Q3 2023 Autonation Inc Earnings Call

Good morning, My name is Ellen and I'll be your conference operator today at this time I'd like to welcome everyone to the Autonation third quarter registering Street earnings Conference call. All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and a question during the call if you'd like to register a question. Please press star one if I want thank you Pat.

I would now like to turn the floor, that's Derek Fiebig, Vice President of Investor Relations you May begin your conference.

Thank you Alan and good morning, everyone and welcome to Autonation third quarter 2023 conference call.

Our call today will be Mike Manley, our Chief Executive Officer, and Tom <unk>, Our Chief Financial Officer. Following their remarks, we will open up the call for questions.

Before we begin I would like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995.

Such forward looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward looking statement additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC.

Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call reconciliations are provided in our materials and on our website located at investors Autonation com.

I'll turn the call over to Mike.

Thanks, Eric and good morning, everyone. Thank you for joining us today.

Im going to start on slide three.

To provide some opening remarks before Tom takes you through the third quarter results in greater detail. So as we all know that continues to be mixed economic signals in the economy. Despite concerns as affordability.

From a demand for vehicles remains relatively healthy.

During the quarter.

Has it improved new vehicle supply and stable used vehicle inventory, we saw double digit year over year growth in music with strong sequential growth in used vehicle volume and.

Frankly this is the first time in eight consecutive quarters that we've seen growth in combined new and used.

Volumes for Autonation.

I think that's very positive.

We also continue to see significant benefits without clear purpose, and emphasize which delivered a record quarter for revenue and margin and as a result, <unk> delivered a solid performance in this evolving operating environment.

So I'm just kind of crazy.

Performance by business and I'll start with new vehicle sales volume was up 12% in tons and nine 5% on a same store basis and Thats full cockpit municipal margins are down sequentially in the quarter remained at about $4000 a unit.

During the quarter, we did see some mix impact on our margin and that was driven by significant year over year volume growth in our import franchises, which benefited from improved inventory flows releasing some of the pent up demand for those brands and I'll touch on the inventory numbers in a minute, but basically I think that we got we sold.

We saw.

Another large increase in <unk>.

Oh.

Dealerships volumes in the quarter.

But I would say ourselves to an extended look at every potential deal in a very balanced way and you'll see a combined margin performance across new and used which included.

Yes, the income.

Very well and in fact relative to the industry in the quarter and remains one of our pre pandemic levels.

And I mentioned that their inventory levels, let me touch on that obviously have increased from a year ago. They remain less than 35 day supply.

A lot of variation pancreatic.

Brand and categories, we have 51.

Domestic brands.

And just one other questions about what's happening in my previous hometown.

We have 51 days of domestic brands as we sit at 33 days of luxury incentives mean days of input Brian.

Now moving on to used vehicles.

At the beginning of the year. We spent some time talking about the fact that used vehicle inventory would be harder to source and obviously critical to success. This year.

And that was made continued investments to maintain and grow used vehicle inventory I think the team in the quarter to do that good job sourcing retail quality of used vehicles and to visit our tenant. This we've increased our investment and we buy your car marketing and infrastructure, which you're obviously going to see in our SG&A and addition to have our teams looking at every potential sale and a much more of a.

Let's speak why considering not just the vehicle margin, but also the income from CFS and additional consideration if the sow yields at least high level right now and as a result used inventories being stable, which has helped US post the sequential used vehicle sales increased 5%, which would not be possible without <unk>.

Daily focus on vehicle sourcing.

Which by the way have resulted in over 90% of our two used vehicles being self sourced in the quarter.

As you know they can volume you'll use is important for many reasons, but key for US is our industry, leading performance in customer financial services, which again continues to deliver in the quarter.

<unk> has done a great job driving significantly higher interest rate environment, and lower finance penetration by continuing to maintain and grow product sales per unit sold.

Now moving onto after sounds here as the business continues to be one of our branches sports revenue was up 12% and our gross profit was up 14%, but Greg and complexity of vehicles is leading to higher values per repair order and we've also been keenly focused on growing our technician workforce, which is allowing us to serve more customers.

I was also I am pleased with the operating cash generation in our business. It was another great quarter of cash conversion relative to net income, which Tom will no doubt talk more about later.

Okay, but aside from the very solid quarter from a financial perspective, there are a few of the highlights I'd like to touch on before handing over a 11 million plus customers are cool.

And we are extending our product offerings and reach into more recurring revenue stream and we're adding new customers every day across all of our channels and during the quarter. We increased the penetration of Autonation finance and I am USA stools.

We're now financing roughly one in four and USA vehicle sales and we have also expanded into our franchise stores grew.

As the nation finance continues to be integrated.

And mentioned with Tyson is in fact.

Where we thought it would be which is why we expanded it to our franchise businesses.

We're also actively launching supplementary products and services to meet our customers' needs, which supports consumer vehicle usage.

And so our Cherokee customers to us and we launched a micro <unk> business called alternation of mobility and in e-commerce parts and accessories platform <unk> com.

<unk> along with <unk> recently acquired mobile repair service complements our traditional dealership model, while expanding our reach into the transportation industry.

We expanded those in Iceland USA footprint is our 17th store in Hilton Head Island and this was the full opening of the year and then we expect formal openings in the fourth quarter, including our Fort Myers facility, which opened this week.

As you can imagine it's not an easy task to get these greenfield businesses open and up and running and I'd like to congratulate and thank the teams that continue to work incredibly hard on this.

I'm also pleased to say that so far these businesses are selling ahead of plan and are showing considerable growth year over year and by the way.

Since this project with ion USA. The staff has now sold over 70000.

So that's not bad for organic growth I think.

So moving on the exceptional service, we provide to our customers did not go unnoticed as Autonation was recognized as the top public franchise dealer group.

Potentially in 2023 automotive reputation report now that's an honor that we have how full out in the last five years and of course.

Can be possible because of the 24000 plus dedicated Autonation associates.

Tirelessly in our business, and whom I would like to thank you all for listening.

And I think you're the person that's I'll get Alan to the business model.

And finally, we were named best companies to work for list by U S News and World. So you can see customers at the center. What we do we are focused on growth and outstanding customer service and operational excellence throughout our business and we're also looking to the future of how the industry will evolve and what the needs of our customers will be there is clearly an opportunity for autonation to cast.

The law is on a strong brand and footprint to retain and reactivate customers and provide them with more value and garner a larger share of wallet over a longer period of time.

Now Tom will take you through the financials and tried to detail color, yes, thanks, Mike and good morning, everybody more detailed outline of our Q3 highlights.

Our slides.

For the material.

New revenue vehicle was up 11%.

The $3 two.

$3 2 billion.

<unk>, a new vehicle were up 12%.

As Mike mentioned, 25% on imports and 5% on domestic schools with luxury roughly flat volume wise same store volumes were up 9% and revenue per vehicle retailed was stable.

Ellen: Good morning, my name is Ellen and I'll be your conference operator today. At this time, I'd like to welcome everyone to the AutoNation third quarter 2023 earning conference call. All lines have been placed on mute to prevent any background noise.

Used vehicle revenue declined 10%.

Ellen: After speakers are marked, there'll be a question and answer session. During the call, if you'd like to register a question, please press star, follow by one on your hands. Thank you, Pat.

Year over year with U S sales down roughly 4% and revenue per vehicle retail down, 6% importantly, as Mike mentioned, though.

Derek Fiebig: I would now like to tell us all over to Derek Fiebig, Vice President of investor relations. You may begin in your conference. Thank you, Ellen, and good morning, everyone.

Used vehicle sales improved <unk>.

<unk>.

One 5% compared.

With the second quarter so.

Derek Fiebig: Welcome to AutoNation third quarter 2023 conference call.

The efforts of our investments are starting to pay dividends.

Derek Fiebig: Leaner calls today will be Mike Manley, our chief executive officer and Tom Szlosek, our chief financial officer. Following the remarks, we'll open up the call for questions. Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute floor looking statements within the meeting of the federal private security litigation reform act of 1995. Such forward looking statements involved known and unknown risks that may cause our actual results as performance to different materially from such forward looking statements.

Customer financial services revenue increased 2% to $370 million. This reflects the increase in total retail volume from 2022.

Derek Fiebig: Additional discussions of factors that could cause our actual results to different materially are contained in our press release issue today and in our filings with SEC. Certain non-gaft financial measures as defined in our SEC rules will be discussed on this call.

And fairly stable.

S revenue <unk>.

After sales was up 12% to $1 2 billion in revenue as a result of.

Both higher value repair orders as well as improving volume after sales gross profit margins were up 14%.

In the business.

Third quarter earnings per share were $5 54 down 8%.

Operating income was down 16% and interest expense up $44 million, our EPS was favorably impacted by more than 20% decline in the share count, which obviously is a reflection of our ongoing share repurchase actions.

Derek Fiebig: Reconciliation are provided in our materials and on our website located at investor dot automation dot com with that.

Derek Fiebig: I'll turn the call over to Mike. Thanks, Eric.

Cash from operation as Mike mentioned.

Michael Manley: Good morning, everyone. Thank you for joining us today. I'm going to start on slide three, and I'm going to provide some of the remarks before Tom takes you through the third quarter results in great detail. So as we all know, there continues to be mixed economic signals in the economy, but despite concerns over affordability, consumer demand for vehicles remains relatively healthy. And during the quarter, partly because of improved new vehicle supply and stable use vehicle inventory, we saw double digit year over year growth in new vehicle sales and strong sequential growth in use vehicle volume.

Very strong through September.

We're at $763 million.

Resulted in and conversion on net income of more than 95%. So the company has really impressed me in my first few days first few months in terms of doing the right things to drive cash generation.

The management of working capital.

Mike also mentioned the integration of Autonation Finance. This is still a pretty small business for us with roughly a $400 million portfolio.

Michael Manley: And frankly, this is the first time in eight consecutive quarters that we've seen growth in combined new and used vehicle volumes for automation. So I think that's very positive. We also continue to see significant benefits of our clear focus on after sales which delivered a record quarter for revenue and margin. And as a result, automation delivered a solid performance and this evolving operating environment. So I'm just going to quickly look at the performance by business and I'll start with new vehicle sales, where volume was up 12% in total and nine and a half percent on a same store basis.

But we expect significant growth as we increase the penetration of financing in our stores as part of these efforts.

We've discontinued all third party originations and are now exclusively focused on the Autonation business.

In September and finance represented.

Roughly a quarter of the loan originations in the USA stores as Mike mentioned.

We've also commenced lending and our franchise stores.

In the third quarter as planned.

Most of our lower credit tier loans from the legacy <unk> portfolio, which generated a pre tax gain of $8 million.

Michael Manley: And that's forecast that new vehicle margin was down to quenchally in the quarter that remained above $4,000 a unit. Now during the quarter, we did see some mixing pack on our margin and that was driven by significant year over year volume growth in our import franchises, which benefited from improved inventory flow, releasing some of the pent up demand for those brands. And I'll touch on that inventory numbers in a minute, but basically everything that we got we sold.

Turning to slide five for some commentary on our third quarter P&L on balance the strength in new vehicle unit volumes and after sale added stability and customer financial services more than offset the.

The decline, we experienced new vehicle <unk> and used vehicle revenue and in this environment. We're very pleased with the 3% growth in top line from 2022.

Michael Manley: So we saw quite a quite a large increase in in our import dealerships volumes in that in a quarter. But I would say you know, I felt to intend to look at every potential deal in a very balanced way. And you'll see our combined margin performance across new and used, which include this CFS income held up very well. In fact, relatively industry in the quarter and remains well above pre-pandemic levels. I mentioned earlier in the tree level, so let me touch on that.

Gross profit was slightly lower in nominal terms all in we were down roughly 90 basis points and gross profit margin to 19%, reflecting the moderation in new vehicle gross profit ddr's.

But that was largely offset by growth in the after sales gross profit as I mentioned.

Adjusted SG&A increased 7% to $823 million.

With generally stable core spending and incremental cost to related to our growth initiatives and I'll touch on that a bit more later.

Michael Manley: Obviously they've increased from a year ago, but they remain less than 35 days supply, but we have a lot of variation, frankly, among brands in categories. We have 51 days of domestic brands, but it probably answers one of the questions about what's happening in my previous hometown. So we have 51 days of domestic brands, 33 days of luxury and 17 days of import brands.

Third our third.

Third quarter, our floor plan interest expense of $38 million was up from $11 billion in the third quarter of 2022.

As a reflection of both.

Higher rates and borrowings higher borrowings.

Half and half in terms of the impact for <unk>.

Michael Manley: Now moving on to youth vehicles, as you'll recall at the beginning of the year, we spent some time talking about the fact that youth vehicle inventory would be harder to source and obviously critical to success this year. So knowing that would make continued investments to maintain and grow user of inventory, I think the team in the quarter did a good job sourcing retail quality youth vehicles. And to facilitate this, we've increased our investment in we buy your car marketing and infrastructure, which you're obviously going to see in our SDNA.

Non vehicle debt.

<unk> expense was $49 million, which was up from $34 million a year ago.

Both higher rates and increased borrowings impacted.

The interest expense as well our income tax rate was stable at 25%. So all in this resulted in $244 million.

Net income compared to $336 million, a year ago, and as I've mentioned our.

Average shares outstanding of $44 million.

Michael Manley: In addition, we have our teams looking at every potential style in a much more holistic way, considering not just the vehicle margin, but also the income from CFS and additional consideration. It's a sale yields a retailable trade. Now, as a result, youth inventory has been stable, which has helped us post the sequential youth vehicle sales increase over 5%, which would not be possible without the daily focus on vehicle sorting, which, by the way, resulted in over 90% of our total youth vehicles being self sourced in the quarter.

We're more than 20% lower than a year ago. This meaningfully blunted the EPS effect of the net income decline as you can see.

On the sorry on <unk>.

<unk> six I would like to build on the color Mike gave on the performance in our various revenue categories for the third quarter.

As you said the vehicle volumes were up 12% and this includes over 25% on imports.

Revenue <unk> have remained stable for new vehicles.

Gross <unk> continue to moderate.

Michael Manley: Now, as you know, vehicle volume you will use is important for many reasons, but a key one for us is our industry leading performance and customer financial services, which again continue to deliver in the quarter. I think the team has done a great job to overcome a significantly higher interest rate environment and lower finance penetration by continuing to maintain and grow products as per unit sales. Now, moving on to our first round here, the business continues to be one of our brightest spots revenue is up 12%, and our gross profit was up 14%.

Reflecting increased availability of new vehicles, and importantly, as Mike mentioned our intentionality.

Pursuing higher volumes.

To drive the other parts of the business.

New vehicle inventory levels have increased more than 50% in both units and values from a year ago and new units have grown from <unk>.

Roughly 13000 units to over 27000 units.

In used vehicles on slide seven we had a modest volume decline of 4% from a year ago with the most pronounced decline.

Michael Manley: The greater complexity of vehicles is leading to higher values per repair order, and we've also been keenly focused on growing our technician workforce, which is allowing us to serve more customers. I was also pleased with the operating cash generation in our business. It was another great call to a cash conversion relative to that income, which Tom will know that talked more about later.

From our domestic stores, which decreased 10% important luxury stores had less pronounced decline.

As Mike mentioned, we have seen some nice progress with the second quarter used vehicle volumes up 5% sequentially and this was more than twice the market growth there was good traction.

Michael Manley: Okay, but aside from the solid quarter from the financial perspective, there are a few other highlights I'd like to touch on before handing over. Our 11 million plus customers are our core focus and we're extending our product offerings and reach into more recurring revenue stream and we're adding new customers every day across all of our channels. And during the quarter, we increased the penetration of alternation finance that are ANUSA stores, where we're now financing roughly one in four ANUSA vehicle sales, and we have also expanded into our franchise stores.

Quarter over quarter in the 40000, K and below pricing tiers.

Those tiers comprise more than 80% of our unit sale and even on the higher price tiers greater than 40000.

Which has better profitability.

Growth was also respectable rough.

<unk>, 2%.

<unk> is clearly there and we're continuing our initiatives to pursue more supply.

Michael Manley: The alternation finance continues to be integrated at a thought pool and measured place and is in fact ahead of where we thought it would be, which is why we expanded it to our franchise businesses. We're also actively launching supplementary products and services to me, our customers needs, which supports consumer vehicle usage, and also attracting customers to us. And we launched a microleaf business called alternation mobility and an e-commerce partner accessory platform called alternation path.com.

Revenue and gross profit <unk> and used vehicles were both down year over year, mostly reflecting the volume decline and the mix of sales by pricing tier.

Used vehicle inventory levels were overall stable at 33 days with growth in lower priced tiers very strong offset by declines in the higher price tiers, we continue to emphasize self sourcing, including trade ins lease expiries as well as our we'll buy your car initiative for the quarter, our self sourcing represented 96%.

Michael Manley: These businesses along with alternations recently acquired mobile repair service, complement our traditional dealership model while expanding our reach into the transportation industry. We expand the role of the National USA footprint with our 17th store on Hilton Ed Island and this is the fourth opening of the year and we expect four more openings in the fourth quarter including our fourth Maya facility which opened this week. Now as you can imagine it's not an easy task to get these green field businesses open and up and running and I'd like to congratulate and thank the teams that continue to work incredibly hard on this.

Used vehicles acquired.

Now moving on to slide eight and customer financial services, we delivered 2% revenue increase roughly in line with Ah.

Vehicle sales unit growth for the quarter.

New vehicles higher unit volumes and stronger penetration of both finance and non finance products are driving stronger cfos on the used side a portion of our sales with.

With finance products declined modestly year over year, given the interest rate environment, but still remains very high close to 70% penetration.

Michael Manley: I'm also pleased to say that so far these businesses are selling ahead of plan and are showing considerable growth year of year and by the way since this project with ANUSA was started it now sold over 70,000 vehicles so that's not bad for organic growth I think.

Non financial products, we also had a.

Similar modest decline, but still very respectable penetration.

On slide nine after sales as I mentioned.

Up 12% revenue at $1 2 billion.

Customer pay warranty.

Michael Manley: So moving on the exceptional service we provide to our customers did not go and notice this alternation was recognised as the top public franchise dealer group by Reputation in 2023 Automotive Reputation Report and that's an honour that we have had all four out of the last five years and of course that is only possible because of the 24,000 plus dedicated for the nation of socials who work tirelessly in our business and who I would like to thank. So thank you all if you're listening and I thank you the person that they get out into the business more and finally we've renamed best companies to work for the list by US News and World so you can see customers at the centre of what we do.

Internal and collision all experienced double digit growth.

Year over year. So it was very broad across the entire portfolio of a value per order is improving and the number of repair orders has also.

<unk>.

Yes, we're starting to see the benefit from the investment in additional technicians I think we've made over the course of the last few months at.

Gross profit grew 14% year over year, and our gross profit margins were up more than 80 basis points to 47, 47% and again. This is a reflection of those higher value repair orders as well as the scale benefits. We are starting to benefit from in terms of the increase in the number of quarters.

Michael Manley: We are focused on growth, outstanding customers service and operational excellence throughout business and we're also looking to the future how the industry will evolve and what the needs of our customers will be. There is clearly an opportunity for alternation to capitalise a much stronger brand and footprint to retain and reactivate customers and provide them with more value and garner a larger share of what it over a longer period of time.

A quick comment on the UAW strike, we actually hope this is resolved.

Mutually agreeable manner.

Preemptively building inventory, where we can.

After sales.

With the support of Oems.

In the third quarter, there was not much of a financial impact apart from the slight inventory build we obviously are monitoring the situation closely.

Thomas Szlosek: Now Tom will take you through the financials and graded e-tub. Tom. Yes, thanks Mike and good morning everybody.

Thomas Szlosek: A more detailed outline of our Q3 highlights is on a slide forward of materials. New revenue vehicle was up 11% at the 3.2 billion. Volumes and new vehicle were up 12% including as Mike mentioned 25% on imports and 5% on domestics with luxury, roughly flat lifelines. Same store bonds were up 9% and revenue for vehicle retail was stable. Use vehicle revenue declined 10% year-over-year with unit sales down roughly 4% and revenue for vehicle retail down 6%.

Slide 10 operating income was was 6% for the quarter down from last year, but.

Much higher than that.

Like 200 basis points higher from pre pandemic levels.

The decrease from 22 reflects the moderation in new vehicle gross profit per vehicle as well as.

Higher SG&A and.

And the growth in SG&A reflects investments for growth.

Clothing, the supporting infrastructure for our Autonation USA stores as well as for our aftermarket business. We've also had some increased advertising spend related to acquisition of vehicles.

Via that we'll buy your car initiatives, there's been some inflation.

Thomas Szlosek: Importantly as Mike mentioned though, use vehicle sales improved and UN-wise by over 5% compared with second quarter. So the efforts in our investments are starting to give it in. But customer financial services revenue increased 2% to 370 million. This reflects the increase in total retail volume from 2022 and fairly stable CFS revenue PBRs. After sales was up 12% to 1.2 billion in revenue. The result of both higher value repair orders as well as improving volumes.

<unk> added some self insurance cost.

Weather related losses overall normalized SG&A as a percent of gross profit, we do expect to remain lower than pre pandemic levels.

Slide 11, our operating cash flow generation remains very robust.

We were 105% <unk>.

Version of net income for the quarter.

Our cash flow from operations was $256 million in the third quarter, we increased our long trade floor plan by 89 million and our Capex was $87 million. So together these.

Resulted in free cash flow of $258 million for.

Thomas Szlosek: After sales growth profit margins were up 14% in the business. Third quarter earnings per share were $5.54 down 8%. While operating income was down 16% and interest expense up 44 million, our ECS was favorably impacted by more than 20% decline in share count, which obviously is a reflection of our ongoing share repurchase act. Cash from Operations, Mike Manchin was very strong through September, we're at 763 million, which resulted in conversion on net income of more than 95%.

For the third quarter.

Capex for the quarter was up around 10%, reflecting a steadily increasing our reinvestment ratio. We're now at roughly one six times depreciation.

And the principal year over year increase in Capex that drove that 10% is mostly been for growth, including USA expansion.

Some utilities spending for electric vehicles, and some it related projects.

Slide 12.

This shows our capital allocation for the first nine months of 2022 and 2023 last.

Last year, our capital allocation focus was on reinvesting in the business and share repurchases.

Thomas Szlosek: So the company has really impressed me in my first few months in terms of doing the right thing to drive cash generation, including the management working capital. Mike also mentioned the integration of automation finance. This is still a pretty small business for us, with roughly a $400 million portfolio, but we expect significant growth as we increase the penetration of financing in our stores as part of these efforts. We've discontinued all third-party originations and are now exclusively focused on the automation business. In September and finance represented roughly a quarter of the loan originations in the USA stores, as Mike mentioned, we've also commenced lending in our franchise stores.

The beginning of 2022 in fact, we repurchased roughly 21 million shares which is more than a third of our outstanding share count.

It was a low interest rate environment, we are enjoying recovery driven cash flows.

On the M&A landscape wasn't presenting at deals we viewed as attractive.

We had a dislocation in our share price.

While we still believe in the longer term value that will be created in our share price over the course of 'twenty three as interest rates have increased and our cash flows at normalized.

We've moderated the level of share repurchase activity still when you look at it as a percentage of free cash flow.

Share repurchases are relatively stable close to a 100% of free cash flow.

Thomas Szlosek: And in the third quarter as planned, we sold most of our lower credit tier loans from the legacy CIG portfolio, which turned us slide five for some commentary on our third quarter P&L on balance, the strength in new vehicle unit volumes and actor sales, and the stability and customer financial services more than offset the decline we experienced in new vehicle PVRs and use vehicle revenue. In this environment, we're very pleased with the 3% growth in top line from 2022.

At quarter end, our leverage was two times EBITDA.

As at the low end of our two to three times target like LIBOR, we're comfortable with where we sit there.

And moving forward, we will continue to allocate capital.

To maximize shareholder value, so with that I'm going to turn it over to Mike to wrap things up.

Yes.

I was just going to again before we go to the Q&A session. Thank you.

Besides just in the business.

And as I've said I think that there's been a lot of progress in terms of putting the infrastructure in place building.

New offerings and products and services for our customers as well and that will types that'll take tremendous efforts. Thank you will.

Thomas Szlosek: Growth basis points in growth profit margin to 19 percent, reflecting the moderation in new vehicle growth profit PVRs, but that was largely offset by growth in the after sales growth profit, as I mentioned. Adjusted SG&A increased 7 percent to 823 million, with generally stable core spending and incremental costs to relate to our growth initiatives, and I'll touch on that a bit more later. Third quarter, four planned interest expense of 38 million was up from 11 million in the third quarter of 2022.

With that.

So the Q&A Alan if you could please prompt the audience how to get in the queue.

Absolutely as a reminder, if you'd like to ask a question. Please press star followed by one pad.

Pat.

We will take our first question from John Murphy from Bank of America. John Your line is now open to Fahad.

Gentlemen, I don't know if youre on mute.

Okay.

Maybe we have to come back to John.

Thomas Szlosek: That's reflection of both higher rates and higher borrowing. It's about half and half in terms of the impact. For non-vehicle debt, the interest expense was 49 million, which was up from 34 million a year ago. Again, both higher rates and increased borrowings impacted the interest expense as well. Our income tax rate was stable at 25 percent, so all in this result of in 244 million of net income compared to 300, 36 million a year ago. As I mentioned, our average share is outstanding at 44 million. We're more than 20 percent lower than a year ago. This means we've wanted the EPS effects of the net income decline, as you can see.

Okay, let's move on to your budget.

From Jpmorgan. Your line is now open. Please go ahead.

Thanks for taking the question.

I'm just trying to question first time barred from services.

Clearly running strong.

The best in the World.

Amongst your peer group.

Would you be able to give us any more color there in terms of.

Any differences you saw across the regions.

That might have led to the growth.

Well as well.

Could you quantify how much of it might have been driven by.

The traffic or pricing or mix, you know any way to.

Is that growth.

Expectations going forward as well and I have one quick follow up thanks.

Thomas Szlosek: Sorry on slide six, I'd like to build on a color mic gave on the performance in our various revenue categories for the third quarter. As you said, new vehicle volumes were up 12 percent, and this includes over 25 percent import. Revenue PVRs have remained stable for new vehicles, gross PVRs continue to moderate, reflecting increased availability of new vehicles, and importantly, as Mike mentioned, our intentionality in pursuing higher volumes to drive the other parts of the business.

Yes. This is <unk>.

This is Mike.

Doug.

Got it thanks from both an increase in volume we saw as weak as we progressed through the quarter as volume increasing as a result, as a result of the increase we had in terms of productive technicians.

The combination of that and reaching out into the vehicle group grew.

Drew on our accounts.

We saw.

<unk> really across.

Our customer pie, our internal work as well with the growth that we saw in new vehicles and the sequential growth. We've used and then warranty was up as well. So it is a combination of both of those things.

Thomas Szlosek: New vehicle inventory levels have increased more than 50% in both units and values from a year ago, and new units have grown from roughly 13,000 units to over 27,000 units. In used vehicles on slide seven, we had a modest volume decline of 4% from a year ago with the most pronounced decline from our domestic stores, which decreased 10%. Important luxury stores had less pronounced volume decline. As Mike mentioned, we have seen some nice progress from the second quarter with used vehicle volumes up 5% sequentially, and this was more than twice the market's growth.

I have not seen a big difference in terms of the geographical distribution of that growth.

If I look broadly across the market is.

This is roughly in line.

So I don't think that business December anything from a geography perspective thats influenced it.

In summary, just a combination of increased volume, but increased value all around as well.

Got it no that's clear.

And then just on new cars.

Thomas Szlosek: There was good traction, a quarter over quarter in the 40,000K and the low pricing tiers, those tiers comprise more than 80% of our units now. And even on the higher price tiers greater than 40,000, which has better profitability, the growth was also respectable, roughly 2%. The demand is clearly there, and we're continuing our initiatives to pursue more supply. Revenue and gross profit TBRs and used vehicles were both down year over year, mostly reflecting the buying decline and the mix of sales by pricing here.

Helpful color on the slide.

Strategizing.

Profitability there.

You mentioned in your prepared remarks that you were selling like all of inventory that governments coming in but.

But with the slide deck Scott.

But are you also suggested that you were trying to push volume.

In order to monetize faster.

Watson services I just wanted to.

Make sure I'm understanding both of those comments.

Correctly.

Did you do have to stimulate volumes with them.

GPU.

<unk>.

Thomas Szlosek: Usy as limitary levels were overall stable at 33 days, with growth in lower price tiers very strong, offset by declines in higher price tiers. We continued to have the size sales sourcing, including trade-ins, lease expirates, as well as our will-buyer car initiative for the quarter ourselves sourcing, represented 96% of usy equals acquired.

Make sure you Didnt get the F&I on CFS.

<unk> got more.

Just if you could just clarify that a bit would be it would be helpful. Thanks.

Yes, no problem.

I'll try and clarify some things did not happen and reconnect.

What we asked the teams to do we've obviously invested a lot. We've recognized so let me just step back as I mentioned in my opening comments, we recognize that how we manage our used vehicle inventory as we go through this year and get into next year is going to be critical for us to be able to continue to progress not just in terms of used vehicles from our franchise businesses, but also have the out of stock.

Thomas Szlosek: Now moving on to slide eight, in customer financial services, we delivered 2% revenue increased roughly in line with the vehicle sales unit growth for the quarter. For new vehicles, higher unit volumes and stronger penetration of both finance and non-finance products are driving stronger CFS. On the use side, the portion of our sales with finance products decline modestly, you're over year giving the interest rate environment, but still remain very high, close to 70% penetration.

All of the incremental land USA stores that were opening.

And we recognize we have met with <unk>.

First thing a lot of money in that whether it's incremental marketing or incremental infrastructure to support while we buy your car.

We also have teams to do is to take a very I missed.

Thomas Szlosek: On non-finance products, we also had a similar modest decline, but still very respectable penetration. On slide nine, after sales, as I mentioned, up 12% revenue at 1.2 billion. Customer pay, warranty, internal and collision, all experience, double digit growth, year over year, so it was very broad across the entire portfolio. The value per order is improving, and the number of repair order has also increased. We're starting to see the benefit from the investment in the additional technicians that we've made over the course of the last few months.

The view in terms of volume in the marketplace not to distress tell anything at all but just recognize that we have we have a very good run.

Cody and tons of CFS performance, we had a very good <unk> in terms of self sourcing and then as youre looking at opportunities in the marketplace. Just make sure you are taking over those into account because one of the most profitable.

<unk> as we used vehicles as you non is actually to try to use that come on are new will use cost style.

Really a reflection of us making sure that people are recognizing that there are multiple different sources of profit.

Thomas Szlosek: I growth profit grew 14% year over year, and I growth profit margins were up more than 80 basis points to 47% and again, this is a reflection of those higher value repair orders as well as the scale benefits we're starting to benefit, from in terms of the increase in the number of orders.

Individual sales deal and then just make sure you reflecting that as general managers general managers in the dealerships. When you when you are building your model.

And I think.

Just the logical description is something that we would want them to do take a balanced approach to the business is multifaceted.

Thomas Szlosek: Quick comment on the UAW strike. We honestly hope this has resolved in a mutually agreeable manner. We've been preemptively building an inventory where we can, an after-sales with the support of OEMs. In the third quarter there was not much of a financial impact apart from the slight inventory bill. We are honestly monitoring the situation closely. Slide 10, operating income was was 6% for the quarter down from last year, but still much higher than the 200 basis points higher from pre-tantanical levels.

Got it got it.

Maybe like just to finish up on the new Gpus.

What are you able to provide.

Did you see any benefit of the strike and the card and do you expect any benefit from a slower inventory build in the fourth quarter due to gpus or.

Or would you think about the strategy around like CFS and driving.

Julie.

<unk> decline.

The GP is here in the fourth quarter.

No that would be not a benefit.

Some comments to that.

When we saw Gpus rise across the industry, we saw them rise because all of the competitive cross shop models will ensure supply.

Thomas Szlosek: The decrease from 22 reflects the moderation in the vehicle growth profit for vehicles as well as higher SGNA. And the growth in SGNA reflects investments for growth, including the supporting infrastructure for our automation U.S.A, stores as well as for our after-market business. We've also had some increased advertising spend related to acquisition of vehicles via that we'll buy your car an issue if there's been some inflation and some self-insurance calls for weather-related losses. Overall, normalized SGNA's percent of the growth profit bill we do expect to remain lower than pre-tantanical levels.

You have a situation where every brand was in short supply and therefore prices drive that if we just have individual domestics and sue will supply the cross shop brands that consumers are looking at in addition to domestic ethanol there'd be no reason, there's no known potential for those domestically in my view to get pricing as a result.

The fact that they may have a few days less supply than the others.

And.

And that's just in general the pandemic was I as we've said it was a one time reset to the industry and secondly, we said it was 50 thought based upon domestics.

That's nowhere near the peak that we had before the pandemic, but it's certainly enough to take us through for the next for the next few months, obviously what were looking for us.

Thomas Szlosek: Slide 11, operating cash flow generation remains very robust. We were 105 percent conversion of net income for the quarter. Our cash flow from operations was 256 million in the third quarter. We increased our non-trade floor plan by 89 million, and our cat-backs was 87 million. So together, these resulted in pre-cash flow to 158 million for the third quarter. Cat-backs for the quarter was up around 10 percent. We're flattening a steadily increasing reinvestment ratio.

Mentioned in these speeches.

Yeah.

Youtube and the strike as soon as possible, but as we sit today, we've got 55 days I think it will be archived.

Got it great. Thanks for taking the questions and all the color and good luck.

Thank you.

Thank you. Our next question today comes from Daniel in bankruptcy then Daniel Your line is now open. Please go ahead.

Yes, good morning, everybody, thanks for taking our questions.

Thomas Szlosek: We're now at roughly 1.6% appreciation. And the principal year-over-year increasing cat-backs that drove that 10 percent has mostly been for growth, including the AMUSA expansion. Some still be spending for electric vehicles and some IT related projects.

Mike maybe I'll follow up it's sort of on the new unit side, I think you called out strength in it.

Important brands, even as production increase can you talk about what you think is driving that is it more affordable product just a strong lineup set and understand why some of those brands are performing so well.

Thomas Szlosek: Slide 12, shows our capital allocation for the first nine months of 2022 and 2023. The last year, our capital allocation focus was on reinvesting the business and share repurchases. Since the beginning of 2022, in fact, we've repurchased roughly 21 million shares, which is more than the third of our outstanding share count. It was a low interest rate environment. We were enjoying recovery driven cash flows. The M&A landscape wasn't presenting deals we viewed as attractive and we did dislocation in our share price.

So we're not immune to the inventory numbers its not just think about the last few years. What we saw initially as we came into the pandemic with his input brands are holding up in terms of their inventory and we saw kind of a delayed effect that inventory levels got really low and new materials.

About.

345, guys is five days of supply and so on.

A lot of those a lot of those.

Customers for those brands just couldnt find them.

And.

As we've been able to see flow increase and improve.

I genuinely think it is just some pent up demand that has been unable to get unlocked as a result of that.

Thomas Szlosek: And what we still believe in the longer-term value that would be created in our share price to over the course of 23 years interest rates has increased and our cash flows have normalized. We've moderated the level of share repurchase activity still when you look at it as a percentage of free cash flow. We share repurchases on relatively stable, close to 100% of free cash flow. At court round, our leverage was two times EBITDA. This is at the low end of our two to three times target micro-liberal comfortable with the bill where we sit there. And moving forward, we'll continue to allocate capital to maximize shareholder value.

And we saw we saw those brands rebound and rebound strongly and.

Yes.

Convinced that that is what it was.

And those brands and now turn rates suggest phenomenon and as you can see we still.

We are still very low day supply, but produced great volume in the quarter I think.

That's great and then Tom maybe your strategy. One for you you guys are I think put in a bid on a UK asset during the quarter would've been a big International deal. Maybe you can give us discuss where dealership M&A fits you, obviously said that the buyback this quarter, but were dealership M&A fits in your focus and maybe is international.

Michael Manley: So with that, I'm going to turn it over to Mike to wrap things up. Yes, thanks. I'm just going to, again, before we go to the Q&A session, thank all of our researchers in the business. And as I said, you know, I think that there's been a lot of progress in the putting infrastructure in place, building new offerings, products and services for our customers as well. And that will take that will take tremendous effort.

Michael Manley: Thank you all.

Even more of a focus for you guys. As you think about the next leg of growth for Autonation.

Yes.

Yes, thanks for the question Danielle.

When you.

I'll, let Mike answer the specifics on pet dragging, but when it comes at capital allocation in general.

Yes, the first thing I look at when I look at Autonation is that we have a lot of cash or capital to allocate in other words. The cash generation is very strong. So we've got a lot of optionality.

Ellen: And with that, let's go to Q&A. Alan, if you could please prompt the audience how to get in the queue. Absolutely. As a reminder, if you'd like to ask a question, please press star for it by one on your telephone keypad.

I really like and which is what attracted me to join the company in the first place.

And we can either reinvest in the business through Capex and M&A.

John Murphy: We'll take our first question today from John Murphy, from Bank of America. John, the line is now open to four heads.

And even delevering and not to the extent we.

I think we need to as I said, we're comfortable with our debt levels right now.

And we also Ken.

Unknown Executive: John, we can't hear you. I don't know if you're on mute. Maybe we have to come back to John.

No.

Return.

Cash to our shareholders through dividends, which we don't have.

And share buybacks, which as I've said.

Unknown Executive: Okay, let's move on to the project.

Unknown Executive: Good to have from Dapy Morgan.

One of our primary emphasis in the last couple of years given the.

Roger: Roger, your line is now open. Please go ahead. So taking the question. Just had a question first time, you know, parking services, clearly very strong trends there. I think it was the best result amongst your peer growth. Would you be able to give us any more color there in terms of any differences you saw across the regions, that might have led to the growth, as well as if you could quantify, you know, how much of it might have been driven by, you know, either the traffic or pricing or mix, you know, any way to, you know, size that growth and expectations going forward as well.

The low interest rate environment.

Things moderate over time.

Then.

We have to be mindful that our number one objective is just <unk>.

<unk>.

Shareholder value.

And we'll do that thoughtfully, obviously will continue to.

Reinvest in the business.

And where we think theres opportunity.

Also.

B.

Thoughtful about it.

<unk> shareholders.

Share repurchase.

On the M&A front.

I do think that opera.

Opportunities are abundant.

The trick is finding the one that we think are good for our shareholders and where we can run them profitably would add value to the business.

Roger: And I have one quick follow up. Thanks. Yes, well, this is, this is Mike. Greg came from both increasing volume. We saw as we progressed through the core to volume increasing as a result of increase, as a result of the increase we had in terms of productive technicians. So combination is that and reaching out into the vehicle park grew our account. But then we saw value grow really across our customer pay, our internal work as well with the growth that we saw in new vehicles and the sequential growth they've used.

And we're very active in looking at all sorts of different opportunities and I'll, let Mike comment on the Pendragon one in particular.

Wow.

And the last thing that was it.

Ask the question also is much more subtle and backup.

We made up $9 million on that.

Obviously competitive.

At the time that we thought it was a type of thing we think that with good assets.

We did our diligence and decided to.

So not all log off at that point, I think that nothing else. Besides us.

Yes.

Roger: And then warranty was up as well. So the combination of both of those things, I have not seen a big difference in terms of the geographical distribution of that growth. If I look broadly across the market, it's, it's, it's roughly in line. So I don't think that there's necessarily anything from a geography perspective that's influenced it.

Let's continue to do exactly as you described.

Yes, that's really helpful and I guess squeeze in one more just quick model Clarifier, Tom I think in your prepared remarks, you mentioned that the sale of <unk> loans. This quarter was an $8 million pre tax gain and if so where was that in the P&L and SG&A offset or is it getting reported below the line, just where that $8 million gain.

Michael Manley: So in summary, just a combination of increased volume but increased value per hour as well. Got it. Let's clear. And then just on new cars, you know, a helpful color on the slides and, you know, how we are strategizing, you know, the overall profitability there. You mentioned it prepared remarks that, you know, you were selling like all of the inventory that was coming in, but, but the slide that got, you know, but he also suggested that you were trying to push volume.

Right.

I think I think it's embedded in the <unk>.

Yes.

Yes, you can see it in other.

It's footnoted within <unk>.

In the financial statements Youll see it there.

At the at the financial statements footnote one.

And you'll see it there in the press release.

Included in there, it's net of other things going on so.

Alright, so the number was $8 million is that right Tom correct, that's correct pre tax $8 million.

Michael Manley: You know, in order to, you know, monetize, you know, CFS and parking services, you know, just wanted to make sure I'm understanding, you know, both those comments, you know, correctly, you know, did you, did you have to stimulate volumes with some GPU reduction, you know, to, you know, make sure you still get the FNI or CFS, CFS income or, you know, just, if you could just clarify that a bit. It would be helpful. Thanks. Yeah, no problem. And by the way, if I'll try and clarify the field, feel free to dive in and read direct what we are for teams to do, we've obviously invested a lot.

Great. Thanks, so much guys.

Okay.

Thank you. Our next question comes from Bret Jordan from Jefferies. Your line is now open. Please go ahead.

Hey, guys. This is Patrick Buckley on for Brian Thanks for taking our questions.

Could you talk a bit more on the used sourcing environment during the quarter. It sounds like you guys successfully increased spend there do you see further room to grow through additional dollar spend or is that pretty close to the optimal run rate.

It's a great question I think.

Michael Manley: We recognize, so let me just step back. As I mentioned in my open comments, we recognize that how we manage our user inventory as we go through this year and get into next year is going to be critical for us to be able to continue the progress. Not just in terms of the use vehicles cars for our franchise businesses, but also be able to stock up all of the incremental and USA stores that we're opening.

I think the balance that we will be starting in the quarter is probably optimal going forward.

Beyond the additional thing that we ask the timeframe in which might not seen on the scheme of things is the full new ethane demand in USA just to make sure that we have an incremental inventory to those but I think we've got a good balance now in terms of we bought Youll come what's coming in and trying to as I said, we're looking at each student and giving credit.

Michael Manley: And we recognize that we're investing a lot of money in that, whether it's incremental marketing or incremental infrastructure to support, are we by your car. And what we are for teams to do is to take a very holistic view in terms of volume in the marketplace. Not to distress out anything at all, but just to recognize that we have we have a very good record in terms of CFS performance. We have a very good record in terms of sourcing and as you're looking at opportunities in the marketplace, just make sure you're taking all of those into account because one of the most profitable sources for use vehicles, as you know, is actually the traders that come on a new or use car sale.

We would try to make sure that we can get not just a sign of whenever we are sending to do something at a second site right. So on the site optimal balance at this moment in time and if we're able to continue to get sequential growth will obviously need to get more inventory, but.

<unk>.

I'd say, it's balanced right now desktops I can give you.

Great. That's helpful and then switching to the new side of things are you guys seeing any mismatch between higher content units in your inventory versus demand for a more affordable lower term units.

I don't think I'm, saying any mismatch, obviously, we look.

Michael Manley: So it was really a reflection of us making sure that people were recognizing that there are multiple different sources of profit in an individual sales deal and just make sure you're reflecting that as general managers as general sales managers in the dealerships when you are when you're building your month. So it really was, I think, just a logical description of something that we would want them to do and take advantage approach the business is multifaceted.

As everyone does.

Turn rates across different models I think one of the things that's happening in new that we saw in the pools or at least I mentioned in my opening comments that I thought the team did well even <unk> penetration levels were down.

Yes. He is on the new total finance penetration on new for Us remains stable, but it moved from what I would call.

Just strike tighter into leasing.

And as it does that.

Michael Manley: Got it, got it, but that's clear maybe like just to finish up on the new GPUs. Were you able to like, did you see any benefit of the strike in the third and you expect any benefit, you know, from a slower inventory bill in the fourth quarter to the GPUs or. Oh, you think like, you know, the strategy around like CFS and you know, driving away and will continue to continue to decline those GPUs here in the fourth quarter.

And that can have quite a lot with higher content vehicles. Obviously, so I think that was beneficial for us on the new side.

And as I said, a new side Thats, where we saw.

Penetration rates dropped.

Nothing that stands out to me.

When I look at inventory the only.

Different as I say in terms of time lines at the moment.

On electric.

Electric vehicles versus other powertrains.

Michael Manley: No, there'll be no benefit and I'll put some color to that. When when we saw GPUs rise across the industry, we saw them rise because all of the competitive cross shop models were in short supply. So you have a situation where every brand was in short supply and therefore prices drove up. But if we just have individual domestics in short supply, but the cross shop brands consumers are looking at in addition to the domestics are not.

We are seeing improvements in ton on electric vehicles, but they are still roughly twice.

Over the past 10 twice as fast at the moment.

Great Thats all right. Thanks, guys.

Thank you.

Yeah.

Thank you. Our next question comes from John Murphy from Bank of America. John Your line is now eight then please go ahead.

Michael Manley: There'd be no reason there's no no potential for those domestics in my view to get pricing as a result of the fact that they may have a few days less supply than the other, and that's just in general. The pandemic was a, as we've said, it was a one-term reset to the industry. And secondly, we see we're 55 days for blind domestics. Matt, no, a near-to-peak that we had before the pandemic, but it's certainly enough to take us through for the next few months. Obviously, what we're looking for is, from mentioned in these speeches, a mutual end to the strike as soon as possible, but as we see it today, we got 55 days. I think we'll be okay.

Hi, Good morning, guys can you hear me now.

Yes.

Yes.

Sorry, it seems like we're not paying our phone bill here I apologize.

Yes.

First question, Mike You mentioned something.

When youre talking about but the used car business about how you might be willing to accept.

A lower grosses because there is you can make it up on the on the CFS side and there might be a retailer will vehicle that comes in trade.

It sounds like that's kind of also alluding to that you might go a little bit deeper into the maybe the third turn of the vehicle as opposed to just the second turn.

Can you maybe comment on what you were getting out there and how institutionalize that that process is and maybe accepting lower grosses and trying to make it up on growing the business. If you will on the CFS and on that third term.

Unknown Executive: Great. Thanks, I think the question and all the color and good luck. Thank you.

Daniel Imbro: Our next question today comes from Daniel Inversum Steven. Daniel, your line is now way from Steve. Go ahead.

Yes, Sean.

No.

What does that wanted to do is creating confusion. So what we ask our sales teams to do is to obviously look at the other programs that they generate we want them to continue to hold or gain market share for the brands that they represent but also grow new to used ratio is within that business.

Daniel Imbro: Ask them more and everybody. Thanks again, our questions. Like, maybe I'll follow up with totally new units. I think you caught up strength in Port Brands, even as production increased. He had talked about what you think is driving that. Is it more affordable product? Just a strong line up. You're trying to understand why some of those brands are outperforming so well. So without diving into all of the imagery numbers, if I just think about the last few years, what we saw initially as it came into the pandemic was those import brands were holding up in terms of their inventory and we saw a kind of delayed effect of their inventory levels got really low and we were talking about 3, 4, 5 days of supply.

So I think sometimes particularly when you've got a high interest rate environment as you're constructing a deal in the showroom.

Multiple different ways that sounds executive orders.

Sales manager can construct that deal.

On.

And then appropriate fashion for the customer so does that means that as you're looking at that you take a lot of things into account.

Is it does it represent CFS income and also does it represent.

Opportunity.

Daniel Imbro: So a lot of those customers for those brands just couldn't find the tools. And as we've been able to see flow increase and improve, I genuinely think it is just some pent up demand that it's been able to get a lot to the result of that. We saw those brands rebound and rebound strongly and I'm convinced that that is what it was. In those brands and our terminators are just phenomenal as you can see we're still very low in the culture, I think.

One of the big dynamics that we've seen is and Tom alluded to this as a shift in terms of average mix of used vehicles titles.

Daniel Imbro: That's great.

Notwithstanding the fact that we were up sequentially, but that was really driven by vehicles under $20000. So if I think about used vehicles $20000 $20 $40000 $40000 above 20 under $20000 is still a huge amount of interest in loan growth as you put the inventory that broadly.

Flat to down 20 to 40, and then 40 plus down.

So as we're thinking about trying to what we're doing is we are.

We are investing more and trying to be able to keep our inventory at that sub $20000 level as well. So all of that we take into consideration because as you know in sourcing of it when we bought <unk>. It comes when it comes with a.

Thomas Szlosek: And then Tom, maybe a strategy one for you. You guys, I think you know, put in a bid on a U.K.A, that during the quarter would have been a big international deal. Then you can use the software dealership M&A fifths, you obviously said that the buybacked this quarter, but we're dealership M&A fifths in your focus and maybe is international becoming more focused for you guys as you think about the next layer of growth for coordination.

Heap of cost not just your advertising cost not just your commission costs to your sales executives.

Other costs associated with that channel. So as we think about the business in a balanced way, let's just make sure. We're maximizing all the channels available to US whilst you are making unacceptable total gross profit per unit.

Thomas Szlosek: Yeah, I mean, thanks for the question, Daniel. I mean, when you, I'll let Mike answer the specifics on Penn Dragon, but when it comes to capital allocation in general, the first thing I look at when I look at automation is we have a lot of cash, capital allocation. In other words, the cash generation is very strong, so we've got a lot of opportunity, which I really like and which is what attracted me to join the company, the first place.

Unit zone, So I think.

We're very pleased with our teams that.

Profit per unit very very important, but we also recognize that balanced.

Okay. That's helpful. And then just a second question on after sales and you may have gone into it but.

The increased technician head count I was just wondering if you can quantify that and how are you finding these tax I mean, it seems like everybody is finding having a hard time sourcing them and is there more opportunity.

Thomas Szlosek: And we can either reinvest in the business, you know, through CAPEX and M&A at any even delivery, I think we need to, the same comfortable with our, where we are at levels right now. And we also can, you know, at return, of the cast or shareholders through dividend, which we don't have, and share buybacks, which, you know, as I said, it's been one of our primary emphasis in the last couple of years, given that the low interest rate environment, you know, things moderate over time.

With whatever youre doing there to increase head count our tech count even more.

Yeah.

Yes.

<unk>.

I cant give you I would give you the fact that remember the impact to increase that.

It's fairly significant in terms of the head count. So then maybe one on <unk>.

One time drags that number Adam on memory, let me just turn.

We're doing it and what we've done is something you said.

Net.

We got basically dealership by doing that you can understand what the opportunity is with it whether that is increased penetration and then who partner with us to improve customer service by reducing.

Thomas Szlosek: And, you know, we have to be mindful that our number one objective is just maximizing shareholder value, and we'll do that thoughtfully, obviously we'll continue to, you know, reinvest in the business, and, you know, where we think there's opportunity, you know, also be thoughtful about the return of shareholders through, you know, share purchases. So on the M&A front, I do think that, you know, opportunities are abundant, you know, the trick is finding the ones that we think are good for our shareholders, and where we can run them properly and add value to the business. And we're very active in looking at all sorts of different opportunities.

Customer lifetime, So I think once you've done that you understand exactly what you're looking for in terms of productive technicians and then we have we have pulled the guys a group of.

Most senior.

Obviously active with all right.

Our teams to put together what I think is a great campaign for attracting and recruiting technicians, but.

What we have to be in this area, we have to constantly make sure that pay package units are benefits are fully aligned if not better than the marketplace because youre right.

And in demand.

In demand perfection and.

And it's all just about it's not just about.

Michael Manley: I'll let Mike give comment on the, yeah, the pen dragon one in particular. Well, for the way I think that was a great ask the question, I'm sure there's much more to add on pen dragon. I mean, when we made up memory of that, obviously compared to the authors that were out there at the time, that we thought it was a appropriate thing, and we think they were good assets. And we did our diligence to decide it to not formalize an offer at that point. I think there's nothing much to say and check the quotes that continue to do is, is that these you just saw?

Trying to have more accrual settlements out because you're not keeping the ones that you saw.

Im going to cyan.

I have to circle back in.

From memory I think we've had.

Okay.

And then I guess.

14% same store.

Thank you.

Against that number.

Okay.

On that I mean, those those stalls exists to put those people into youre not paying a 150 to $200000 of Capex I mean theres room to.

There's capacity to put them in so cap Ute goes up is that a fair statement.

Under the plan.

Thomas Szlosek: Yeah, that's really helpful and I'm going to squeeze in one more quick model clarify, Tom. I think you prepared a mark. So you mentioned that the sale of CIG loans this quarter was an $8 million pretext game. And if the where was that in the PNL, is it an SGNA offset or is it getting reported below the line? Just where is that $8 million game? I think it's embedded in the, yeah, you can see it's in other footnoted within the financial statement.

Bye bye.

High utilization is about 55% of the moment.

Thomas Szlosek: You'll see it there. Look at the financial statement footnote 1, Daniel, and you'll see it there in the press release. Great. It's included in there. It's not of other things going on. So the number was $8 million, was that right, Tom? Correct. That's correct. Pretext game, $8 million. Great.

We.

<unk> also mentioned, there's been some beautiful beautiful dealerships and once upon a building dealerships as they put plenty of capacity in there I'm not sure even does about it.

Perfect. Thank you very much.

Welcome.

Thank you our last question today comes from David Whiston Morningstar. David Your line is now open. Please go ahead.

Thanks, Good morning.

You mentioned in the slide deck that you increase your tech head Count I was just curious if you have to do any aggressive spending on compensation or advertising to make that happen.

Now as I mentioned before we obviously checked very regularly in market by market.

Hi, and benefit packages to make sure that we are competitive with market.

Everybody apps like everybody else, we often signing bonuses.

Unknown Executive: Thanks so much, guys. Thank you.

In the marketplace.

We also do a lot of work.

And there's more we can do in this area frankly, but we do a lot of work in terms of recognition seniority and tenure in those things, but it's something that.

Unknown Executive: Our next question comes from Brad Jordan from Jeffries. Brad, your line is now open. Please go ahead. Hey, guys. This is Patrick Falkley on for Brad. Thanks for taking our questions. Could you talk a bit more on the use sourcing environment during the quarter? It sounds like you guys successfully increased spend there. Do you see further room to grow through additional dollar spend? Or is that pretty close to the optimal run rate?

It's something that we recognize as I said it isn't.

It's a very high demand in demand.

Section.

We just went very hard as do others.

And I believe last quarter, you were talking about wanting to get more recurring business from your customers.

Michael Manley: It's a great question. I think the balance that we will be struck in the quarter is probably optimal going forward date. The only additional thing that we have to say to him, which may not seem a lot on the skin of things, is before New Evans, the very end USA, just to make sure that we have incremental inventory for those. But I think we've got a good balance now in terms of we body or car what's coming in in trade, and as I said, we're looking at each year and giving credit, it says it is a really good trade there, to make sure that we can get not just the sale of whatever we're selling, but also get a second sale out of the trade.

Service would be a big part of that of course, especially on the customer pay side I'm just curious how do you Vince.

Vince consumers normally haven't been considering using the dealer for service anymore, then they have to to start doing so.

So.

Let me just give you an answer the question in a slightly different way and they will help build out some of the things I'm trying to I'm trying to communicate obviously poorly met.

Let's start with the premise that if you block out at some point, you're going to need incentive is right.

Michael Manley: So I would say optimal balance at this moment in time, and if we're able to continue to get sequential growth, we'll obviously need to get more inventory, but I say balance right now, that's not so good. Great, that's helpful.

What we are trying to do is build out a service channels for you.

Susan needs for you as an individual you may you might want to do that work yourself, which is why we've now got I am Pasto <unk> will provide you that you.

You may not want to use the franchise environment, you might want to use a non franchise environment.

Michael Manley: And then switching to the new side of things, are you guys seeing any mismatch between higher content units in your inventory versus demand for more affordable lower trim units? I don't think I'm paying any mismatch. Obviously, we look at everyone does at our turn rates across different models. I think one of the things that's happening in new that we saw in the culture at least, and I mentioned in my own in comments that I thought the team did well, even though finance penetration levels were down.

You may leave 30 miles away from the closest franchise. That's why we have Autonation mobility services. The reason, we bought replenishment and if you do want to use the franchise environment. That's why we have a franchise environment.

I kind of look at it in that sense customers at different ways of getting that service would have done and it's about us giving them providing them channels that are appropriate for them at the right convenience and the right cost. So youre right. There is if you're told to Christian.

Michael Manley: The reality is on the new total finance penetration on new side for us remains stable, but it moved from what I would call just straight paper into leasing. And as it's done that, that can help quite a lot with higher contented vehicles, obviously. So I think that was beneficial for us on the new side. And as I said, on new side, that's where we saw penetration rates dropped. So nothing that stands out to me.

Ahead of after sales.

This is.

There is more likelihood of fuzzy line customers.

Making the decision to assigning the franchise channel and we will do them notwithstanding the franchise channel.

And we obviously target those people very well.

Aggressively since he remains a fantastic channel for you, but if you want something Allison, let me introduce you to replenishment automation medical services.

Okay.

Okay, and just one last thing on M&A, you mentioned, its becoming more attractive or are sellers, becoming more reasonable or are there other variables at play here that that change.

Michael Manley: When I look at inventory, the only difference is I see in terms of turn rate at the moment are electric vehicles versus other powertains, where we are seeing improvements in turn on electric vehicles, but they are still roughly, I'll say twice. I don't have time to turn twice as fast as the moment. Great.

Sorry, you broke up there you just repeat that again.

I think in the slide deck, you mentioned M&A is becoming more attractive and is that just solely because sellers are becoming more reasonable in their asking prices or are there other variables, causing that change.

Yes.

This is Tom I mean, im relatively new to the to the environment and you know.

Unknown Executive: That's all for us. Thanks, guys. Thank you.

Obviously.

And as we as we work with our corporate development team.

John Murphy: Our next question comes from John Murphy from Bank of America. John, your line is not way. So please go ahead. Good morning, guys. Can you hear me now? Yeah. Sorry, it seems like we're not paying our phone bill here, I apologize. First question, Mike, you mentioned something when you're talking about the use car business about how you might be willing to accept your lower grosses because there's you can make it up on the on the CFS side.

Are suing them.

Lots of different opportunities, whether its stores franchises or some of the other things that Mike has mentioned.

I would say that seller expectations have probably not.

John Murphy: And there might be a retailable vehicle that comes in trade. It sounds like it's kind of also looting to that you might go a little bit deeper into the maybe the third turn of the vehicle is supposed to just the second turn. Can you comment on what you were getting out there and how institutionalized that that that process is and maybe accepting lower grosses and trying to make it up or growing the business, if you will, on the CFS and on that third turn.

Moderated in any meaningful way.

As you might expect a seller.

And particularly with.

Their P&L for the last couple of years being able to sell off of.

Pandemic level P&L.

Expectations are pretty high the trick for us is.

And evaluate the opportunities.

Figuring out what.

The moderation is gonna be.

Normalization impact you're going to be.

And I think Thats the point I was trying to make is that yes.

Those expectations have to start moderating as we cycle out of it what was that pretty frantic.

John Murphy: Yeah. All right. What I don't want to do is create confusion. So what we ask ourselves things to do is to obviously look at the overall growth that they generate. We want them to continue to hold or grow market share for the brand that they represent, but also grow new to use ratios within their business. So I think sometimes particularly when you've got high interest rate environment as you're constructing a deal in the showroom, there's multiple different ways that are sales executive or sales manager can construct that deal in an appropriate fashion for the customer.

Period of time here for for the whole.

U S and globally not just in.

Retail auto.

Many other industries.

That's the that's.

Hopefully that's clear for you David.

Yeah, Okay. Thanks, a lot.

Go ahead Mike.

No no.

Goodnight.

Did that answer your question David.

John Murphy: So that means that as you're looking at that, you take a lot of things into account is that it represents if I think I'm an also to represent an opportunity to get a trade, but one of the big dynamics that we have seen is and Tom alluded to this is a shift in terms of average mix of use vehicle sales. So notwithstanding the fact that we were up sequentially, that was all really driven by vehicles under $20,000.

So I think that was the last question, Yes, let me.

By the way they are doing.

Doing the mental math on technicians I think your number is wrong. So we probably have to talk about because.

My recollection is it's.

Something in the order of between four to 500 types with some of my prepared upon that so just cycle back to make sure we cover that off.

With that I'd like to bring the call to a close and thank everybody for being on the call and we look forward to seeing you in the next quarter and as I say, thanks to all of our team. Thank you everyone Bye bye.

John Murphy: So if I think about use vehicles, $20,000, $20,000, $20,000, $40,000, $40,000 above, under $20,000 still a huge amount of interest, a lot of growth if you've got the inventory there. Broadly, factor down 20 to 40 and then 40 plus down. So as we're thinking about trades, what we're doing is we are I think investing more in trades to be able to keep our inventory at that sub $20,000 level as well. So all of that we take into consideration, because as you know, sourcing a vehicle and we buy your car comes with comes with a heap of costs rate, not just your advertising costs, not just your commission cost, your sales executive.

That concludes today conference call. Thanks for joining you may now.

Line.

Okay. Thank you 19.

[music].

John Murphy: But the other cost associated with that channel. So as we think about the business in a balanced way, let's just make sure we're maximizing all the channels available to us whilst you are making an acceptable total profit per unit per unit. So I think we're very clear with our teams that profit per unit is very, very important, but we also recognize that balance.

Michael Manley: Okay, that's helpful. And then just a second question on after sales and you may have gone into this, but the increased technician, you know, headcount. I was wondering if you can quantify that and you know, how are you finding these texts? I mean, it seems like everybody's finding having a hard time sourcing them and is there more opportunity with whatever you're doing there to increase the head count or the tech count even more.

Michael Manley: Yeah, I said, I can't give you, I would give you if I could remember the exact increase, but it's fairly significant in terms of the head count. So then maybe while I try and direct that number out of my memory, let me just tell you how we're doing it and what we're doing it. The first thing is that we go basically dealership our dealership to understand what the opportunity is, whether that is increased penetration in their vehicle park or whether it's to improve customer service by reducing customer wait times.

Michael Manley: And I think once you've done that, you understand exactly what you're looking for in terms of productive technicians. And then we have, we have pulled together a group of more senior service directors with our HR teams to put together what I think is a great campaign for attracting recruiting technicians, but you're quite right. But we have to be in this area, we have to constantly make sure that our pay package is our benefits are fully aligned.

Michael Manley: It's not better than marketplace because you're right. It's a, it's an in demand, an in demand profession. And it's not just about, it's not just about trying to hire more. It's also about, as you know, keeping the ones that you've got. Well, I'm going to say and very, very much to circle back in from memory. I think we've added it over, over 14% of the story. All right, so both end percent, thank you for getting that number for me.

Michael Manley: Joe, those stalls exist to put those feet people into. You're not playing $200,000 of cat backs. I mean, there's room to pass you to put them in. So, cat view goes off. Is that a fair statement? Absolutely, Sam, by utilization of about 55% at a moment. So, we, the organization, the organization has built some beautiful, beautiful dealerships, and we're a part of building in beautiful dealerships as they put plenty of capacity in there. We are not sure if that's even done as a boat. Perfect.

Michael Manley: Thank you very much. Welcome. Thank you.

David Whiston: Our last question, say, comes from David Whiston from Morningstar. David, your line is now open. Please go ahead. Thanks. Good morning. You mentioned in the slide deck that you increased your tech head count. I was just curious if you had to do any aggressive spending on compensation or advertising to make that happen. Now, as I mentioned before, we obviously check very regularly market by market, paying benefit packages to make sure that we are competitive with market.

David Whiston: Like everybody else, like everybody else, we offer signing bonuses in the market place, and we also do a lot of work, and there's more we can do in this area, frankly, but we do a lot of work as a recognition seniority ten year and those things. But it's something that we recognize it, as I said, it's a very high demand, in demand profession.

Michael Manley: We just were very hot, as we love it. I believe the last quarter you were talking about wanting to get more recurring business from your customers. Service would be a big part of that, of course, especially on the customer pay side. I'm just curious, how do you convince consumers who normally haven't been considering using the DLIFR service any more than they have to to start doing so?

Michael Manley: So, let me just give you an answer to the question in a slightly different way, and it'll help build out some of the things I'm trying to communicate, obviously poorly. So, let's follow the premise, but if you've got a car at some point, you're going to need a service, right? And so, what we are trying to do is build out service channels for you that Susan needs for you as an individual.

Michael Manley: You may want to do that work yourself, which is why we've now got A and past.com. We'll provide you the parts. You may not want to use a franchise environment, you may want to use a non-franchised environment, or you may live 30 miles away from the closest franchise. That's why we have automation mobility services, the reason we've all prepared for it. And if you do want to use a franchise environment, that's why we have a franchise environment.

Michael Manley: So, I kind of look at it that says customers have different ways of getting that service work done, and it's about us giving and providing them channels that are appropriate for them at the right convenience and the right cost. So, you're right, there is what, if you talk to Christian ahead of after sales, there is this, well, there is this what I call a fuzzy line where customers are making the decision do I say in the franchise channel or do I not say in the franchise channel. And we obviously target those people very aggressively to say, hey, it remains a fantastic channel for you, but if you want something else, then let me introduce you to repairs with Services.

Thomas Szlosek: Okay, and just one last thing on M&A, you mentioned it's becoming more attractive or are sellers just becoming more reasonable or are there other variables that play here that that change? Sorry, you broke up, you just repeating that again? I think in the side that you mentioned M&A is becoming more attractive, and is that just solely because sellers are becoming more reasonable in their asking prices or are there other variables causing that change?

Thomas Szlosek: Yes, I'm relatively new to the environment and obviously as we work with our corporate development team on pursuing lots of different opportunities whether it's stores, franchises, or some of the other things that Mike has mentioned. I would say that seller expectations have probably not moderated in any meaningful way as you might expect, as a seller. Particularly with their P&Ls for the last couple of years being able to sell off of pandemic level P&Ls, the expectation is pretty high.

Thomas Szlosek: The trick for us is in evaluating the opportunities, figuring out what the moderation is going to be or normalization impacts are going to be. I think that's the point I was trying to make is that those expectations have to start moderating as we cycle out of what was a pretty affrontive period of time here for for the whole US and globe, not just in the retail, but many other industries. That's kind of the point I'm trying to make hopefully that's clear for you David. Yeah, okay, thanks for yeah. I'll go ahead Mike. Yeah. No, no, I was going to add in now. Did that answer the question, David? I think that was the last question.

Michael Manley: Yeah, let me, by the way, Derek, I'll be doing the mental math on technicians and I think your number is wrong. So we probably have to do that. My recollection is it's funding in the order between four to five hundred takes that we've still on over period of time, but so just circle back to make sure we cover that off.

Michael Manley: So with that, I'd like to bring the call to a close.

Ellen: Thank you everybody for being on the call and we look forward to seeing you in the next quarter and as they say, thanks to all of our team. Thank you everyone. Bye bye.

Ellen: That concludes the conference call. Thanks very much for joining. You may now disconnect your line. Transpping your line three now.