear on that going in and I had a sense that maybe there was some confusion around that and that's why I wanted to be so explicit today.
John Murphy - Merrill Lynch: The ongoing number is what matters more. So, now that we understand that, I think everybody should be, should understand it now. That's very helpful. Second question, obviously you guys should be trusted on allocating capital given your track record whether it's making acquisitions or buying back shares. So, that's kind of easy to understand why you are making that shift. But I'm just trying to understand, as you look at making these acquisitions or ramping up acquisitions and then getting these add points, has anything changed in the relationship with the automakers, it's making that avenue of capital allocation more attractive than it may have been historically?
Mike Jackson - Chairman and CEO: No, I don't think the critical path however, for us has ever been the approval with the manufacturers. We have an outstanding relationship with each and every manufacturer today. That's not to say that if I went back to '05, '06, '07, that we didn't have a different view about inventories and where the industry was and where it was going. That was rather contentious, but I think everybody, every manufacture acknowledges today that our point of view was correct and we are – the industry is in a better place today. So, we're really back to the essence of the partnership, which is selling cars and taking care of customers. Certainly, the manufacturers have seen the advantages of the large publicly-traded groups in that when it comes time to step up, to meet standards on facilities, we can do it across the entire enterprise in a very professional way and that when it comes to investing strategically long-term where we think customers will be we have the scale and the ability to do it. So there is a great sense of partnerships. So that is not the critical path. I would say it's absolutely our price. That may sound simple, price but I think to lose sight of price around acquisitions vis-a-vis what you can do on share repurchase is a critical mistake in capital allocations and you can't fall in love passionately with one or the other. It's got to be a cold calculation looking at where you can get the best return and that's why I said to the point that even at times we looked at and said we can buy our debt at a discount. That's the best place for our capital. So the only thing that's etched in stone for us is that we will invest in the existing business. There will be capital needs and capital opportunity in our existing business every year and every year that comes first. Then we look at it opportunistically from there and if you look just at that share repurchase, well the point of share repurchase is; a, to not only why you're improving operating of the business is to reduce the share count. So we were very disciplined not to give out shares on acquisition, not to get out options like confetti that you then have to take your capital and buy them all back, just to get back to where you were. So I think our track record of creating value is strong. So that philosophy remains the same going forward. We recognize or acknowledge we are in serious discussions with a lot of sellers, but I could easily be sitting here a quarter from now and not have a single deal to talk about because if we don't come to agreement on price we are not going to do the deal.
John Murphy - Merrill Lynch: Last question on the customer care business. We are starting to see a good acceleration there in the same-store sales comps, and I'm just curious if you think we are really just at the early stages of this recovery of UIOs in this zero to five year old or zero to six year old ranges that are your sweet spot, because it seems like there might be some more to come, but we're already seeing some really good benefit. So just trying to understand sort of what inning you think we are in that surge of those vehicles.
Mike Jackson - Chairman and CEO: For units in operation for customer care, we are in the first inning, and the only thing we have to debate is whether it's the top of the first or the bottom of the first, that's how early we are in units in operation recovery for automotive. And it's a mathematical calculation that we could literally tell you, for which brand on which day the bottom point is and when it turns and moves in the right direction. So, we have made a significant investment in customer care both from the point of view that we think we can genuinely attract more business through convenience, value and security, our propositions to the consumer, at the same time, anticipating the turn which is this year, means, it can be a very rewarding period for customer care. Mr. Maroone, would you like to add?
Michael E. Maroone - Director, President and COO: Well, just two years ago, Mike Jackson challenged our team to refocus more effort, more resources on customer care. We brought in a new leader, a very skilled gentleman out of Mercedes, Alan McLaren. He has rebuilt the team, adding talent from Pep Boys and from inside the industry, so we've added talent, we've added analytic capability, and we are now at the stage of making a greater investment in customer-facing technology. The idea being to speed the transaction to provide more accurate information to customers to have a clear line of communication between the technician, the advisor and the customer, and we're in a – I think we're at nine stores into our rollout of that and pilot, and it's impressive. And I think that commitment is timely. You'd ask the question on the UIO that increase in the UIO of that zero to five year population only increased by 1% from the first quarter to the second quarter, and it's still below where the UIO was a year ago. So, I'll call it the top of the first inning to use Mike Jackson's term, but we're very optimistic about the opportunity. We've really focused on speeding up the transaction on express service, on tires, extending hours and most importantly putting more talent in the space. So, it's a real bright spot for our business.
Operator: Simeon Gutman, Credit Suisse.
Simeon Gutman - Credit Suisse: So, Mike AutoNation has been pretty transparent on its thoughts regarding the stair-steps, and so mentioned it as a reason this quarter that gross profit was hurt a little. Can you characterize the environment there meaning, are manufactures leaning towards their steps even more than versus a year ago whatever timeframe. And then the other comment that was made regarding some of the competition, some of the mid-size imports. Is that more a dealer-to-dealer combat in local markets, or is that coming vis-a-vis manufacturer price decreases and that's not being passed through in the same way that it was to the dealer before?
Mike Jackson - Chairman and CEO: So, on the epic struggle stair-steps, we have one breakthrough to report and that's Nissan. Nissan was very aggressive on stair steps for a very long time and I think the point where the brand was hurt in the sense that they were selling the deal more than they were selling a very fine product and over time that erodes your position and when you paint yourself in the corner like that it's not so easy to get out of. But there is new determination at Nissan, real commitments to get it right and if I look at actually changing the transaction prices, changing the MSRPs and adjusting the incentives to more tactical basis rather than strategic basis is a bold step. It will take some time to fully get through it but I think they should be applauded for what they've done. So that's the breakthrough. We will see where it leads.We have other companies that firmly believe stair steps are where to be and so the struggle goes on. On your second point, I would say, stair steps unleash a whipsaw competition at the retail level, where you have basically told the customer, unless the customer shops exhaustively to find out where the greatest stair step is hidden, that the customer is a fool. So you put the customer into the marketplace knowing the customer has to go five, six, seven places to find really where it's been hidden. It's not very customer-friendly, that's one of the reasons it's certainly out of step with today's customer, but if you tell a customer that's what you have to do to get the price, the customer will do it. So it unleashes a vicious competition at retail, and even when stair-step programs and the customer is still trained to do that, so you have a hangover effect that takes quite some time to clear. So, the white hotspot on this whole issue right now is Japanese midsize sedans which is a big part of our business and also subcompact sedans, that's where you really see it, and we applaud the step of Nissan and hope that the level of stair-steps mitigates in the future. Mike, do you want to add anything.
Michael E. Maroone - Director, President and COO: The only thing I'd like to add to it is, you've got to think your head off to the domestics who now have introduced products and the Korean that really give the Japanese imports a run for their money. The fusion is just hot, hot, hot. The Sonata has been very effective. Chevy's retooling the Malibu, and I just think the competition is really intent. The segment is very large, and Mike has already called out all the challenges of the stair-step programs.
Simeon Gutman - Credit Suisse: I guess, look, we see on a high-level, the gross profit per unit over time has given back some. So, do you think that this period was unusual and that we could see a bounce back or is that memory that Mike Jackson mentioned, is that going to take some time to wean the customer off of?
Mike Jackson - Chairman and CEO: Our philosophy is the diversified approach and nobody knows the answer for sure, but the challenge for us as a management team is always to find a way to rebalance it. So, what I look at it – when I look at our variable result per vehicle retailed. If I take it all in, all units, new, used, finance, insurance products, we actually had an increase despite the challenge in front-end gross profits on the absolute new car. So, we always have ways to try to balance. We've successfully done it here. I think we'll successfully do it in the future. In the meantime, we are doing everything possible to stabilize new car front-end growth and look for opportunities to improve them, but I can't guarantee you that will happen.
Simeon Gutman - Credit Suisse: Just a follow-up on the parts and service side. So the incoming wave of younger cars we are seeing, I think that is a bit easier and more clear-cut given that the manufacturer warranty et cetera and typically, the dealers typically retain a higher percentage in that bucket, but my question is on the older vehicles, the older vintages that you're servicing which I think your business did a great job during the downturn, but can you talk about now the retention of the older age groups? What's the experience been over the past year or so and then anything in particular that you focused? Because I think those cars are chunkier from a spending perspective.
Mike Jackson - Chairman and CEO: Depends on your definition of old. What are you calling out as old?
Simeon Gutman - Credit Suisse: Not really, like six to 10 to 12-years tops, but six to 10 years roughly.
Mike Jackson - Chairman and CEO: So six to 10 years is a very small part of our business. I would say – Mike, what would you say?
Michael E. Maroone - Director, President and COO: It's about 30%, and obviously you've got a very complex product that's not easy to be serviced, the mechanical breakdown aspect of it or it's not easy for your independence to handle it. I think our retention activities that we've undergone in customer care. Our communication, our marketing efforts really applies to both segments. So I think we can deal with whatever headwind there is there with this very rapid growth in UIO we are going to experience.
Operator: Rod Lache, Deutsche Bank.
Dan Galves - Deutsche Bank Securities: This is Dan Galves standing in for Rod Lache from Deutsche Bank. I have a couple questions, the first one on kind of the combination of new gross plus F&I. What's your view of how that would be impacted as interest rates go higher? I think that benchmark rates for auto loans were up maybe 20 to 30 basis points in the quarter. Did you see any impact in the quarter and kind of what's your view if interest rates continue to rise back towards historical levels?
Mike Jackson - Chairman and CEO: Obviously automotive retail very much is in the short end of the yield curve both for funding our inventory and what the financial institutes – the instruments the financial institutions use to fund auto loans. So we are not really impacted by 10, 20, 30 year rates. I expect it to be quite some time until short-term rates begin to move, and if they do move its unequivocal that it will be because you have a dramatic – you have an economy that's dramatically strengthening. So as you said, Mike, what's your choice, a weak recovery with low rates or a strong economy with normalized rates, I would take the second. I think it's a better place to be. So also for our customers, 100 basis points on an average car loan is $15 a month, so it's manageable. But I think – and we did not see rates move in the quarter on lending. You mentioned 20 to 30 basis points. We didn't see any movement in the quarter. So I think it's; a, I think it's quite some time until you see material movement on rates on the short end of the curve, and one that does move, it will be because it's unequivocally, indisputably a strong economy.
Dan Galves - Deutsche Bank Securities: I was actually talking about the benchmark like a three year swap rates that were up 30 bps some, just so you know. The second question has to do with customer care. Really two parts, someone brought up the six to 10 year age group. It looks like that, units in operation in that group will fall pretty significantly over the next couple of years. If that's 30% of your business, how does the UIO decline combined with increasing complexity which probably helps you quite a bit? Like what do you see of the impact on that 30% of your business? If you have any sense of kind of where your capacity utilization is on service space currently? I'd appreciate any color on that too. Thanks.
Michael E. Maroone - Director, President and COO: On the capacity issue, we've continue to renovate facilities and add capacity. I think we've got the capacity to handle that business. The 30% that we quoted is of the customer pay and warranty business not of the total business. I think, given our retention efforts, we are well-equipped to grow our market share in that segment.
Operator: Adi Oberoi, Goldman Sachs.
Aditya Oberoi - Goldman Sachs: I have another question on the customer pay business, obviously a great performance in the quarter from a comp standpoint. But correct me, if my understanding is wrong here, but I don't think a big part of that was driven by the increase in UIO. So can you just please elaborate what were the key drivers? Was it more internal or what led to that strong performance in the segment?
Michael E. Maroone - Director, President and COO: Customer pay business is about 42% of overall of our customer care business, and we've put an incremental marketing spend. We're going to spend about 30% more in marketing this year. We've done some very good work with our analytics group on pricing and begun to put the tools in place to allow our stores to focus on the pricing. And I think overall, we are just trying to compete in all segments of that customer pay business, both with a very robust tire program that's now in its second year, a real focus on express service, and really modernizing our whole communication and service, so there's a lot of focus, a lot of effort, a lot of talent there to drive that customer pay business in advance of the UIO.
Aditya Oberoi - Goldman Sachs: Just a follow-up on that, like if the mix of tire sales in the overall P&S segment is going to grow, typically our understanding is that, that the margins in the tire segment are lower than your average margin in the overall segment. So could it pressure margins in the near-term do you think?
Michael E. Maroone - Director, President and COO: I don't think it's that big of a piece today, but we have really worked hard on the margins in our tire business. Our tire business gross margin is up about 20%. But I think we want to compete in all segments of the service business, and whether it's express tires, low-margin high-margin, we want to serve the customer and be a full-service provider, so we are willing to compete and I don't think it's going to impact our overall margins. Our margins in the quarter are – were expanded 50 basis points in spite of a growing tire business.
Operator: Yejay Ying, Morgan Stanley.
Yejay Ying - Morgan Stanley: I wanted to follow-up again on the interest rate environment question, but maybe more on how that pertains to your own capital structure. So how do you see this environment impacting your floorplan's last corporate debt over the coming quarters? Are there any hedges in place or this just not a concern at this point?
Michael J. Short - EVP and CFO: Yejay it's Mike Short. We don't have any hedges in place. Our corporate debt structure is about 50% fixed, 50% variable, a little bit more fixed maybe 55%-45%. We are happy with that structure. As Mike talked about, a lot of our – the duration and maturity of our capital structure is fairly short term, so we like the short end – operating on the short end of the yield curve and don't see a reason to want to hedge that. If there is a movement in the yield curve we see that more at the longer end of the curve. So we are not over concerned about it. On the floorplan side about 50% – it's entirely variable, but as Mike pointed out earlier, to the extent that we see rates going up they might drive the short term rates higher, that's going to be coincident with an improving overall economic environment which we are happy to operate in that setting.
Yejay Ying - Morgan Stanley: Could you give you a bit more color on your used inventory as well, so maybe a breakdown, how is the late model used supply looking versus the older earlier models and are you starting to see improvements in off-lead supply?
Michael E. Maroone - Director, President and COO: It's Mike Maroone. We have definitely seen some improvements in supply. It's still not where we would like it to be but there is a very robust CPO business. CPO increased 17% for us in the quarter. It's about 30% of our used business and we are seeing more availability there. So, even in the last two quarters, we've seen some dramatic shifts in product. We've also tried to add capabilities, both buying vehicles online, putting together centralized buying teams and doing some other kind of out-of-the-box things to increase our used vehicle availability. We are really pleased with our used business and to get 9% volume growth on a same-store basis is a good step for us. We are hoping there's even more there.
Yejay Ying - Morgan Stanley: I've got one final question if I could sneak it in more housekeeping. With regards to the F&I growth, F&I per vehicle that you guys saw, could you break out what the contribution was from the financing side and what the contribution was from insurance?
Michael E. Maroone - Director, President and COO: We break it out really from a product versus rate. The rate contributes about 35%, products contribute 65%.
Yejay Ying - Morgan Stanley: Then, more of – how much did the rates I guess grow of that 7% year-on-year growth? What was the rate side of it and maybe what was the product side of it?
Michael E. Maroone - Director, President and COO: There's stronger growth on the product side than there was on the rate side. I don't have it at the tip of my fingers. I'm sure we can get that to you.
Operator: Irina Hodakovsky, KeyBanc.
Irina Hodakovsky - KeyBanc: I wanted to follow up on the SG&A expense. Excluding the $11.5 million in costs on the rebranding efforts, your gross profit throughput ratio is only 35%, substantially below the three-year average that you've put out there. You have mentioned the integration side of costs, which impacted the second quarter as well. So where are you in that process? Should we be expecting a normalized run rate going forward or perhaps another quarter of elevated, like slightly elevated expenses?
Michael J. Short - EVP and CFO: Irina, I pointed out two things in addition to the rebranding cost. One is the front-end gross margin compression that Mike discussed earlier and then secondly acquisition and integration cost. Those typically come in over the first couple of quarter following an acquisition as you get systems aligned and people in place. So, that's a couple of quarter time period over the first few quarter following an acquisition.
Irina Hodakovsky - KeyBanc: My last question is on the used vehicle side. The volume is very, very strong and you really delivering on the process to improve the used vehicle sales there. Very encouraging and I wanted to ask you on the gross profit per unit. It holds backs slightly on the year-over-year basis, but we're picking up in the industry and talking to other dealers. Majority are reporting and increase on a year-over-year basis. Can you detail what is happening in your specific operations?
Michael E. Maroone - Director, President and COO: We are down $18 on a $1,600 base year-over-year, so it's less than 1%. If I look inside the segments, we grew margins in Domestic, in Import, there was a little more pressure on Premium Luxury as it's quite a competitive market. There were some shortages in some new products that are caused by some upcoming product launches, and so that off lease Premium Luxury car was in a lot of demand, but all-in-all I think that there is – I think there was a very solid job done in used to drive the volume and the gross at that kind of level.
Irina Hodakovsky - KeyBanc: So, more or less, a result of perhaps driving volume really improving volume there and will stabilize going forward?
Michael E. Maroone - Director, President and COO: We would like to stabilize or even get better going forward. Again two of the three segments grew. One put a little pressure, but all in all our total gross combining everything is up 8% on the used side and 9% on volume, so pretty comparable.
Mike Jackson - Chairman and CEO: Thank you everyone for joining us today.
Operator: This will conclude today's conference. All parties may disconnect at this time.