AutoNation, Inc. (AN) Q3 2012 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to AutoNation's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, you may disconnect. Now I will turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, you may begin.

Good morning, and welcome to AutoNation's Third Quarter 2012 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. Following their remarks, we will open up the call for questions. Kate Keyser-Pearlman 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 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, will be discussed on this call. Reconciliations are provided in our press release, which is available on our website at investors.autonation.com. And now I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Thank you. Good morning. Thank you for joining us. Today, we reported earnings per share from continuing operations of $0.66, a record third quarter, and an increase of 38% compared to the prior year period. Third quarter 2012 revenue totaled $3.9 billion compared to $3.5 billion in the year-ago period, an increase of 12%, driven primarily by stronger retail new vehicle unit sales. In the third quarter, total U.S. industry new vehicle retail sales increased 15%, based on CNW Research data. In comparison, during the same period, AutoNation's new vehicle unit sales increased 21%. In the third quarter, we saw import inventories return to normal and import unit sales growth of 35% over the same period last year when both Toyota and Honda were dealing with limited supply of parts for production due to the earthquake. As we have previously discussed, recovery is driven by replacement demand as the average age of the light vehicle fleet has increased to 11 years. Also manufacturers have stepped up to launch pace of new models. Finally, the credit environment is very strong with low interest rates and ample credit available. I'll now turn it over to our Chief Financial Officer, Mike Short.

Thank you, Mike, and good morning, ladies and gentlemen. For the third quarter, we reported net income from continuing operations of $82 million or $0.66 per share versus $71 million or $0.48 per share during the third quarter of 2011, a 38% improvement on a per share basis. There were no adjustments to net income in either period. In the third quarter, revenue increased $427 million or 12% compared to the prior year and gross profit improved by $47 million or 8%. SG&A as a percentage of gross profit was 70% for the quarter, which represents 150 basis point improvement compared to the year-ago period. Our improved operating leverage reflects our disciplined expense management, long-term investments in centralized processes and improve productivity across our operations. This month, we completed the rollout of the extended design in our Shared Service Center. Our Shared Service Center is now responsible for end-to-end deal processing for all of our stores. In the extended design, we've increased automation, which has resulted in improved transparency, greater transaction efficiency and lower store accounting costs. I'd like to thank all of the associates involved in this multiyear project for their hard working and dedication. We continue to focus on initiatives at the SSC and across our stores to drive further cost savings for AutoNation and streamlining additional processes. Returning to third quarter results, net new vehicle floorplan was a benefit of $7.9 million, an improvement of $1.3 million from the third quarter of 2011, primarily due to higher floorplan assistance driven by higher new vehicle sales volumes. Floorplan debt was approximately $2.2 billion at quarter end, an increase of approximately $80 million from June 30, 2012, in line with inventory levels. Non-vehicle interest expense was $22.2 million for the quarter, an increase of $5.8 million compared to the $16.4 million in the third quarter of 2011 due to higher debt balances. We $395 million of outstanding borrowings under the revolving credit facility at the end of September. And on September 30, our non-vehicle debt balance was $1.9 billion, an increase of $405 million compared to September 30, 2011. Provision for income tax in the quarter was $51 million or 38.2%. There were no share repurchases during the third quarter. AutoNation has $368 million remaining board authorization for share repurchase. As of September 30, there were 121.7 million shares outstanding. This does not include the dilutive impact of stock options, which was approximately 2 million shares in the third quarter of 2012. Our leverage ratio as of September 30 was 2.74x or 2.47x on a net-debt basis compared to the covenant limit of 3.75x. Capital expenditures were $45 million for the quarter. We expect CapEx to be approximately $155 million for the year. Capital expenditures are on an accrual basis, excluding operating lease buyouts and related asset sales. Our quarter end cash balance was approximately $100 million, which, combined with our additional borrowing capacity, resulted in total liquidity of approximately $890 million at the end of September. Our strong cash flow generation, solid balance sheet and lean cost structure position us to continue to invest in our business. Now let me turn you over to our President, Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning. In the third quarter, we delivered growth in revenue and gross profit for all sectors of our business: New and used vehicles, Customer Care and finance and insurance, as well as record finance and insurance gross profit for vehicle retail, strong operating margin of 4.2% and record third quarter earnings per share. We're pleased with our performance in what continues to be an improving auto retail environment. The remainder of my comments will be on a same-store basis compared to the period a year ago unless noted otherwise. AutoNation retailed 68,250 new vehicles in the third quarter, an increase of nearly 12,000 vehicles or 21% comparing favorably to industry retail sales that improved 15% in the quarter according to CNW Research. We saw growth across all 3 segments. Normalized inventories contributed to the Import segment recording the largest unit gain of 35% on a total store basis. Premium Luxury new vehicle unit sales were up 11% and the Domestic segment increased 9%. Additional contributing factors across all 3 segments were replacement demand, steady introduction of new products, strong availability of financing in the prime, near-prime and sub-prime markets. Relative to geography, it was a positive story overall for all of our core markets. In particular, we saw a continued solid growth year-over-year in California, Texas, Florida and Colorado. Las Vegas and Phoenix were also strong markets in the quarter. On a same-store basis, our new vehicle volume was up 28% in California, 26% in Colorado, 23% in Texas and 17% in Florida. At $2.2 billion, new vehicle revenue increased $357 million or 19%. Revenue per vehicle retailed was 32,800 down $618 or 2% compared to a year ago. These normalized inventories drove a mix shift towards the Import segment, which has the lowest selling price of the segments. Revenue per vehicle retail was flat when compared sequentially to the second quarter of this year. Gross profit per new vehicle retailed of $2,119 that was down $335 or 14%. And at 6.5%, new vehicle gross profit as a percent of revenue declined 80 basis points. Nearly all of the margin compression was in the Import segment where gross profit was extremely higher a year ago given the shortage of product at that time. When compared sequentially, new vehicle gross profit as a percent of revenue was off just 10 basis points and improved 20 basis points compared to the pre-disruption third quarter of 2010. At September 30, our new vehicle day supply was 58 days or 51,700 units, this compares to 45 days and 33,900 units a year ago and 60 days or 49,200 units at June 30. We continue to build our inventory and are in good shape for year end sales events, particularly in the Premium Luxury segment. Turning to used vehicles. In the quarter, we retailed 45,400 used vehicles, an increase of 1,200 vehicles or 3%. Same-store retail used vehicle revenue of $809 million increased $29 million or 4% year-over-year. Revenue per used vehicle retailed increased $160 or 1% to 17,800. Same-store retail used vehicle gross profit of $72 million was up $5 million or 7%, and gross profit per vehicle retailed increased $65 or 4% to $1,589. Gross profit as a percent of revenue for used vehicles increased 30 basis points to 8.9%. At September 30, our used vehicle days supply was 29 days compared to 30 days a year ago. Given the extremely tight supply of low mileage, late-model used vehicles, the price gap between these models and new vehicles has narrowed. This, along with credit availability, low interest rates, incentives and improved vehicle content, has shifted customers to new vehicles. We also noted in the quarter that percentage of our trades with higher mileage continues to grow. Next, Customer Care or service parts and collision. Their same-store revenue increased $17 million or 3% to $595 million, with improvement across the board in internal warranty, customer pay, collision and wholesale parts. Customer Care gross profit of $251 million increased $9 million or 4% compared to the quarter a year ago. Strong contributors were internal, driven by increased vehicle sales and warranty gross, which grew 4% in the quarter. I'll note that this was the ninth consecutive quarter of year-over-year gains in customer pay gross, as well as revenue. Overall, Customer Care gross profit as a percent of revenue improved 30 basis points to 42.2%. We remain keenly focused on growing our Customer Care business and customer retention through initiatives that include a new field support structure and technology enhancements that will modernize and significantly improve the customer experience. We're very pleased with our performance in the quarter and look forward to the units in operation base beginning to grow again in 2013. Our finance and insurance team delivered a record same-store gross profit per vehicle retail of $1,290 in the quarter, an increase of $77 or 6%. Total F&I gross profit of $147 million increased $25 million or 20% compared to a year ago. Our preferred lender network, OEM service contract alliances, strong product penetration, store level execution continue to drive our outstanding F&I performance. I'm pleased to share that we finalized agreements in the third quarter for 2 new manufacture open points. The first is a Audi store in Orlando, Florida and the other is a Maserati store in San Jose, California. Both are targeted to open in late 2013. We're very excited about each of these opportunities, which are located in markets where we already have critical mass and offer additional growth in the Premium Luxury segment. At the end of the third quarter, our store portfolio stood at 215 stores, 261 franchises, representing 32 brands in 15 states. As always, we continue to actively pursue acquisition opportunities that meet our market brand and a return on investment criteria. Our drive for productivity is really paying off as we have delivered year-over-year revenue growth of 12%, with a headcount increase of just 2%. We continue to make significant investments in technology to aid this improvement in productivity, as well as to provide customers with a better buying and ownership experience. In summary, we're pleased with our performance in the quarter and see even more opportunity going forward in 2013. We're grateful for the outstanding efforts of our 20,000 associates. We thank them for their commitment to delivering memorable experience for our customers. With that, I'll turn it back to Mike Jackson.

Great. We'll be happy to take your questions now.

[Operator Instructions] The first question is coming from John Murphy, Bank of America.

A question on capital allocation here. I mean, as you guys are generating pretty strong cash flow continuously here, you slowed down on the share buybacks. I'm just wondering where that cash ultimately will go, or if we just saw a pause in this quarter and the share buybacks will pick back up. And also, would you consider a dividend in the future if you don't think share buybacks are that attractive?

John, it's Mike Short. I would say just to start off the discussion on capital allocation. Our priorities really haven't changed in a very, very long time. We've been consistently focused on maintaining a strong balance sheet is our first priority. After that, we use our capital to make sure that our capital expenditures are funding our stores so that they stand tall and ready to serve our customers. And then beyond that, we really do look opportunistically across all opportunities that we can evaluate to create shareholder value. As an example of that, you're familiar with our share repurchase history and we brought back over 400 million shares since 1999 at an average price of below $17. So we are disciplined and patient and to that point, with regard to future capital allocation, it will continue to be on an opportunistic basis with the sole goal of driving shareholder value going forward. If that happens to be continued share repurchase or acquisitions or additional capital investments in technology, those are all great options for us. Again, just because we haven't done a dividend in the past, that doesn't mean we won't do one in the future. We, again, if we come to the conclusion that that's the best way to create shareholder value, then that would obviously be something that we'd be interested in looking at.

Okay. But if we look at the quarter in stock in the mid-40s with no buybacks, I mean, that's a fairly strong statement given your track record of buying back stock aggressively in the past. I'm just trying to understand, I mean, is this the kind of thing where if we stayed in the mid-40s, tax policy didn't change going forward? Who knows exactly what's going to happen with the election in the fiscal cliff, in tax rates, on dividends at all next year. But if we saw a stock that stayed in the mid-40s and you didn't buy back stock in this quarter, it seems like you might be a little bit more inclined to pay a dividend than you have historically. I mean, is that a correct interpretation? I'm just...

John, this is Mike Jackson. I think the keyword -- I think Mike Short laid it out very well. The hallmarks of the journey, strong balance sheet, best in our stores and then opportunistic. And there's been price points at certain times. You could look at where we were very low at a certain price point, didn't buy shares. And then in another quarter, at that exact same price, we bought quite a bit. So it's opportunistic, it changes as we go forward and I can't tell you what's going to happen.

Okay. That is helpful. Second question on these average transaction prices. It sounds like they came down a bit because of mix. I'm just curious if you are seeing anything else out there as far as the pricing environment getting tougher, as far as more incentives or gross give backs. I'm just trying to make sure that this really is just a mix impact and there's nothing else underlying here going on as far as pricing deteriorating.

John, it's Mike Maroone. I think it is mix-driven. Obviously, with the growth in the Import segment, those are our lower priced vehicle. But I wouldn't read anything further into it. In terms of the incentives, it appears to be a pretty rational situation right now with a pretty good supply-and-demand balance. I don't anticipate aggressive incentives across the board although certainly, in the fourth quarter, I think you'll see the luxury business pick up. There's much greater availability and I assume it's going to be a very competitive environment. But in general, I think the rational nature of incentives will continue.

And then just lastly, you guys highlighted financing is getting much closer to normal through the spectrum of credit to your consumers. I'm just curious, how much further do you think that has to go and sort of secondarily, where you think we are on leasing right now in returning to sort of a more normal level in the low-20% range for the industry and if that might be another opportunity in addition to credit easing a bit here to really help sales recover.

John, this is Mike Jackson. I think we have normal credit across the entire spectrum. I would say the only thing that is different than if I go back to '05, '06, '07, using home equity as a piggy bank to make down payments on a car, that game is over. So the consumers had to save up for the down payment, they can't get it from someplace else. And as far as in the past, we saw leasing at a much higher rate. That was a distortion created by incentives and subsidies, it was not the natural market. So I think the market, the finance availability at the moment is normal, balanced, appropriate.

The next question is coming from Simeon Gutman, Crédit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: I have a couple of questions on the used car business. I think new vehicle sales are outpacing used, at least industry-wise, and as we march back towards normalization, I expect that will probably continue. And so as we get closer to those older run rates of new car sales, the commitment down the road to used, I realize that the business has been a lot better, more focused on used. Will there be a capacity or constraint issue on your lots? Meaning trading new for used at that point and will that be less of a focus on used when we get down to that point?

It's Mike Maroone. I think used is always going to be a core part of our business and it's certainly something we're looking to increase our capabilities. Now the current situation really has a limited amount of late-model, low-mileage vehicles. But they seem to be in 2 buckets. That limited amount and then there's a high number of high-mileage vehicles. That's really due to the pent-up demand. I think over time, the used business will stabilize and I think there's plenty of opportunity for us there. I don't see any constraints as the units in operation come back and more vehicles come off lease, I think the supply will become more normalized. But we do we think there's great opportunity in the used vehicle side. Simeon Gutman - Crédit Suisse AG, Research Division: But there's no more -- I mean, the priority to sell more new, let's say, the new selling rates goes up to $17 million. Just from a physical capacity standpoint, you'll still be able to source and emphasize the used business as much or will the new take more precedent at that point?

No. I think the used business has got great opportunities. As we move back to 16 million, 17 million, we'll see a lot more trades, and I think there's still plenty of opportunity there. There's no capacity constraint. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And then the second piece relating to price. When we've had low supply and we clearly moved up in price quite a bit now. As you mentioned, the spread is somewhat narrow. How do you think the pricing evolves? I guess, there could be 2 camps where you see a slow and steady moderation or just less growth. Or you can see something more sharply correct as new outpaces? I'm curious if you have any thoughts there.

I think prices will moderate as supply gets back to more normalized level. I think that the prices are very high on low-mileage products and both the incentives and the low interest rate environment certainly are skewing buyers today to new. But we've seen this phenomenon before and it all seems to even out over time, but I think there will be some moderation as supply is restored. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And I guess, any thoughts on that pace of that moderation? I know it's hard to predict and I think some of it depends on the interplay of growth of new, but just curious if it can go more for soft landing or hard landing with respect to prices.

Well, I think it's going to be a soft landing and I do think that in late 2013, you'll see more vehicles coming off lease and '14 will get even better. So I think there will be more supply in '13 and '14.

The next question is coming from Patrick Archambault, Goldman Sachs.

Actually, I wanted to follow up just on that question, what Simeon was asking about here. What specifically, I mean, it sounds like you think there's a number of conditions that will obviously help the used business regain growth. But maybe you could just outline again some of the things specifically that you guys think you can do to improve your share in that market because it feels like there is some low-hanging fruit that you guys could address to grow.

It's Mike Maroone. I definitely think there's opportunity for us. In the execution point of view, we have opened up a large number of value vehicle outlets and we need to be sure that we continue to stock those outlets aggressively and provide customers real choice. Certainly, there's some adjustments going on from a customer point of view in terms of seeing used vehicles with much higher mileage than they're accustomed to. But I think we're going to have to be creative and keep our costs of reconditioning down and continue to try and execute at a higher level. And Certainly in the digital world, there's plenty of opportunity and we're going to aggressively go after it.

Okay, that's helpful. And then just on kind of getting back to the topic of new margins. I mean, you said that the mix it sounds -- excuse me, the margin are being impacted by the mix of vehicles. I mean, not to give guidance or anything like that but how do you see the fourth quarter playing out? One of your competitors was on the call saying it might be similar because I guess, some of the mix pressures that were in Q3 may persist in Q4 and potentially, it's a very competitive environment. Do you kind of agree with that assessment from a market-wide perspective?

This is Mike Jackson. We had an increase in new vehicle margins with the extreme shortages of a year ago. That has now normalized back to where they were before the shortages and we'll probably have a mix that's favorable on margins in the fourth quarter because the fourth quarter is usually very strong on Premium Luxury. So you'll probably see $100 sequential improvement in margins in the fourth quarter.

Okay. That's helpful. And just to make sure I have it right. I mean, it sounds like companies like Honda have put big stair steps and things like that. I mean, is that something that you feel blending into all of your end brands, hasn't really been that impactful, it's really just been mix or has there been some aggressive activity that you feel has maybe just gotten better by the end of the quarter?

Well, I think that certainly the volume-based incentives are a factor. I think when you look at our 21% improvement in new vehicles, you can see that we aggressively went after those targets, in most cases, achieve that target. But I think going back to Mike Jackson's comment, I think that current margins are relatively normal when you compare to a pre-disruption level. I think the opportunity in the short term is going to be on Premium Luxury.

Next question is coming from Ravi Shanker, Morgan Stanley.

Can you just talk a little bit more about the potential leverage you have on SG&A? I mean, you guys have addressed that a little bit on this call but I would have expected to see maybe a little more traction this quarter, especially compared to what some of the other dealers are seeing. Again, any special items you point out and where do you think SG&A can go over time?

Well, Ravi, what I think I said in the past and actually played out in this quarter as well is that we target having about 50% of the incremental gross profit flow through the operating income line for SG&A leverage. I don't see any reason to change that at this point.

Got it. And also there's a fairly bullish thesis around housing in pretty much in many sectors. Given the geographic markets in which you are playing, how do you see that playing out over 2013 and do you think that's going to be particularly beneficial for both the auto, as well as you guys?

This is Mike Jackson. When I talk about the journey back to 16 million, 17 million units a year for the auto industry, I said the foundation in the first years will be driven by replacement need. That's the phase we're in right now, then the next phase we'll hand off to housing coming back in and being supportive of the economy and of truck sales. And we're happy to say that we see signs of stability in all of our housing markets and it looks like an improved housing market is for real this time and will be a benefit over the next several years. And then finally, I always called out that we do need a real economic recovery that creates jobs to make it all the way to 16 million, 17 million units. That's open to question at the moment with GDP only growing expected 1.5% this year. So we need a much more robust economy to make it all the way to 16 million, 17 million. But if I look at the next year or 2, it will be replacement need and the recovering of the housing have pretty much put in place that we'll have improvement. We'll wait till after the year closes to talk about exactly how much of that will be next year. Then ultimately, we do need a better economic environment.

The next question is coming from Brett Hoselton of KeyBanc.

F&I and it's interesting, just when I think that you can't do a better job on F&I, you performed even better. And so my question to you is at $1,290 per unit, do you think there's some additional upside there? Another $50 or something on those lines or do you kind of feel like this is a level that I think is a very good level and sustainable over the next year or 2 or so?

Mike Maroone. When we look at the bandwidth, among our stores and our regions, we think there's still plenty of opportunity. I don't want to predict how high it could go but I think as long as you execute the F&I processes the way we're training people, which is with the right speed, the right transparency, the right understanding with a focus on value-added products, I think there is more upside opportunity. And we have stores and regions that are hitting well above the average just by definition. And I think we'll continue to make improvement in that part of the business.

And then I don't know if you're prepared to talk about 2013 yet, but do you have any sense or feeling as to where you think the [indiscernible] might be in 2013, do you have any opinion here?

Mike Jackson. I think we're going to hold that till January, what our outlook is. We have a couple of momentous events between now and then, namely the election of the President of the United States and what's the grand bargain going to be around the fiscal cliff. And I think it will prudent to see how they play out before we put a forecast out there for industry sales next year. I've called out at the beginning of the year, a risk in the fourth quarter of disruption in the industry sales around the election and the fiscal cliff. We're seeing no sign of it. It's business as usual at the store level. The mindset of the consumer is regardless of who's elected President of the United States, there will be some sort of grand bargain around the fiscal cliff that the consequences are so huge of going over it that somehow someway the Republicans and Democrats will shake hands and there will be a grand bargain. So that's what we see right now. Now as we get closer to it, the situation can change. But I think it will be prudent to see how it all plays out before we put a number out for next year.

The next question is coming from Rod Lache, Deutsche Bank.

It's Dan Galves in for Rod. Just wanted to -- wondering if you could give us a little more color on the parts and service business. I think you said that the internal segment was a pretty big grower in the quarter. Is that mostly reconditioning costs on used vehicles? Are you -- just kind of give us a sense of are you spending more on used vehicles? Have you figured out a way to kind of recoup or invest more in used vehicles and get that back on the sales side?

It's Mike Maroone, Dan. It clearly -- internal is directly tied to vehicle sales, and it's both for new and used vehicles. On the used vehicle side, the higher mileage older vehicles are requiring more reconditioning. So I think there's slightly more reconditioning there than normal. Across the whole Customer Care business, we saw growth across all parts of the business. Customer-pay basis, warranty, internal, collision, we saw a nice growth in spite of the fact that we had one less selling day in the quarter versus the last year. So we're optimistic about that business. We've had 9 consecutive quarters of growth in our customer pay service business and believe with the units in operation bottoming out this year that we will see a growth in the units in operation and a lot of progress in that business, which is a nice high-margin business for us.

Yes, that's really good performance. What do you attribute on the warranty growth in the quarter because I know at least one of your competitors had another decline in warranty.

It's generally focused on select brands and the recalls certainly influence it. One of the other things that influenced it is that some of the manufacturers offered prepaid maintenance as part of the vehicle purchase. That goes in that segment as well.

Okay, great. And just one additional. I wonder if you could talk a little bit about the acquisition environment and the pipeline and whether possibly the reduction in share buybacks is to maintain more flexibility for acquisitions?

This is Mike Jackson. There's very active discussions in the acquisition market. There is definitely demographically backlog of sellers. I would say there's still a price gap that has yet to be bridged. And whether it will be bridged or not be bridged remains to be seen. As you know us, we'll pay a fair price but we're very disciplined. And so we're never afraid to walk from the table. On the other hand, if we see a strategic fit at the appropriate price, we're not afraid to step up and make the deal. So I can't -- I hate to use the word opportunistic, meaning, it's unpredict -- we are unpredictable if you go back and look at the record, we've had periods where we've done significant acquisitions and we've had periods before where we did no share repurchase. And then going forward, we get quiet on acquisitions, do a lot of share repurchase. So it really depends on multiple factors. It's not something you can just walk into a model and there it is. We're constantly weighing where the capital will produce the greatest return for us on the long term. And I could well be sitting here in the future talking to you about share repurchase or that we did a lot of acquisitions. So I don't know the answer, it's not that I'm keeping it from you but I can tell you, there's lots of discussion on the acquisitions side, there are sellers, there is a gap on price. I don't know whether it will be bridged and we still view share repurchase opportunistically.

The next question is coming from Colin Langan, UBS.

I thought -- maybe I misheard earlier, I thought that current new margins are normal. I'm just trying to tie that back with your -- you had a 7.3% margin last year for the full year and then you had 6.5% this quarter. I think you mentioned Luxury mix, maybe will improve in the fourth quarter. But I mean, how should we think about where long-term new margins should go? I mean, can they get back to that 7%-type level?

Well, when I say back to normal, you have to go back to 2010. 2011 was the abnormal year with some of it still carrying over into this year. Short, you have a point of comparison. If you have another question, we'll check that number for you.

[indiscernible]

Sure. I guess, while you're looking at it, any color on -- I'm trying to get a sense on SG&A leverage going forward. What is the mix currently of your fixed and variable portions of the SG&A?

It's about 50-50, Colin.

Okay, Colin, well, if you don't have another question, we'll get back to you before we break.

I just have one quick last one. Just a thing about leverage, I noticed it improved pretty bit sequentially, obviously from good cash flow. I mean, is 3 times what it was last quarter? Is that sort of as high as you want to go? I know you have some room on your covenant or is it just -- is that part of -- how do you think about what the right level of leverage with business is?

Colin, I hate to beat the drum again but we do think of it a little bit opportunistically. We love the idea of having a very strong balance sheet and so we obviously focus on that very significantly. But we're not afraid to use our balance sheet to make the appropriate investments if they drive shareholder value. And I think we've demonstrated that over the years that we're willing to take on leverage, if we can create value and at times when there's not a clear way to deploy capital opportunistically, then we're happy to be patient and let it recharge the balance sheet. And I think we've gotten credit from the rating agencies and others for managing capital that way over a long period of time. So there is no specific line in the sand in terms of leverage ratio other than in light of the overall capital allocation priorities that I laid out a second ago.

Colin, it's Mike Maroone. On the margin question, When we go back and Mike Jackson talked about looking at pre-disruption, our margins back in -- for new vehicles back in Q3 of 2010 were 6.3%. They're 6.5% this quarter. So from a basis points, they're stable looking over that 2-year period and, of course, we had the blip in 2011 that was created by the import product shortage. When we looked at the other 2 segments that were not as impacted, the Domestic and Premium Luxury, they were almost spot on where we were 2 years ago. So we do believe it's a normalized environment, although an increased or change in mix toward Premium Luxury could push the margins even higher.

Last question, please.

That is coming from Matt Nemer, Wells Fargo Securities.

This is Josh Dolin on for Matt. In the last call, you hinted at a premium value outlet that you were starting to create and work on. Can we get an update on what's going on there and where you think that might ultimately go especially as you look at off-lease volumes increasing dramatically at the end of 2013 into 2014?

Matt, it's Mike Maroone. We have one of those opened and we're still in the process of validating that concept. It really requires a critical mass in Premium Luxury stores around it. And so far, we're pleased with the results. Again, there are Premium Luxury vehicles just like non-luxury that have high mileage and have been in service a lot longer. And there seems to be a market for it. But I think it's too early to speak to a rollout. So we've got 28 of the vehicle value outlets and only one of the premium one at this point in time.

Thank you, everyone, for joining us today.

This will conclude today's conference. All parties may disconnect.