Andrew Wamser - Treasurer and VP of IR Mike Jackson - Chairman, President and CEO Cheryl Scully - CFO Bill Berman - COO Jon Ferrando - EVP of General Counsel, Corporate Development and Human Resources.

Patrick Archambault - Goldman Sachs Rick Nelson - Stephens David Lim - Wells Fargo Paresh Jain - Morgan Stanley James Albertine - Stifel Brian Sponheimer - Gabelli.

Welcome to AutoNation's First Quarter 2015 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.

Now I will turn the call over to Andrew Wamser, Treasurer and Vice President of Investor Relations for AutoNation..

Good morning and welcome to AutoNation's first quarter 2015 conference call and webcast. Leading our call today will be Mike Jackson, Chairman, CEO and President; Cheryl Scully, CFO; Bill Berman, COO; and Jon Ferrando, EVP 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.

Certain statements and information on this call may 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 such forward-looking statements.

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 and on our website located at investors.autonation.com. And now, I will turn the call over to AutoNation's Chairman, CEO and President, Mike Jackson..

Good morning and thank you for joining us. Today, we reported record first quarter earnings per share from continuing operations of $0.97, a 29% increase as compared to adjusted EPS from continuing operations of $0.75 for the same period ended prior year.

This is our 18th consecutive quarter of double-digit year-over-year growth and EPS from continuing operations. First quarter 2015 revenue totaled $4.9 billion compared to $4.4 billion in the year ago period, an increase of 13% driven by stronger performance in all of our business sectors.

In the first quarter AutoNation's retail new vehicle unit sales increased 10% or 9% on a same-store basis. AutoNation continued reforms during this recovery with an optimal brand and market mix and a disciplined cost structure. We continue to have solid results across all our business sectors.

I’ll now turn the call over to Chief Financial Officer, Cheryl Scully..

Thank you, Mike and good morning, ladies and gentlemen. For the first quarter, we reported net income from continuing operations of $112 million or $0.97 per share, versus adjusted net income of $91 million or $0.75 per share during the first quarter of 2014, a 29% improvement on a per-share basis.

There were no adjustments to net income in the first quarter of 2015. Adjustments to net income in prior periods are included in the reconciliations provided in our press release. In the first quarter, revenue increased $581 million or 13% compared to the prior year and gross profit improved $93 million or 13%.

SG&A as a percentage of gross profit was 69.7% for the quarter, which represents a 110 basis points decrease compared to the year ago period.

Net new vehicle floorplan was a benefit of $14.2 million, an increase of $2.9 million from the first quarter of 2014, primarily due to higher floorplan assistance, which increased due to higher new vehicle sales.

Floorplan debt decreased sequentially approximately $95 million during the first quarter to $3 billion at quarter-end, primarily due to increased -- decreased borrowings on our used vehicle floorplan facilities.

Non-vehicle interest expense decreased slightly to $21.4 million compared to $21.6 million in the first quarter of 2014, primarily due to improved pricing from our credit facility refinancing that was completed in December of 2014.

At the end of March, we had $1 billion of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of $2.1 billion. This was a decrease of $73 million compared to December 31, 2014. The provision for income tax in the quarter was $69.8 million or 38.5%.

From January 1, through April 28, 2015, we repurchased 150,000 shares for $9 million at an average price of $60.46 per share. AutoNation has approximately $272 million of remaining Board authorization for share repurchase. As of April 28, there were approximately 114 million shares outstanding.

This does not include the dilutive impact of stock options. Our leverage ratio decreased to 2.2 times at the end of Q1 as compared to 2.3 times at the end of Q4. The leverage ratio was 2.0 times on a net debt basis and this includes used floor plan availability and our covenant limit is 3.75 times. Capital expenditures were $63 million for the quarter.

Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. Our quarter end cash balance was $74 million which combined with our additional borrowing capacity, resulted in total liquidity of $900 million at the end of March.

The finance team remains committed to supporting our operational partners with the unified focus on driving long-term shareholder value. Now let me turn you over to our Chief Operating Officer, Bill Berman..

Thank you, Cheryl, and good morning. AutoNation posted stellar first quarter results with double-digit growth in revenue and gross profit across all business sectors. This marked our 18th consecutive quarter of double-digit EPS growth. Going forward, my comments will be on a same-store basis and compared to the period a year ago unless noted otherwise.

Total gross profit for variable operations was $459 million, up 12%. Total variable growth was $3,406 on a per vehicle retail basis, an increase of $67 or 2%. New and used same-store sale unit volume was up 10%. New vehicle revenue for the quarter was $2.7 billion, an increase of $277 million or 11%. We retailed 76,900 units, an increase of 9%.

New vehicle gross profit was $2,005 on a per vehicle retail basis, off slightly due to continued pressure in import segment as well as growth in volume of entry level premium luxury models. For the quarter, used vehicle retail revenue was $1.1 billion, an increase of $121 million or 13%. Used vehicles retail were $57,400, up 11%.

Used vehicle gross profit was $1,738 on a per vehicle retail basis, a decrease of $42 or 2%. As you might remember in Q1 2014, we focused on maximizing margins due to our tight inventory supply. We are well positioned with our used inventory for the second quarter.

We increased our total story used units by 26% compared to last year and our current total story used inventory levels at 34 days. Customer financial services gross profit set an all-time record of $1,515 on a per vehicle retail basis and increased $114 or 8%.

Approximately, two-third of our growth profit for vehicle retail was related to customer financial service products and approximately one-third was related to finance. Total gross profit for customer financial services of $203 million was up $32 million or 19% compared to the period year ago.

We continue to see opportunity in customer financial services as we grow our store level execution and offer products that build customer value and loyalty. In the quarter customer care revenue was $723 million an increase of $56 million or 8%.

We set an all-time record high in customer care gross profit of $310 million an increase of $26 million or 9%. Customer pay gross was $124 million or 4%. This was our 19th consecutive quarterly increase in customer pay gross. Warranty growth was $60 million up 19%. Collision growth was $29 million up 11%.

Excluding the impact of elevated recalls we continue to expect mid single digit growth in customer care. I’d like to thank all 24,500 associates for a job well done this quarter. As an organization, we remain focused on driving sales, driving service and building the AutoNation brand. I’ll turn the call over to Jon Ferrando..

Thank you, Bill. We're excited to announce that in April we completed two acquisitions that we signed in the first quarter including Mercedes-Benz store located in San Jose, California. This represents our 22nd Mercedes-Benz franchise and our 21st franchise in Northern California.

We also acquired a Chrysler Dodge Jeep Ram store in Valencia, California, our 32nd franchise in Southern California. The Chrysler store will be an excellent addition to our business in the Valencia Auto mall where we offer nine brands.

Auto Nation has also signed an agreement to acquire a Jaguar, Land Rover and Volvo store in our Spokane, Washington market. This will give us 25 franchises in the State of Washington. As previously announced, during the quarter we completed the acquisition of a Mercedes-Benz store in Reno Nevada and a Volkswagen store in Atlanta.

The combined annual revenue for our five acquisitions since the beginning of 2015 including the Spokane acquisition, which we expect to complete in early May is approximately $320 million. As of today, our store portfolio numbers 290 franchises and 235 stores in 15 states representing 34 manufactured brands.

Looking forward, we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our auto retail markets as well as markets that can be supportive by our existing management infrastructure.

As for M&A market conditions, there is a solid pipeline of potential opportunities in the marketplace. While we've not seen a material increase in competition for deals, we've seen an uptake in sellers testing the market with unrealistic expectations.

We will continue to be selective and prudent with our capital with a focus on investing to produce stronger terms and long-term shareholder value. I'll now turn back to Mike Jackson..

Thanks John. We believe the Auto industry is healthy. We still expect the industry and new vehicle sales to be above $70 million units and with that we will take your questions..

Operator, can you please open the line for questions?.

[Operator Instructions] Our first question is from Mr. Patrick Archambault your line is open..

Thank you. Good morning..

Good morning..

One question I wanted to ask is just you had this Chrysler news that came out where they were talking about raising invoice prices on their dealers and without raising MSRP and I wanted to get your view on whether A, that was being accurately portrayed and B, whether that even matters? Because I feel like you guys kind of set on your own prices and potentially if the vehicles are as hot as they are maybe there’s an ability to really offset the increased less price.

So just some thoughts on that?.

This is Mike Jackson. I believe the reporting is accurate, but more and your B that you have to look at the totality of the relationship. The fact of the matter is our Chrysler business is booming. We have high throughput through our stores.

It’s been a phenomenal recovery led by Sergio and his entire team and the stores are very profitable with profitability growing.

So how they run their marketing scheme and the various things it’s a partnership with them and in principle, as long as it’s a win-win relationship and we certainly believe with Chrysler it is the details are not so much of a concern..

Okay. That’s helpful and maybe if I can squeeze in an obligatory CFPB question, I suppose we’re on the cusp of getting the new rules published where they officially takeover in an regulation on non-bank financials.

There’s been obviously a lot of talk within CFPB documentation about markups and some have speculated that they may try to convenience industry participants to go after a sort of a flat fee. A number of numbers have been thrown out but I mean -- this is just discussion.

Wanted to just see where are you guys were coming out on that and what you thought -- how you thought this might end up?.

Again this is Mike Jackson. Our portfolio has been tested 18,000 times, the time exaggeration, 18,000 times and a very minuscule nominal number of situations we recall to be looked at and when you at them in details there’s not much there. So I can certainly speak for our portfolio that there is no sign of despaired impact let along discrimination.

As far as the CFPB's position for flat, that’s been their position from day one and so far the banking industry has said that’s not where they want to go because the system in principle is working very effectively for all the constituents.

It’s working for the consumer, it’s working for all the protecting classes, it’s working for the bank and it’s working for the retailers. So it’s a very efficient effective system. So what’s finally going to happen, I don’t know, but I don’t sense anything impending that’s going to turn the world upside down..

Okay. Terrific. Well thanks a lot for the perspective..

Thank you. And our next question is Mr. Rick Nelson of Stephens. Your line is open..

Hello, good morning..

Good morning, Rick..

Can I ask you about the reach in areas where you saw strengths and maybe some weakness from commentary on tax credits would be helpful?.

Rick, could you repeat the question?.

The regional carriers have strength and weakness in Texas in particular if you can make some comments, what you're seeing?.

This is Bill Berman, what we’re seeing is strong and city growth in California and Florida and we’ve seen virtually no impact in Texas with a decrease in oil prices. Overall, all of our markets are performing very strong..

Great. Thanks. Also how well segment performance that ran into segment income as built to suite domestic store are driving the income growth where premium luxury is driving the revenue growth but lagging a little bit on the income side. If you could….

So this is Bill Berman, and yes, we’re definitely getting revenue growth out of premium luxury that’s just because average price for point. The growth is definitely being generated out of the domestic segment. That’s primarily driven by increased light duty truck sales trucks and SUVs..

Urgent pressure is just up on that if we can look at those segments domestic Midline import?.

So what we’re seeing out there, this is Bill again, we’re seeing on our PVRs is, we're pleased with our performance in our overall total variable Op PVR, which is up 3.2%.

What we’re seeing is once again steady growth in our domestic or downward pressures on our import and our premium luxuries are holding, but the average sale price on our primer luxuries, because the entry level models that have been recently introduced is bringing down our margins and reducing our growth slightly.

But on and all, like I said, we’re pleased with our performance in our total variable Op PVR has increased 3.2%..

Great, thanks a lot and good luck..

Thank you, Rick..

Thank you. Our next question is Mr. John Murphy of Bank of America Merrill Lynch. Your line is open..

Good morning this [Lisa] [ph] for John. On a same-store basis, your F&I per vehicle got above 1,500 for the first time.

Was there anything in particular helping to boost that number that we shouldn’t think of as sustainable or does it seem like 1,500 is doable on an ongoing basis?.

AutoNation has always been a leader in CFS with our technology and our training and will continue to be that way. We see steady growth opportunities in our CFS performance especially in our lower performing quartile stores and as we increase our focus on our product sales we’ll continue to grow our CFS PVRs..

Great, thanks and on customer care, how much of your revenue there is really to recalls in a typical year and how much of a benefit was elevated recall activity in the first quarter?.

Well, on a growth basis, recall totally represents 5.2% of our total customer care gross profit. So I’ll have to get the exact numbers….

I think as far as our increase, it’s around 25% of the gross profit increase. So of our gross profit customer care increase in the first quarter 25% of it was recall related. So the piece of this surge of recall. That’s all -- that’s what it meant to us to put it in perspective.

The sales numbers is the best 5% of our total customer care business is recall related..

Okay, thanks, it’s very helpful..

Thank you. Our next question is Mr. David Lim of Wells Fargo. Your line is open..

Again I just wanted to -- good morning, gentlemen.

I just wanted to follow-up on that F&I per unit question, wondering if you guys did something with the comp structure that you pay off to your F&I personnel in order to push more of the insurance side on that F&I portion?.

We haven’t had the substitute of change in our competition plans in the last year..

Got you.

And then when it comes to this whole Chrysler situation with MSRP and invoice granted the invoice becomes a lot more public via some of the Internet shopping sites, but have they changed anything from a holdback structure?.

No there’s been no change in build there are no change on the holdback structure or any of the performance bonus metrics..

Great. Thank you very much..

Thank you. Our next question is Paresh Jain of Morgan Stanley. Your line is open..

Good morning everyone. First one on the express stores, it’s early days, but now you have about 120 days of operations under your belt.

Can you give us any color on transaction times and market share performance of the stores there and if you could highlight a few things that may have surprised even you?.

Yeah in Express, our journey to improve our AutoNation digital performance really began with the launching of the brand AutoNation just over two years ago and I recall at the time is said that was the inflection point.

And so our investment in the brand in digital is progressing extremely well and if look at our business here in the first quarter fully 19% of it, was generated by the AutoNation sites and we had about 13% of our total business come from third-party site.

So we’ve significantly outgrown and had a crossover as far as our dependence upon third-party sites. As far as it’s transactional capability under the flag AutoNation Express, it’s not active in 84 of our stores. It’s been very well accepted by our customers and by the stores.

We’ll roll it out across the rest of the enterprise through the course of the year and I expect in the next several years this strength of the AutoNation digital sites versus third party will widen with our sites breaking over 20 and third party sites going down into high single digits over the next couple of years..

That's helpful and just a second one on the used business, you obviously had a great volume product there and pricing continues to be very favorable, but what do we continue to see and this is across the deal, I will go back to impact demand and pricing, isn’t really helping to achieve the use, if you could help us understand why that is the case?.

So our used vehicle volume as you said was up significantly.

We're looking at our total -- overall used car gross profit was up 7.9% and when I think about the used car business, with the availability of inventory increasing and the way the market ebbs and flows as the market drops, we're able to buy our cars for lower money and because of market dynamics being able to drive sustained PBR.

So we really don’t see any negative impact going forward..

Got it. Thank you..

Thank you. Our next question is from James Albertine of Stifel. Your line is open..

Thank you and good morning, everyone..

Good morning, Jamie..

Quick question if I may, I noticed there is some of your press releases during the quarter some of the state-of-the-art facility upgrades just wanting to understand kind of what's going on there.

And if you put the math around the high level as it relates to investments and return on that investment and should we plan to see more of those facility upgrades to allow across the portfolio over time and at what pace, thanks..

Yes this is Mike Jackson. As I've often stated our first responsibility is to our existing organic business that it is state-of-the-art.

In the first quarter we had a number of major expenses and renovations that were of a level that is substantiated a re-grand opening that we get events in those markets, I hosted events in those markets with our associates and customers. We did allow local market press for the press release..

Yes, I think you're going to see that continue through the course of the year that our confidence and optimism about our existing footprint remains -- will commence through OEM partners to have first class facilities and when they arrive to a certain level of investment we will be doing events in those markets and then you will see a press release..

And Jamie we're sticking with and it's called out $235 million CapEx forecast for this year..

Thanks again. Let me add my congratulations and best of luck in the second quarter..

Thank you..

Thank you. Our next question is coming from the line of Brett Hoselton of KeyBanc. Your line is open..

Good morning this is [Raveena] [ph] for Brett Hoselton. I had a question for you regarding acquisitions in the comments you made about market activity.

Is it reasonable to assume that going forward given the increased number of sellers in the market perhaps your capital deployment will be weighed a little more towards acquisitions than stock repurchases?.

This is Mike Jackson. Going forward on capital allocation we've never given that much clarity other than to say we're always looking at the balance between the opportunity on the acquisition side and the opportunity that's available on the share repurchase side.

I think it's fair to say that we have a lot of discussions underway, but you never really know whether meets the transactions or not. So it's very dangerous to say we're going to do X in this quarter and that quarter because then you feel this pressure to conclude to meet the commitments that you made.

But I think it is fair to say that there is a lot of activity and a lot of discussion underway from willing sellers and we will see if that leads to transaction..

Thank you for that. Congratulations on a good quarter..

Thank you..

Thank you. Our next question is Brian Sponheimer of Gabelli. Your line is open..

Hi good morning, nice quarter..

Thank you..

Thanks Brian..

Hey, just a couple of questions here thinking about just the recall comment that you made before, what's your sense of where you are in some of the largest campaigns that are out there? And I guess to add on to that is Jackson the sense of that we're in elevated recall world for the foreseeable future?.

So the two biggest recalls we have out there right now is the GM ignition switch. We've performed approximately 23,000 recalls there. It's about 60% of what we feel is available to our current customer base and on the Takata airbag, we've done 48,000, which is approximately $0.20.

On the availability on the parts of the Takata airbag are starting to open up. So we see might be small increase in that but overall that's where we're at on the two biggest..

All right. I appreciate that.

And just with the thought that for the next three to five years or maybe in the perpetuity we're looking at a situation where recall activity is just going to be elevated?.

Yes I think it will be it probably will be higher, but whether it's mid high, I am not convinced at all. These are two extraordinary recalls that are so broad and so old that to say we are going to have these type of recalls open ended, I am not necessarily there.

But I think the feeling within the industry is if in doubt to recall sooner the better and certainly the whole process somehow, someway needs to be improved. It's really broken the way it is today almost dysfunctional.

We get it all done at the end of the day, but it's certainly not ideal and it's certainly the customer deserves something better than what's going on today. But to say we're going to be open ended at this level, I would not necessarily agree with that..

Okay.

And then just my last one used vehicle pricing I may have missed it, average selling prices continue to rise, how much of that is mix going from car and crossover to full size SUV versus just like-for-like what you're seeing from a pricing standpoint on used?.

We have to get the breaks down on what truck versus SUV versus car and the used cars. Inherently as the volumes increase on the new car side, the corresponding years on the late model two to four year old cars, inherently the prices go up. So most of it's being driven by the mix of inventory that's available to marketplace..

Understood, thank you very much for answer..

Thank you. And the next one is Mr. David Lim of Wells Fargo. Your line is open..

Good morning everyone.

Question for either Mike, Cheryl or Bill when we think about the S&I PVR and I think you mentioned earlier it is from the finance side in a scenario where the CFPV does mandate a fixed fee of let’s say 250 or 300 whatever it is and you guys lose $100 to $200 per vehicle, what are the levers that you could pull in order to make up the $100 to $200 loss there in theory? And then I do have a second follow up question..

This is Mike Jackson. So first I'll take the price as the industry move to a flat fee and if they did move to a flat fee, I am surprise if that is what the flat fee is the number that you mentioned. Doesn’t mean I can't be surprised, that's not where I think this is going, but let’s see. I think Bill stated the case well.

We see exceptional potential in the product side of the portfolio and speaking of flatness, our finance side of the equation has been relatively flat for years.

All of growth has been on the product side and we intend to take a big step launching a pilot in the third quarter where again with the brand AutoNation we will now offer our own maintenance contracts under the AutoNation brand name and we feel this will be another growth opportunity that had potential to be very beneficial in 2016 as we get through the pilot study..

Interesting and then I know that some of these OEMs further down the road are talking about over the air software updates whether it be infotainment or what have you for their vehicles, how would that affect your business or the dealer business in general? And is that something where you guys are maybe or in dealers in general pushing back on the OEMs or proposing that these software update actually should occur at the dealership.

Thank you..

First, we’re quite the opposite. We’re advocating whatever is most convenient for the customer and have long argued that the cars be designed and equipped in a way that these software updates can be done on a regular basis without any inconvenience to the customers. And I think that’s pretty much the direction the industry is going in.

I think some manufacture on certain models are already there and I expect that would to be continued in the future. It’s not a big part of our business today..

This is Bill. The thing I would add to that is on the flip side of this. I think technology is also going to be able to drive the customer to be able to diagnose a car and drive the customer back into the dealer to perform whether it’s a maintenance requirement or a possible warranty of recall.

I think it nullified the dealer and the customers as well as come back into us. So we see as a positive..

Yeah, and that’s the other thing we’re pushing forward to manufactures and that the car communicate with us what its maintenance needs are, so that when the customer comes in we already know, the parts of been ordered and that they're there and we're ready to make the repairs.

So I think this connected car were the car, whereas the car talking to the manufacturer and talking to the customer care experts namely as the retailer, I think has tremendous potential for the business and for the convenience of the customer and we're all for it..

Excellent perspective. Thank you very much..

Thank you. [Operator Instructions].

I think we're all set for the day. Thank you very much for joining us. Very much appreciated. Thank you for the questions..

This concludes today's conference. We thank you all for joining..