Q2 2024 AutoNation Inc Earnings Call

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Alyssa: Good morning. Thank you for attending the AutoNation 2Q24 earnings call. My name is Alyssa, and I will be your moderator today.

Elisa: Good morning. Thank you for attending the Autonation to Q24 earnings call. My name is Elisa and I will be your moderator today.

Alyssa: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call to our host, Derek Fiebig with AutoNation. Please go ahead.

Elisa: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Elisa: I would now like to pass the call to our host Derek Fiebig with Autonation. Please go ahead.

Derek Fiebig: Thank you, Alyssa. And good morning, everyone. Welcome to AutoNation's second quarter 2024 conference call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call to questions. Before beginning, 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 forward-looking statements within the meaning of the Federal Private Security Litigation Reform Act of 1995.

Derek Fiebig: Thank you Alyssa and good morning, everyone. Welcome to Autonation second quarter 2024 conference call, leading our call today will be Mike Manley, Our Chief Executive Officer, and Tom <unk>, Our Chief Financial Officer.

Derek Fiebig: Following their remarks, we will open up the call for questions before beginning 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 forward looking statements within the meaning of the federal Private Securities Litigation Reform Act of $19 95 and such.

Derek Fiebig: Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. 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 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. With that, I'll turn the call over to Mike.

Derek Fiebig: Such forward looking statements involve known and unknown known risks that may cause our actual results or performance to differ materially from such forward looking statements 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.

Mike: Certain non-GAAP 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 that Autonation dot com with that I'll turn the call over to Mike.

Michael M. Manley: Thank you, Derek, and good morning, everyone. Thanks for joining us today. As I mentioned in today's press release, the CDK outage masked what was developing into a very positive for AutoNation. April and May new unit sales were up about 5%, while used unit sales were flat or accelerating in June.

Mike: Thank you Derek and good morning, everyone. Thanks for joining us today.

Mike: As I mentioned in today's press release with CDK outage Moscow was developing into a very positive quarter for autonation.

Speaker Change: April and mining New unit sales were up about 5%.

Mike: Used unit sales were flat for accelerating in June after sell off the sales growth was consistent with first quarter trends and margin trends in many of our business lines are moving positively and I was certainly encouraged with where the quarter was sitting in the CDK outage here. This on June 19th.

Michael M. Manley: After sales growth was consistent with first quarter trends, and margin trends in many of our business lines were moving positively. And I was certainly encouraged with where the quarter was sitting when the CDK outage hit us on June 19th. Now, as usual, Tom is going to take you through more details of our performance during the quarter in his section, but I did want to give you a summary of the scope of the impact on our business.

Tom: As usual Tom is going to take you through more details of our performance during the quarter in his section, but I did want to give you a summary of the scope of the impact on our business before.

Michael M. Manley: Before I do that, however, I think it's important to state that as of the last week of July, the incident with regard to its operational impact on our business is now behind us. Now to give you a sense of scope, virtually all of our business processes, including CRM, deal processing, financial services, inventory management, after-sales systems, and accounting, are tied in one form or another to the CDK background and therefore were all immediately impacted.

Speaker Change: Before I do that however, I think it's important to state that as of the last week of July the incident with regard to its operational impact on our business is now behind us.

Tom: Now to give you a sense of scale virtually all of our business processes, including CRM deal processing financial services inventory management after south systems and accounting.

Todd: Todd in one form or another to the CDK background and therefore, we will immediately impacted.

Michael M. Manley: Now, naturally, we worked with each of our business units to put in place interim solutions, some of which were off the shelf, and some of which had to be developed. Now, each solution, based upon the discipline involved, returned our business to some level of functionality and productivity, but the workaround processes were, in large part, manual. For example, we manually processed close to 60,000 repair orders during the outage, and you can imagine this slowed things down tremendously. Now, the main functionality of CDK was brought back online in late June, however, there were some ancillary integrations which have only recently been restored.

Todd: Really we worked with each of our business units to put in place engine solutions, some of which were off the shelf when some of which had to be developed.

Todd: Solution based upon the discipline and bolt returned the business to some level of functionality and productivity, but the work around processes were in large part menu. For example, we manually processed close to 60000 repair orders during the outage and you can imagine this slowed things down tremendously.

Todd: Now main functionality CDK was brought back online in late June.

Speaker Change: However, there were some ancillary integrations, which are only recently been restored now is a direct outcome of our second quarter results were adversely impacted by approximately $1 55 per share which includes the loss revenue and margins during the outage as well as the impact of certain onetime costs incurred including a pay guarantee for a variable compensation based.

Michael M. Manley: As a direct outcome, our second quarter results were adversely impacted by approximately $1.55 per share, which includes the lost revenue and margins during the outage as well as the impact of certain one-time costs incurred, including a pay guarantee for our variable compensation-based associates. Now notwithstanding their four mentions, there were a number of really encouraging areas in our performance in the second quarter, which I'm going to highlight. Let me start with the new vehicles.

Speaker Change: Associates.

Speaker Change: Now notwithstanding a full mentioned there were a number of really encouraging areas and outperformance in the second quarter, which I'm going to highlight let.

Speaker Change: Let me start with new vehicles.

Michael M. Manley: You can see that margins are stabilizing, and following two quarters of sequential margin decline for more than $300 per quarter, second quarter margins declined to $3,108 or $220 during the period, and we're basically flat from May to June. Now, although for the quarter, new vehicle sales were down 2% even with the outage, we grew units of our import brands by 6%, and Used Vehicles. Total used vehicles for the quarter decreased by 8% from a year ago on a same-store basis until the units were 5% lower, and that benefited from the growth of our ANUSA footprint, and to date, as you know, we've opened four new ANUSA stores. Used car demand remains relatively strong, certainly through the quarter, although demand by price point changed to move into lower price bands, but total demand volume is healthy.

Speaker Change: You can see that margins stabilizing and following two quarters of sequential margin decline of more than $300 per quarter second quarter margins declined.

Speaker Change: <unk> $3108 or 220 during the period.

Speaker Change: And we're basically flat may to June.

Speaker Change: Now although for the quarter, new vehicle sales were down 2%, even with the outage. We grew units of our import brands by 6%.

Speaker Change: In used vehicles.

Speaker Change: Total used vehicle for the quarter decreased by 8% from a year ago on a same store basis until the units were 5% lower and that benefited from the growth of variety in USA footprint and to date as you know we've opened four new iron USA stores used car demand remains relatively strong and certainly through the quarter although demand.

Speaker Change: By price point change to move into lower priced bonds, but total demand volume is healthy.

Michael M. Manley: Our pace of used car inventory sourcing slowed significantly in the second half of June, but it is now improving, and I expect it to return to normal levels in the second half of August. Our PBR has continued to recover in the quarter, increasing by $165 on a sequential basis. And you'll recall that earlier this year we discussed the actions our operating teams were taking to better align inventory and increase turns, and I'm pleased to note the continued recovery in margins, which is not coming at the expense of a slowing turn rate. Customer Financial Services, or CFS, continued to deliver in the quarter.

Speaker Change: So the used car inventory sourcing slowed significantly in the second half of June now improving and I expect it to return to normal levels of used car inventory in the second half of August.

Speaker Change: PDL has continued to recover in the quarter, increasing by $165 on a sequential basis and you'll recall that earlier. This year. We discussed the actions. Our operating teams are taking to better align inventory and increased turns and I'm pleased to note is the continued recovery in margins, which is not coming at the expense of the slowing turn.

Speaker Change: <unk>.

Speaker Change: Customer financial services with CFS continued to deliver in the quarter. We did see some moderation in products so per unit cell, which dropped approximately 10% from last year.

Michael M. Manley: We did see some moderation in product sold per unit sale, which dropped approximately 10% from last year. Now, we progressively took actions to address this, and I'm saying we've seen an increase throughout July back to what we consider normalized levels. Now, as part of our CFS strategy, we remain focused on driving penetration of AutoNation Finance. ANF originated over $240 million in loans during the quarter, almost four times higher than the second quarter of 2023.

Speaker Change: We progressively took actions to address this and saying we've seen an increase throughout July actually what we consider normalized levels.

Speaker Change: Now as part of our <unk> strategy, we remained focused on driving penetration of Autonation finance.

Speaker Change: <unk> originated over $240 million of loans during the quarter, almost four times higher than the second quarter 2023, and the portfolio balances now exceed $700 million.

Michael M. Manley: And the portfolio balance now exceeds $700 million. Now, for our shareholders, this means a shift to a model that, on a lifetime basis, is two and a half to three times more profitable than that of the traditional third-party finance offering. While this focus can have a short-term adverse impact on CFS PVRs and cash flows, we're pleased with the enhanced long-term value creation by the more regular contact with our customers that this model naturally provides. After sales delivered another good quarter, tracking around 10% growth for the quarter through May, we ended basically flat as a result of the loss of productivity in the second half of June.

Speaker Change: Now for our shareholders. This means a shift to a model that on a lifetime basis is two and a half to three times more profitable than the traditional third party finance offering.

Speaker Change: While this focus can have a short term adverse impact on CFS.

Speaker Change: Cash flows we're pleased with the enhance long term value creation by the more regular contact with our customers that this model naturally provides.

Speaker Change: After sales delivered another good quarter tracking around 10% growth for the quarter. Three may we ended basically flat as a result of the loss of productivity in the second half of June.

Michael M. Manley: During the quarter, we improved service effectiveness and delivered a positive next shift, which enabled a year over year 60 basis point increase in gross margin to 48% for the quarter. Now, this business represents close to half of our profitability and is a key part of our continued engagement with our customers. We continue to focus on technician development, productivity, and retention as well as capacity utilisation to support the continued growth of the business, which we expect to deliver increasingly in the second half.

Speaker Change: During the quarter, we improved service effectiveness and delivered to the positive mix shift, which enable the year over year 60 basis point increase in gross margin to 48% for the quarter.

Speaker Change: Now this business represents close to half of our profitability and is a key part of our continued engagement with our customers.

Speaker Change: We continue to focus on technician development productivity and retention as well as capacity utilization to support the continued growth of the business, which we expect to deliver and increasingly in the second half.

Michael M. Manley: Importantly, our total technician workforce increased 3% from a year ago, and this was achieved in a labor market that remains very competitive. We also joined forces with the U.S. Army to create job opportunities for soldiers through the Partnership for Your Success program.

Speaker Change: Importantly, our total technician workforce increased 3% from a year ago and this was achieved in a labor market remains very competitive we.

Speaker Change: We also joined forces with the U S army to create job opportunities for soldiers through the partnership fuels success program.

Michael M. Manley: The strength of our balance sheet and cash generation continue to give us optionality for capital deployment. As planned, we're spending more modestly on CapEx, and to date, through the second quarter, we've purchased $350 million of AutoNation shares at an average price of $1.59 a dollar per share. This has reduced our share count by more than 5% since the beginning of the year.

Speaker Change: The strength of our balance sheet and cash generation continued to give us optionality for capital deployment.

Speaker Change: As planned we are spending more modestly on capex in to date through the second quarter, we purchased $350 million of Autonation shares at an average price of $1 59 per share this reduced share count by more than 5% since the beginning of the year.

Michael M. Manley: Our leverage remains within our targeted range. Inventory levels of new vehicles are almost fully restored to pre-COVID levels, and I'm happy with where we're positioned in our new vehicle business. As such, I'm expecting to recover market share in the second half of the year. As you know, while new vehicle sales generate a small portion of our gross profit, around 16%, they start the flywheel for all our other businesses, something which we're acutely focused on.

Speaker Change: Our leverage remains within our targeted range inventory levels of new vehicles are almost fully restored to pre COVID-19 levels and I'm happy with where we are positioned in a new vehicle business and as such I am expecting to recover market share in the second half of the year as you know while new vehicles sales generate a small portion of our gross profit around 16% they start with.

Speaker Change: Flywheel for all our other businesses, something which were acutely focused on we acquired triad into salaries used we attached product penetration of finance offerings and it leads to after sales business. So these continued strong trends for new vehicle sales are encouraging for that.

Michael M. Manley: We acquire trade-ins to sell as used, we attach product penetration and finance offerings, and it leads to after-sales business. So these continued strong trends for new vehicle sales are encouraging for that, and with that, I'm going to hand over to you, Tom. Okay, thanks Mike.

Thomas A. Szlosek: I'm turning to slide four to discuss our second quarter P&L. Our total revenue of $6.48 million was nearly identical to the first quarter despite the outage, and, as Mike mentioned, we were tracking above expectations across the enterprise when the outage hit during one of the highest volume periods of the quarter. When you combine this with the expected year-over-year normalization in vehicle selling prices, our revenue decreased 6% from 2023. Most profit of $1.2 billion was 18% of revenue and decreased 3% on a sequential basis, reflecting the productivity drag from the outage.

Utah: And with that I'm going to hand over to Utah, Okay. Thanks, Mike I'm.

Utah: Turning to slide four to discuss our second quarter P&L.

Utah: Total revenue of $6 $48 million was nearly identical to the first quarter. Despite the outage.

Utah: And as Mike mentioned, we were tracking above expectations across the enterprise.

Speaker Change: It wasn't the outage hit during one of the highest volume periods of the quarter when.

Speaker Change: When you combine this with the expected year over year normalization vehicle selling prices our revenue decreased 6% from 2023.

Mike: Gross profit of $1 2 billion was 18% of revenue and decreased 3% on a sequential basis, reflecting the productivity drag from the outage Mike.

Thomas A. Szlosek: Mike mentioned the encouraging margin rate trends; gross margin rates improved 60 basis points from the first quarter in both the used and after sales businesses, and the rate of TBR moderation in new businesses was also encouraging. Adjusted SG&A was relatively stable at $782 million, compared to $786 million in the first quarter.

Mike: Mike mentioned, the encouraging margin rate trends gross margin rates improved 60 basis points from the first quarter in both the us and after sales businesses and the rate of PBR moderation in new business as Mike mentioned was also encouraging.

Mike: Adjusted SG&A was relatively stable at $780 to $82 million compared to $786 million in the first quarter. This resulted in adjusted operating income of $319 million, just under 5% of revenue.

Thomas A. Szlosek: This results in an adjusted operating income of $319 million, just under 5% of revenue. Now below the operating line, our second quarter results were impacted by higher interest expense, mainly for floor plan debt, and benefited from lower income tax expense. The second quarter floor plan interest expense of $54 million was up $21 million from a year ago, as expected, which is a reflection mostly of higher inventory levels and, to a lesser degree, higher interest rates.

Mike: Below the operating line, our second quarter results were impacted by higher interest expense mainly for floor plan debt.

Mike: <unk> benefited from lower income tax expense.

Mike: Second the second quarter floor plan interest expense of $54 million was up $21 million from a year ago as expected.

Mike: Which is a reflection mostly of higher inventory levels and to a lesser degree higher interest rates. As a reminder, we reflect floor plan assistance received from Oems and gross margin at assistance was down slightly from the second quarter last year, and so net of OEM incentives the new vehicle floor plan.

Thomas A. Szlosek: As a reminder, we reflect floor plan assistance received from OEMs in gross margin, and assistance was down slightly from the second quarter last year. And so, net of OEM incentives, the new vehicle floor plan expense changed from a benefit of $3 million in 2023 to a cost of $21 million in 2024. Our second quarter adjusted net income excludes the $43 million of direct costs associated with a CDK outage, and last year's second quarter adjusted net income excludes $16 million of losses from hailstorms and natural catastrophes. All in, this resulted in an adjusted net income of $163 million compared to $285 million a year ago.

Mike: <unk> changed from a benefit of $3 million in 2023, a cost of $21 million in 2024.

Mike: Our second quarter adjusted net income excludes the $43 million of direct costs associated with the CDK outage at last year's second quarter. Adjusted net income excludes $16 million of losses from Hailstorms in natural catastrophes.

Mike: All in this resulted in adjusted net income of $163 million compared to $285 million a year ago.

Thomas A. Szlosek: Mike talked about our share repurchase activity, which helped to partially offset the EPS effects of the net income decline. Total shares repurchased over the past year have decreased our average outstanding share count by 10 percent to 40.7 million shares in the second quarter.

Mike: Mike talked about our share repurchase activity.

Mike: To partially offset the EPS effect of that income decline.

Mike: Total shares repurchased over the past year have decreased our average outstanding share count by 10% to $40 7 million shares in the second quarter. This was a benefit for our adjusted EPS, which was $3.99 for the quarter.

Thomas A. Szlosek: This was a benefit for our adjusted EPS, which was $3.99 for the quarter. Now, let me move to slide five for some more color on new vehicle performance for the quarter. New vehicle unit volumes were attracting approximately 5% growth through May, but ended the quarter down 2%, including an increase of 6% for imports, a 5% decrease in domestic, and a 10% decline in premium luxury. The outage disrupted vehicle sales, inventory, and customer relationship management functions in June.

Speaker Change: Let me move to slide five for some more color on new vehicle performance for the quarter, New vehicle unit volumes were tracking at approximately 5% growth through may.

Mike: We ended the quarter down 2%.

Mike: Including an increase of 6% for imports a 5% decrease in domestic and a 10% decline in premium luxury.

Mike: The outage disrupted vehicle sales inventory and customer relationship management functions. In June we are encouraged by customer demand indications the vehicle supply and manufacturing support including manufacturing incentives such as low interest financing and rebates.

Thomas A. Szlosek: We are encouraged by customer demand indications, vehicle supply, and manufacturing support, including manufacturing incentives such as low-interest financing and rebates. On average, new vehicle unit revenue decreased 3% in a quarter, while new vehicle unit costs increased modestly, resulting in moderation of new vehicle PBR. As Mike mentioned, we are encouraged by the stabilization of our new PBRs, and the $220 sequential decline is more modest on an absolute and relative basis than we've experienced over the last several quarters. The new vehicle supply dynamics have significantly improved. New vehicle inventory levels sit at 47,000 units at the end of June.

Mike: On average new vehicle unit revenue decreased 3% in the quarter, while new vehicle unit costs increased modestly, resulting in moderation of new vehicle P. D. R.

Mike: As Mike mentioned, we are encouraged with the stabilization of our new <unk> and $220 sequential decline is more modest on an absolute and relative basis than we've experienced over the last several quarters.

Mike: The new vehicle supply dynamics have significantly improved new vehicle inventory levels stood at 47000 units at the end of June. This represents 67 days of sales up from 44 days at the end of the first quarter.

Thomas A. Szlosek: This represents 67 days of sales, up from 44 days at the end of the first quarter. Excluding the impact of the outage, we estimate that we would have been closer to 50 days of sales at the end of the second quarter, which continues to track below the mid-60 day levels pre-COVID. Turning to slide six, slide six used vehicles we were tracking at flat year over year volumes through May but ended with a unit volume decrease of 8% same store from a year ago and a 5% decline on a total store basis.

Speaker Change: Excluding the impact of the outage, we estimate that we would have been closer to 50 days sales at the end of the second quarter, which continues to track below the mid 60 day levels pre COVID-19.

Speaker Change: Turning to slide six us to slide six used vehicles, we were tracking at flat year over year volumes through may.

Speaker Change: It ended with a unit volume decrease of 8% same store from a year ago, and 5% decline on a on a total store basis.

Thomas A. Szlosek: This reflects the outage disruption on our vehicle sales, inventory, and CRM function. Average used vehicle selling prices moderated year over year by 5%, reflecting the shift to lower priced used vehicles. Demand for those lower priced used vehicles remains resilient. Total unit sales of vehicles priced under $20,000 increased by 4% from a year ago. Mid-priced vehicles were down 5%, and vehicles over $40,000 were down more significantly.

Speaker Change: This reflects the outage disruption on our vehicle sales inventory and CRM functions average used vehicle selling prices moderated year over year by 5%, reflecting reflecting a shift to lower priced used vehicles demand for those lower price.

Speaker Change: Vehicles remains resilient total unit sales of vehicles priced under 20000 increased by 4% from a year ago mid.

Speaker Change: Mid priced vehicles were down 5% in vehicles over 40000 were down more significantly with you with the Oems taking actions to improve the affordability of new vehicles. There has been some shift away from higher priced used vehicles.

Thomas A. Szlosek: With the OEMs taking actions to improve the affordability of new vehicles, there has been some shift away from higher-priced used vehicles. Mike discussed the encouraging outcomes and used vehicle PBRs in the quarter, reflecting the actions we took to better align used vehicle inventory with market demand and to optimize pricing. While unit profitability was down year over year as a result of a mixed shift to lower-priced used vehicles, these actions helped to increase unit profitability by $165 on a sequential basis. Used vehicle inventory levels were at 30,000 units at the end of June, down 15% from a year ago.

Speaker Change: Mike discussed the encouraging outcomes in used vehicles <unk> in the quarter, reflecting the actions we took to better align used vehicle inventory with market demand and to optimize pricing while unit profitability was down year over year as a result of the mix shift to lower priced used vehicles. These actions helped to increase unit profitability by 100.

Speaker Change: $65 on a sequential basis.

Speaker Change: Used vehicle inventory levels are at 30000 units at the end of June down 15% from a year ago. This represents 34 days sales up from 31 days sales at the end of the first quarter, excluding the impact of the outage, we estimate that we would've been closer to mid twenties day's sales, which is less than we would prefer used vehicle sale.

Thomas A. Szlosek: This represents 34-day sales, up from 31-day sales at the end of the first quarter. Excluding the impact of the outage, we estimate that we would have been close to the mid-20s in daily sales, which is less than we would prefer. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing, and speed while optimizing customer satisfaction. I'm on slide seven now, customer financial services.

Speaker Change: And profitability continue to be a big area of focus for us as we emphasize effective sourcing pricing and speed, while optimizing customer satisfaction.

Speaker Change: Now slide seven customer financial services.

Thomas A. Szlosek: The outage not only reduced new and used vehicle sales but further limited our ability to attach CFS products and finance offerings to the vehicles we did sell, as Mike mentioned. So, a little bit of a double whammy in an environment where high interest rates are already consuming more of our customers' monthly budgets. However, our outage workarounds were very effective in this area, and we were able to restore our product attachment rates and finance penetration and keep CFS unit profitability within 3% of the first quarter rate.

Speaker Change: There has not only reduced new and used vehicle sales, but further limited our ability to attach CFS product and finance offerings to the vehicles. We did so as Mike mentioned, so a little bit of a double whammy in an environment, where high interest rates are already consuming more of our customers monthly budgets. However.

Mike: Our outage workarounds, we're very effective.

Speaker Change: In this area and we were able to restore our product attachment rates and finance penetration and kept CFS unit profitability within 3% of the first quarter rates. We are encouraged by our continued strong performance in this portion of the business.

Thomas A. Szlosek: We are encouraged by our continued strong performance in this portion of the business. We continue to grow and finance business, as Mike mentioned, which did serve to shift about $85 away from CBS. CFS PBRs in the quarter.

Speaker Change: We continue to grow and finance business as Mike mentioned, which did serve to shift about $85 away from Cvs.

Thomas A. Szlosek: This is done with purpose, however, as the profitability to AutoNation over the course of an AutoNation finance loan is expected to be more than two and a half to three times that of a non-AutoNation finance loan. Mike gave you some of the other numbers for AutoNation Finance. The business is on track to exceed our original expectation of over $700 million in originations in 2024. As a reminder, A.N. Finance now only underwrites AutoNation loans and targets a higher credit quality than it did prior to AutoNation ownership.

Speaker Change: <unk> in the quarter.

Speaker Change: This is done with purpose. However is the profitability to autonation over the course of a of an Autonation finance loan is expected to be more than two and a half to three times that of a non autonation finance loan.

Speaker Change: Mike gave you some of the other numbers for Autonation finance the business is on track to exceed our original expectation of over $700 million in originations in 2024 now as a reminder, an finance now only underwrites autonation alone.

Speaker Change: And targets, a higher credit quality than it did prior to Autonation ownership.

Thomas A. Szlosek: It is already the number one lender across the AutoNation enterprise. Its credit profiles and profitability also continue to improve, and delinquency rates on the business underwritten since the acquisition have been in line with our expectations. We're also finding that and finance is deepening the relationship we have with our customers. So far, this acquisition is proving out with attractive cash-on-cash returns on equity. Moving to slide eight on after sale. We grew at a 9% fame store pace through May. Gross profit in June was down about 20% year over year, reflecting the challenges from the outage, and for the quarter, total store gross profit declined approximately 1% from a year ago.

Speaker Change: It is already the number one lender across the Autonation enterprise its credit profile and profitability also continued to improve and delinquency delinquency rates on the business underwritten since the acquisition have been in line with our expectations were.

Speaker Change: We're also finding it and finances deepening the relationship we have with our customers.

Speaker Change: So far this acquisition is proving out with attractive cash on cash returns on equity.

Speaker Change: Moving to slide eight on after sale, we grew at 9% same store pace through may.

Speaker Change: Gross profit in June was down about 20% year over year, reflecting the challenges from the outage and for the quarter.

Speaker Change: Total store gross profit declined approximately 1% from a year ago, our gross margin rate once again increased reaching 48% for the quarter. This is up 60 basis points from both a year ago and sequentially.

Thomas A. Szlosek: Our gross margin rate once again increased, reaching 48% for the quarter. This is up 60 basis points from both a year ago and sequentially as the value per repair order has improved, and we had a favorable makeshift to higher margin categories within after sales. Slide 9, adjusted pre-cash flow for the first half of the year was $519 million, compared to $530 million a year ago, and as you can see, the conversion relative to our income improved. However, the timing of payments during the second quarter was affected by the CDK outage, although conversion would still have been higher than in 2023, even without this timing impact.

Speaker Change: As the value per repair order has improved and we had a favorable mix shift to higher margin categories within after sales.

Speaker Change: To slide nine adjusted free cash flow for the first half of the year was $519 million compared to $530 million a year ago and as you can see the conversion relative to our income improve the <unk>.

Speaker Change: Timing of payments during the second quarter were affected by the CDK outage, although conversion would still have been higher than 2023, even without this timing impact.

Thomas A. Szlosek: We remain focused on our cash cycles across the business, which has helped us to achieve these results. We closely monitor our metrics for our key operating cycles and have resources and programs in place to drive efficiency and ease. Capital Investments were slightly below 2023 levels.

Speaker Change: We remain focused on our cash cycles across the business, which has helped us to achieve these results we closely monitor our metrics for our key operating cycles.

Speaker Change: And have resources and programs in place to drive efficiency in each.

Speaker Change: Capital investments were slightly below 2023 levels in.

Thomas A. Szlosek: And consistent with the expansion of A.M. Finance, our auto loans receivable related to loans originated at our own stores increased by approximately $370 million in the first half of the year. And, as I mentioned, we expect continued growth in this portfolio. Slide 10 shows our capital allocation for the first half of 2024 compared to the same six months in 2023. Now, being a strong generator of cash provides us with nice optionality in terms of capital allocation. To me, the debt and M&A line stand out. For the first half of 2023, we were net borrowers by over 400 million to support M&A.

Speaker Change: And consistent with the expansion of it and finance our auto loans receivable related to the loans originated at our owned stores increased by approximately $370 million in the first half of the year and as I mentioned, we expect continued growth in this portfolio.

Speaker Change: Slide 10 shows our capital allocation for the first half of 2024 compared to the same six months in 2023 now being a strong generator of cash provides us nice optionality in terms of capital allocation.

Speaker Change: To me the debt and M&A line stand out for the first half of 2023, we were net borrowers by over 400 million to support M&A and 2024, we have significantly moderated our borrowing activity in light of the lower M&A activity to date and lower share repurchases. We do remain committed to the efficient allocation of our cash.

Thomas A. Szlosek: In 2024, we've significantly moderated our borrowing activity in light of the lower M&A activity to date and lower share repurchases. However, we do remain committed to the efficient allocation of our capital to both M&A and share repurchases. This will be balanced with the need to maintain appropriate leverage levels in this dynamic environment to support our investment grade credit rating. At quarter end, our leverage was 2.5 times EBITDA, which is in line with our 2 to 3 times EBITDA long-term target.

Speaker Change: To both M&A and share repurchases this will be balanced the need to maintain appropriate leverage levels. In this dynamic environment to support our investment grade credit rating at quarter end, our leverage was two five times EBITDA, which is in line with our two to three times EBITDA long term target.

Michael M. Manley: Now, let me turn the call back to Mike before we address your question. Yeah, thank you, Tom. So, as you can imagine, we are pleased to move on, particularly from the end of Q2. And while we do so, I think it's important we do not allow some improvement and performance trends we were seeing to be lost in the midst of the outage. I'm encouraged that the business delivered reasonably close to what was a strong first quarter despite the difficult circumstances.

Mike: Now, let me turn the call back to Mike before we address your questions. Yes. Thank you Tom So as you can imagine we are pleased to move on particularly from the end of Q2 and while we do so I think it's important we do not allow some improvement performance trends, we were seeing <unk> being lost in the midst of the outage.

Mike: We encourage the business delivered reasonably close to what was a strong first quarter. Despite the difficult circumstances margin in cash were the highlights as well as the pre outage volume trends we.

Michael M. Manley: Margin and cash were the highlight, as were the pre-outage volume trends. Looking forward, as I mentioned earlier, I view the current levels of vehicle demand we are seeing as positive. With this coupled with our significantly strengthened supply of new vehicles, I expect to regain any share loss in the coming period. Now we've continued to work, we have continued work to do in our improving used businesses. As you know, this is a very long-term business, and its performance is largely in our control. We have strong self-sourcing capabilities, remain focused on turning inventory quickly, and are pleased with the quarter-over-quarter margin improvement. And with that, I'd like to hand it over for any Q&A you may have. Thank you.

Speaker Change: We can pull it as I mentioned earlier. These are the current levels of vehicle demand. We are seeing is positive.

Mike: With this coupled with our significantly strengthened supply of new vehicles, I expect to regain any share loss in the coming periods.

Mike: And we've continued to we have continued work to do in our improving used businesses. As you know this is a very high touch business and its performance is largely in our control.

Speaker Change: Strong self sourcing capabilities remain focused on turning the inventory quickly and I'm pleased with the quarter over quarter margin improvement.

Speaker Change: With that I would like to hand, it over for any Q&A. You may have thank you Melissa if you could please open up the lines for Q&A.

Alyssa: Alyssa, could you please open up the lines for Q&A? Sure. We will now begin the Q&A session. If you would like to ask a question, please press star one on your telephone.

Melissa: Certainly we will now begin the Q&A session if.

Melissa: If you would like to ask a question. Please press star one on your telephone keypad.

John Joseph Murphy: The first question is from the line of John Murphy with Bank of America. Please go ahead. Good morning, guys. I just want to ask one very quick question before a second longer one. What was the reaction that your sales folks had to the $43 million that you paid despite the CDK disruption? I'm just curious how much goodwill that may have engendered among them.

Speaker Change: The first question is from the line of John Murphy with Bank of America. Please go ahead.

John Joseph Murphy: Good morning, guys just wanted to ask one very quick one before the second.

John Joseph Murphy: Longer one what was the reaction that your sales folks had to the $43 million.

Speaker Change: You paid despite CDK disruption I'm, just curious how much goodwill that may have engendered with folks.

Michael M. Manley: Thanks, John. I actually was in the dealerships when we made the announcement. As you can imagine, given the nature of their pay and, obviously, their dependency on productivity, there was a lot of concern within businesses about the impact on them and their families. So I think the sense of gratitude and recognition of support from the organization was clearly seen when I was there, and we continue to see it in the business, not just for our sales executives but also for our technicians because, as you know, and I mentioned briefly in my remarks, we've grown our technician base.

Speaker Change: Thanks, John I actually was in the dealerships when we might be when we might be announcements.

Speaker Change: As you can imagine there was.

Speaker Change: Given the nature of that high end, and obviously that dependency on productivity. There was a lot of concern within the businesses about.

Speaker Change: The impact on them and their families. So.

Speaker Change: I think the sense of gratitude and recognition of support from the organization was clearly seen when I was there and we continue to see it in the business not just.

Speaker Change: With <unk>, but also for our technicians because as.

John Joseph Murphy: As you know and I mentioned briefly in my remarks.

John Joseph Murphy: We've grown our technician base, it's incredibly competitive labor market retention and technicians development with technicians and selling pools and then given all of the work that we've done I think it was a very necessary and right investment for us to make and you saw the impact these things are not cheap, but at the end of the day.

Michael M. Manley: It's an incredibly competitive labor market. Retention of technicians, and development of technicians, is so important, and given all of the work that we have done, I think it was a very necessary and the right investment for us to make. And you saw the impact.

Michael M. Manley: These things are not cheap, but at the end of the day, I genuinely believe that businesses are created and delivered through the people that they employ and the people that they engage. No, I think it will pay dividends for some time to come. Just on cap allocation real quick. I mean, it seems like there might be a slight shift that occurs over time as acquisitions become more realistic on multiples, and there might be more capital that goes towards AutoNation USA stores as the zero to six year old fleet, you know, eventually grows in one to two years.

John Joseph Murphy: I genuinely believe that their.

John Joseph Murphy: Businesses are created and delivered through the people that they employ and the people that I engage so familiar it was a.

Speaker Change: The necessary thing today, sorry for that announces a quick question.

Speaker Change: No I think I think it will pay dividends for some time to come just on cap allocation real quick I mean, it seems like there might be a slight shift with.

John Joseph Murphy: It occurs over time as acquisitions become more.

Speaker Change: Realistic on multiples.

Speaker Change: Be more capital that goes towards Autonation USA stores is zero to six year old fleet. Eventually grows in one or two years' time, how do you think about some of the.

Michael M. Manley: How do you think about sort of the shift in potential cap allocation over the coming quarters and potentially coming years as things shift and maybe your shares are less attractive relative to, I'm sure they'll probably, you know, hopefully be less attractive over time as they go up, but to those other incremental opportunities to allocate capital creatively? I'll start John and then Tom, and I'll ask you also to comment on this question.

John Joseph Murphy: Shift.

Speaker Change: Potential capital allocation over the coming quarters, and potentially coming coming years as things shifting and maybe your shares are most attractive relative to I'm sure they'll probably.

Speaker Change: Hopefully be less striking over time as they go up.

John Joseph Murphy: But.

John Joseph Murphy: Those other incremental opportunities to allocate capital Accretively.

John: Well I'll start John.

Tom: Tom I'll ask you to comment on this question.

Michael M. Manley: There's no change in terms of our philosophical approach to capital allocation, and it starts with the best returns we can give our shareholders and will always be centered around our shareholders. And as such, we tend to have a very consistent method of assessing the investments we make, whether that's investments in our own stock or investments in dealerships. There is no doubt that we are seeing, and we'll continue to see for a period of time, a normalization of asset prices in the marketplace, and as such, they have become more attractive than they were, for example, 12 months ago, because the combination of returning capital to our shareholders and growth in our organization organically or through M&A is important for shareholder return over the period and into the future. And that is our focus. So you're going to see exactly the same view on capital allocation.

Tom: There is no change in terms of philosophical approach to capital allocation and it starts with the best returns, we can give our shareholders and we will always be centered around our shareholders.

Tom: And as such we tend to have a.

John Joseph Murphy: Very consistent method is assessing investments, we make whether that's investments in our own stuff where investments in dealerships. There is no doubt that we are seeing and will continue to see it for a period of time, a normalization of asset prices in the marketplace and as such they become.

John Joseph Murphy: More attractive than they were for example, 12 months ago, because the combination of returning capital to our shareholders and growth in our organization organically or M&A is important those two things working in tandem that I think ultimately deliver the best shareholder return over the period and into the future.

John Joseph Murphy: He is our focus so youre going to see exactly the same view on capital allocation, the resulting allocation of spend may change, but it will only change because assets are very attractive and synergistic to what we already have in place some of them.

Thomas A. Szlosek: The resulting allocation of spend may change, but it will only change because assets are very attractive and synergistic with what we already have in place. Tom, I don't know if you want to add to that. Yeah, no; I would have been totally answering the same return-based focus.

Speaker Change: I would have been totally answering the same return base to that focus.

John Joseph Murphy: I don't I don't see a shift.

Thomas A. Szlosek: I don't see a shift. We don't talk about a shift, basing it on where we get the best returns. I would say that, Yeah, we still don't think we're at our intrinsic value on the share price. And so that does remain attractive. I would definitely agree.

John Joseph Murphy: We don't talk about a shift.

John Joseph Murphy: Anything on when we get the best returns I would say that.

John Joseph Murphy: We still don't think we're around our intrinsic value on the share price.

Speaker Change: That does.

Speaker Change: Attracted to it.

Speaker Change: I would definitely great. Thank you very much guys I appreciate it.

Unknown Speaker: Thank you very much, guys. I appreciate it. I think that's all right.

Speaker Change: Thank you Sir.

Unknown Speaker: Thank you. The next question is from the line of Rajat Gupta with JP Morgan. Your line is now open. Please go ahead.

Speaker Change: Thank you.

Speaker Change: The next question is from the line of Rajat Gupta with Jpmorgan. Your line is now open. Please go ahead.

Rajat Gupta: Great, thanks for taking the question. Yeah, I had, you know, a question on parts and services. You gave us the April and May commentary on 9% student faint stroke growth. And clearly, that's well above, you know, what we've seen at your peers.

Rajat Gupta: Great. Thanks, Thanks for taking the question I had.

Speaker Change: <unk> services.

Speaker Change: You gave us April and May commentary, 9% same store growth.

Speaker Change: Clearly, that's well above what we've seen.

Speaker Change: And your peers.

Speaker Change: Mentioned, the 3% growth in technician head count I'm curious, if you can unpack that 9% a bit more.

Speaker Change: In terms of how much is coming from price from mix and just traffic.

Michael M. Manley: But you mentioned the 3% growth in technician headcount. I'm curious if you could unpack that 9% a bit more, in terms of, you know, how much is coming from price, from mix, and just traffic? And how should we think about, you know, how July is tracking right now and, you know, expectations for the remainder of the year? And have a quick follow.

Speaker Change: And how should we think about how July is tracking right now and your expectations for the remainder of the year.

Speaker Change: I have a quick follow up.

John Joseph Murphy: Yes.

John Joseph Murphy: Yes.

John Joseph Murphy: So.

Michael M. Manley: When I reflect back and think about the delivery of that, a large amount came from the incremental capacity that we had, and Christian and all of the after-sales teams in the dealerships really focused on service effectiveness, which as you know is penetration into the vehicle park. It's an area where, traditionally, franchise retailers are only getting 50% of what's out there within a seven-year park, and for us that is the key focus.

Speaker Change: When I reflect back and think about the delivery is that.

Christian: Large amount of time from the incremental capacity that we had and Christian and all of the after sales teams in the dealerships really focused on service effectiveness, which as you know is it penetration into the vehicle Park. It's it's an area, where traditionally franchise retailers or any getting 50% of what's out there within 70 epoch and for us.

Christian: That is the key focus so when I think about a 9% growth some of it did come from mix because we saw a reduction for example in.

Michael M. Manley: So when I think about our 9% growth, some of it did come from the mix because we saw a reduction, for example, in some of our wholesale and retail counterparts and a little bit of a reduction in our internal work. But the majority of what we're seeing is incremental revenue and income on a per repair order basis because some of the technology that we've put in place and the interface that we have with our customers means that we're much more effective at communicating with our customers opportunities for them to preemptively, in many instances, look after the service needs of their vehicles. So it's a combination of mixed change on the one hand and also incremental revenue per repair order. Tom, any other color to add to that?

Christian: Some of our wholesale and retail counterparts, and a little bit of reduction in our internal work, but the majority of what we're seeing is incremental.

John Joseph Murphy: Revenue and income on a repair order basis, because some of the technology that we've put in place and the interface that we other than our customers means that we are much more effective at communicating with our customers opportunities for them to preemptively.

John Joseph Murphy: The instances.

John Joseph Murphy: Look after the service needs of their vehicles. So it's a combination of mix change on one hand, and also incremental revenue upon retirement.

Thomas A. Szlosek: I just hit ask about July, Richard. Oh yeah, well I think July has returned very strongly in the after-sales, in the service and parts business. I mean, maybe that's some of the unlocking that John mentioned from our people.

Speaker Change: Any other comments on that.

Rashad: He had asked about July rashad.

Rashad: Oh, Yeah, Yeah, well I think July.

Rashad: This return very strongly on the after sales service and parts business I mean.

John Joseph Murphy:

John Joseph Murphy: It may be that some of the unlocking that John mentioned from from our people now I don't think that we will recover a sale of the hours that were lost because theres still a capacity limitation that we have but I think if I look across the various elements of our business.

Michael M. Manley: Now I don't think that we will recover, per se, all of the hours that were lost because there is still a capacity limitation that we have. But I think if I look across the various elements of our business, the after-sales teams, I think they have recovered the quickest. And I would say we exited July at a good pace.

Speaker Change: The sales teams I think have recover the quickest and I would say we exited we exited July on a on a good pace.

Rajat Gupta: Sorry, that's, that's very clear. And just to follow up on a bit of a long-term question. You know, with the experience you had, you know, with the CDK outage, I'm curious, like, what does this mean for your thinking around, you know, long term, like systems that you have in place? You know, are you thinking about, like, maybe adding more redundancy, you know, quartering with other lenders, or any more like cybersecurity, cyber insurance expenses that might start to flow through? I'm curious, like, what's your, you know, have you, have you, have you started to think in that direction?

Speaker Change: Got it.

Speaker Change: That's very clear and just a follow up on a bit of a long term question.

Speaker Change: With the experience you had with the CDK outage.

Speaker Change: I'm curious like what does this mean for your thinking around long term like systems that you have in place.

Speaker Change: Or are you thinking about like maybe adding more redundancy.

Michael M. Manley: And what would that mean, you know, just from like an IT expenses or cost structure perspective? Let me try and give you a good answer on that. So obviously, what we're able to do looking back now is we're able to see which elements and systems have the biggest impact on us across the integrations that we've had. AutoNation has spent a lot of time integrating with a DMS system to drive some productivity levels, enabling us, for example, to provide a large volume of back office services from central locations. And that integration, frankly, would have been developed whether it was Reynolds or Reynolds CDK or any other DMS provider.

Speaker Change: Turning with other lenders.

Speaker Change: Or any more like cyber security cyber insurance expenses.

Speaker Change: It might start to flow through in Q curious like whats.

Speaker Change: Have you have you have you started to think in that direction.

Speaker Change: And what that would mean you know just from like an <unk> expenses, our cost structure perspective. Thanks.

John Joseph Murphy: Yeah.

Speaker Change: So let me try and give you good.

Speaker Change: Good answer on this.

John Joseph Murphy: So.

John Joseph Murphy: What we're able to do looking back now as we're able to see which elements and systems at the biggest impact on us in cost across the integrations that we've had.

John Joseph Murphy: Autonation has spent a lot of time integrating dms system to drive some productivity levels, enabling us for example to provide.

John Joseph Murphy: Large volume back office services from central locations.

John Joseph Murphy: Integration frankly would have been the violence, whether it was rent a little Reynolds CDK or any other dms provider. So from my point of view I think one of the important things as we as we review that period of time is to see which had the biggest impact in our performance.

Michael M. Manley: So from my point of view, I think one of the important things as we reviewed that period of time was to see which had the biggest impact on our performance and what we should do in terms of providing either a backup system or a degree, if you like, of redundancy that means that impact could be limited. So we've done that work. And as I mentioned, some of the things that we did in response to the initial outage were systems that were on the shelf that needed further development and integration so that we could use them much more productively.

John Joseph Murphy: What.

John Joseph Murphy: Should we do in terms of providing either a backup system or an owner degree if you like of redundancy that means that impact could be limited. So we've done that work.

John Joseph Murphy: And as I mentioned some of the things that we did in response to the initial outage where systems that were on the shelf that needed further development and integration. So that we could use them much more productively. So we now understand things that we may want to invest in and have invested in that would protect us and some of those.

Michael M. Manley: So we now understand things that we may want to invest in and have already invested in that would protect us in some of those key, let me call them contribution areas that were impacted the highest, for example, CRM. As you know, the speed, the accuracy, and the professionalism with which we respond to inbound opportunities, particularly digital inbound opportunities, has a significant impact on the conversion rate and the output of those. When you lose your CRN systems, obviously, your productivity drops dramatically.

Speaker Change: Let me coal car.

Speaker Change: <unk> areas that were impacted the highest for example.

John Joseph Murphy: <unk>.

John Joseph Murphy: As you know the speed the accuracy and the professionalism that we respond to inbound opportunities, particularly digital inbound opportunities.

Speaker Change: <unk> has a significant impact on the conversion rate in the output.

John Joseph Murphy: When you lose your CRM systems you obviously.

John Joseph Murphy: Youll productivity drops dramatically.

Michael M. Manley: So that's an area where we can, because of our IT guys and girls, develop a light system that doesn't involve a huge amount of investment and that will not have the full functionality of all the work that we have done with our CKB partners in this area but will provide a degree of functionality that means the productivity loss that we saw will be mitigated to a certain extent. And obviously, it's incumbent upon us to look at that and strike the right balance between, I don't want to use the term one time, but that this event was not something that you would completely structure your business around.

Speaker Change: That's an area, where we can because of our I T guys and go.

John Joseph Murphy: Develop a light system that doesn't involve a huge amount of investments that we will not have the full functionality of a little bit.

John Joseph Murphy: We have done with <unk> partners in this area, but we will provide a degree of functionality that means the productivity loss that we saw will be mitigated to some extent and obviously, it's incumbent upon us to look at that and strike the right balance between investments that we want to make recognizing that this event was.

John Joseph Murphy: I don't want to use the term one time, but this event was not something that you would complete the structural business round I would rather structure our business round.

Michael M. Manley: I would rather structure our business around making sure that we are adequately invested, for example, in cyber security. Clearly, there are learnings for everybody involved in this, and we're just trying to expect the most beneficial ones for the company. I mean, the thing that I would add is that these are great questions.

John Joseph Murphy: Show of that.

John Joseph Murphy: We are adequately invested for example in cyber security clearly.

John Joseph Murphy: There are learnings for everybody involved in this and we're just trying to we expect the most beneficial ones for the company.

Thomas A. Szlosek: Yeah, I mean, we're in the early days and trying to get to, you know, what this means for us. And obviously, we've been trying to restore continuity over the last six weeks, which is, like I said, we know, we're pretty much there. When you look at the, you know, the overall profitability of the business, I mean, obviously, 75% of it's in service and CFS, and you would want those two platforms to be, you know, trouble-free, and any kind of disruption, particularly on a short-term basis.

Speaker Change #100: I mean, the thing that I would add that is.

John Joseph Murphy: It's a great question John.

Speaker Change: Early days in trying to get to.

Speaker Change: What this means for us and obviously, we've been trying to restore continuity over the last six weeks, which as Mike said, we were pretty much there when you look at the.

Speaker Change: The overall profitability of the business I mean, obviously, 75% of it in service in CFS and you would want those two platforms to be.

Mike: Trouble free and any kind of disruption, particularly on a short term basis.

Thomas A. Szlosek: So, you know, some of our thinking will revolve around that as well. And the ability to handle repair orders and maintenance to be able to have continuity in our spare parts supply to be able to process customer tickets, all of that, you know, really, really important. And, you know, our workarounds were pretty effective.

Speaker Change: Some of our some of our thinking will.

Mike: Revolve around that as well the ability to.

Mike: Handle with care.

Mike: Orders and maintenance to be able to.

Speaker Change: Have continuity in our spare parts supply to be able to process.

Speaker Change: Customer tickets all of that are really really important.

Thomas A. Szlosek: But I think we, you know, we see some opportunity there as we move forward. Same thing with CFS in terms of being able to have continuity around your presentation of alternatives, and you're helping your customers understand the product and financial. Got it.

Speaker Change: Our workarounds, we're pretty effective.

Speaker Change: I think we we see some opportunities.

Speaker Change: As we move forward same thing with CFS in terms of being in a moment.

Speaker Change: You have continuity around presentation of alternatives and helping customers understand it.

Speaker Change: Product and finance offerings.

Rajat Gupta: That's right there. Thanks for all the collaboration. Thank you. Thank you. The next question is from the line of Douglas Dutton with Evercore. Your line is now open.

Speaker Change: Got it got it that's very clear.

Speaker Change: Thanks for all the color I'll jump back in queue.

Speaker Change: Yeah.

Speaker Change: Thank you.

Douglas William Dutton: The next question is from the line of Douglas <unk> with Evercore. Your line is now open.

Douglas William Dutton: Hey, morning team. Thanks for taking my question here. First, on SG&A normalization in Q3, you know, are there still some latent effects from the loss productivity and lack of continuity early in July? And do we expect that percentage to stay elevated? Or do we head back towards the more normal, you know, mid-66% range as a percent of gross profit? Yeah, great question Doug.

Douglas William Dutton: Hey, good morning team. Thanks for taking my question here just wanted to ask first on.

Douglas William Dutton: On SG&A normalization in Q3, or there's still some latent effects from the loss of productivity and lack of continuity early in July and do we expect that percentage to stay elevated or do we head back towards the more normal mid 66% range as a percent of gross profit.

Thomas A. Szlosek: I mean, I'd encourage you to look at the overall spend on SGA. We do think that, you know, the impact that we mentioned of roughly 76% of loss. Profit, mostly at the gross margin level, distorts the ratio of SG&A to gross profit.

Douglas William Dutton: Yes, great question.

Speaker Change: I encourage you to look at the.

Speaker Change: The overall spend.

Speaker Change: G&A.

Speaker Change: We do think that.

Speaker Change: The impacts that we mentioned roughly 76.

Speaker Change: Loss.

Speaker Change: The profit mostly at the gross margin level due to store.

Speaker Change: The ratio of SG&A to gross profit.

Thomas A. Szlosek: So, you know, when you look at just the SG&A itself, it's almost identical, you know, Q1 to Q2, which, you know, kind of says that we are able to understand the mix, probably 70% of it is variable, and 30% is fixed. The fixed piece, we've done a very good job of holding the line on, and we do see further opportunities for productivity as we get into the more densification and more centralization of some of our back office activities.

Speaker Change: When you look at just the SG&A itself, it's almost identical from.

Speaker Change: Q1 to Q2, which kind of says that we are.

Speaker Change: You know able to understand the mix probably 70% of it is variable.

Speaker Change: And 30% is fixed the fixed piece.

Speaker Change: On a very good job.

Speaker Change: Keep your holding a line on and we do see further opportunities for productivity as we get into the more densification and more centralization of some of our.

Thomas A. Szlosek: So as the volume returns, and we're able to keep those costs flat, continue to drive the productivity in them with our initiative, and I think you'll see ongoing improvement. Let me just jump in there a bit, Tom. I'm sorry, it's in color.

Speaker Change: On the back office activities, so as the as the volume returns and were able to keep those costs flat and continue to drive the productivity and then from our initiatives I think.

Speaker Change: The ongoing improvement in the ratio.

Speaker Change: Let me just jumping out of it Tom and I would also add some color to the Doc.

Michael M. Manley: You're going to see elevated percentages of SG&A for the period of, I would say, 80% of July, as we were returning to levels of productivity, that will still have an impact from the antelope systems and surfaces that were being integrated. I view that now behind us as we get into, but it will have a residual effect on that percentage. Tom is exactly right on the dollar amount that your question was around. This is only my opinion on that.

Speaker Change: Youre going to see elevated percentages in SG&A for the period of.

Tom: 90% of July as we returning to levels of productivity.

Speaker Change: That was still being impacted.

Speaker Change: The Ann Taylor.

Speaker Change: So that would be in any language I view I view that now behind us as we get into as we get into August.

Speaker Change: We will have a residual effect on that percentage.

Speaker Change: Exactly right on the dollar amount that Youre your question was around.

Speaker Change #105: The percentage such as my color on that point.

Douglas William Dutton: Okay, that's super helpful. I appreciate that, guys. And then just on PVRs, you know, they continue to look better on sort of a deceleration basis. Have you had any internal change in thesis on where these could land once we get to some fully normalized level and USR grows back above, say, you know, 16 and a half million? Has there been any sort of internal discussion on that?

Speaker Change: Okay. That's super helpful. I appreciate that guys and then just on <unk> you know they continue to look better on sort of a deceleration basis have you done any internal change in thesis on where these could land once we get into some fully normalized level USR grows back above say $16 5 million has there been any sort.

Speaker Change: Internal discussion on that.

Michael M. Manley: Yeah, we always have internal discussions on our PBRs, and I think you guys will recall on the call when I was asked this question coming into the year. I think many of you thought I was relatively pessimistic when I said our expectations were they'll be fully normalized back to 19 at the end of the year. I have to say I'm moderating that based on our experience in recent months.

Speaker Change: Yes, we always have internal discussion.

Speaker Change: <unk>.

Speaker Change: <unk>.

Speaker Change: You guys when we call on the call. When I was asked this question coming into the year I think many of US will always relatively pessimistic when I said, our expectations are that would be fully normalized back to 19 at the end of the year I have to say a moderating that a moderate in that view on our experience.

Michael M. Manley: I still think that there will be some continued moderation for the year, but probably not at the pace that I saw before. You even look at the difference in the mix, for example, of BEVs now compared to what it was expected to be.

Speaker Change: Recent months I still think that there will be some.

Speaker Change: Continued motivation for the year, but probably not at the pace that I, so well before <unk>.

Speaker Change #102: Even look at the difference. It makes for example, the fed's now compared to what is expected to be and I think as you will know the margin on full battery electric vehicles.

Unknown Speaker: And I think, as you all know, the margin on full battery electric vehicles for the OEMs and for us is significantly lower than their combustion and their hybrid counterparts. So, you know, you're going to see a moderation on our outlook for BEVs, I think, in the year, which will also moderate our outlook on PBRs. So, in summary, you're still going to see some moderation, in my view, on those, but not to the level of, Excellent. Thanks, team.

Speaker Change: <unk> for us is significantly lower than that combustion and hybrid counterparts.

Speaker Change: Youre going to see a motivation on our outlook for beds I think in the year, which will also motivate our outlook.

Unknown Speaker: So in summary, there's still going to see some moderation in my view on those but not to the level of anticipated early in the year.

Speaker Change: Yeah.

Speaker Change: Yeah.

Speaker Change: Excellent thanks team.

Speaker Change: Thank you.

Bret David Jordan: Thank you. The next question is from the line of Bret Jordan with Jeffreys. Please go ahead.

Speaker Change: The next question is from the line of Bret Jordan with Jefferies. Please go ahead.

Michael M. Manley: Hey, good morning, guys. On that PVR question, I guess the moderation: how much is mixed driven? If you think about the outperformance of imports versus domestics, are you seeing maybe a slant is still deteriorating at that prior rate, but those products like Toyota that are in shorter supply are outperforming and supporting PVR, or is everything generally stabilized? I think there is, there is a mixed impact for sure. Because if I look, if I look just year over year in the quarter, I think mix, and Tom, you got to moderate what I say, but my estimate is mix is somewhere between $70-$80 year over year in Q2.

Bret David Jordan: Hey, good morning, guys.

Bret David Jordan: On the ADR question I guess the moderation how much is mixed driven if you think about the outperformance of import versus domestic or are you seeing maybe it's the lantus still deteriorating at that prior rate, but those products like Toyota that are in shorter supply are outperforming in supporting DVR or is everything.

Speaker Change: Generally stabilizing.

Speaker Change: Well I think there is there is a mix impact for sure because.

Tom: If I look if I look just year over year in the quarter I think mix and Tom you got to moderate what I say, but my estimate it makes it somewhere between 70 and $88 year over year quarter.

Tom: In Q2, but I expect that to largely worked back out of the system as we recover market share, particularly in our premium luxury.

Michael M. Manley: But I expect that to largely wash back out of the system as we recover market share, particularly in our premium luxury segment. Yeah, there's been a lot of discussion and debate about different OEMs and their volumes in the marketplace and inventory build. The reality is there are many OEMs that recognize they are where they want to be and maybe a bit higher in their inventory, and they're going to have to step into the marketplace to address that because dealers, in and of themselves, are not going to be able to get to the net transaction price that will create the volume and momentum that they need and that they're looking for as well.

Speaker Change: It hasn't been a lot of discussion and debate about different Oems and the volumes in the market place and inventory build.

Bret David Jordan: Reality is.

Bret David Jordan: Reality is inventory there are many Oems that recognized.

Bret David Jordan: Where they want to they are maybe a bit higher on their inventory and they're going to have to step into the marketplace to address that because dealers in and of themselves are not going to be able to get to the net transaction price that will create the volume momentum that they need and they are looking forward as well. So I answer. The question is I do think that there's potentially mix improvements as we get into <unk>.

Michael M. Manley: So my answer to the question is I do think that there could be potentially mixed improvements as we get into Q3 and beyond that impacted us year over year in Q2. But I think, generally, you've got a number of things going on in the marketplace, including higher levels of leads, for example, that just lead us to believe that you're going to see a moderation in the reduction we're seeing on margins. Tom, do you want to? No, you got it right.

Speaker Change: Q3, and beyond that impacted us year over year in Q2, but I think generally you've got a number of things going on in the marketplace, including.

Speaker Change: Higher levels of lease for example that just leads us to believe that youre going to see a moderation in the reduction we're seeing on our margin Tom.

Speaker Change: Tom do you want to add or you got it right.

Bret David Jordan: Okay.

Speaker Change #110: Okay, and then I guess the question is youre seeing stability and used profits does that make you think about re accelerating autonation USA, we didn't really talk about it much in the prepared remarks, but how does that look on the next couple of years from a growth strategy.

Michael M. Manley: Okay, and then I guess the question is, you're seeing stability and used profits. Does that make you think about reaccelerating AutoNation USA? We didn't really talk about it much in the prepared remarks, but how does that look from a growth strategy? Well, one of the things that I think we're comfortable with is the revised pace of openings because, particularly, through last year, I think we were opening too many, and our capacity to operationalize those, get the right level of inventory into those businesses, really does mean we have to be, I think, more pacey in terms of how many we I would anticipate another maybe four or five this year, at most.

Speaker Change: Well one of the things that I think we're comfortable with is the revised pace of openings because.

Bret David Jordan: Particularly to the back of it through last year I think we were opening we were opening too many in our capacity to operationalized.

Speaker Change: <unk> does get the right level of inventory into those businesses.

Bret David Jordan: Really.

Bret David Jordan: Really does mean, we have to be I think more paced in terms of how many we bring on stream.

Michael M. Manley: So, 10, 11 coming on stream, I think that's something that we can easily absorb into our system, connect to our processes, and make sure that we have the sourcing in place to give them what they need in terms of used vehicle inventory. There are still interesting dynamics in the used market, as I mentioned in my remarks. You're seeing mixed changes in terms of price buckets, which are important for us, and you still see certain availability issues for different price categories, and that's going to continue through the year. Our used vehicle inventory, Tom mentioned, dropped, particularly due to that last period in June.

Bret David Jordan: I would anticipate another maybe four or five this year, Max So 10 or 11 coming on stream I think that's something that we can.

Bret David Jordan: Easily absorbed into our system connect them to <unk>.

Bret David Jordan: <unk> and make sure that we have the sourcing in place that gives them what they need in terms of used vehicle inventory.

Bret David Jordan: There is still interesting dynamics in the used market as I mentioned in my remarks, Youre seeing mix changes in terms of price buckets, which are which are important for us and you still see.

Bret David Jordan: And availability issues for different product categories, and thats going to continue through the year.

Bret David Jordan: Used vehicle inventory Tom mentioned dropped.

Tom: Particularly due to that last period of June we're in the process of recovering inventory levels fell off.

Bret David Jordan: We're in the process of recovering inventory levels, so our used vehicle sale volume will fully recover once we get our inventory levels up to what I would consider a normal amount, and they're probably 15% below where they need to be at this moment in time, but closing that gap. So I don't know if that fully answered your question, but let me know if it did or not. No, that was good.

Tom: In used vehicle sales volume.

Tom: Sure.

Tom: We will fully recover once we get our inventory levels.

Speaker Change #107: Onto what I would consider a normal a normal amount in that probably 15% below where they need to be at this moment in time, but closing that gap.

Bret David Jordan: I don't there's not fully answered your question Brent Let me know if they do not.

Brent: That was good thank you I appreciate it.

Speaker Change: Thank you.

Michael M. Manley: Thank you. Appreciate it. Thank you. Our final question will be from the line of Adam Jonas with Morgan Stanley. Please go ahead. Hi, this is Daniela Hagen on behalf of Adam Jonas.

Speaker Change: Our final question will be from the line of Adam Jonas with Morgan Stanley. Please go ahead.

Bret David Jordan: Hi, This is Daniela Hagen on for Adam Jonas.

Danielle Hogan: So, my question is on vehicle affordability, which continues to be a problem for many Americans, higher for longer ASPs and also race. What is your view on the state of the consumer and, if there is any, on the auto credit side? I think there's no doubt that affordability is top of mind for many of the consumers that come into this marketplace, whether it's for new or used vehicles. I mentioned the fact that, if you look at our CFS performance, it's moderated very slightly. That was about product attachment rates, and that is all about not having a desire for the product per se, but it's all about managing to a monthly budget.

Danielle Hogan: My question is on vehicle affordability, which continues to be a problem for many Americans higher for longer Asps and also rates. What is your view on the state of the consumer and is there anything you're seeing on the auto credit side that gives you concern.

Bret David Jordan: Yes.

Speaker Change #104: Well I think there's no doubt that.

Bret David Jordan: Affordability.

Speaker Change #103: It is top of mind for many of the consumers that come.

Speaker Change #106: Into this marketplace with us on new or used vehicles I mentioned, the fact that if you look at our CFS performance as motivated very slightly that was about product attachment rates and that is all about.

Bret David Jordan: <unk> off of the product per se, but it's all about managing to a monthly budget. So I think that there are impacts in the marketplace. You also beginning to see increases I think in delinquency rates that I think are manageable and not where they were a year ago, but I do think there are signs in the marketplace.

Michael M. Manley: So I think that there are impacts in the marketplace. You're also beginning to see increases in delinquency rates that I think are manageable and not where they were a year ago. But I do think there are signs in the marketplace that my consumers continue to feel the pressure from the current environment. In response to that, you have already talked about the mix shift that we are facilitating and seeing in our used vehicle business.

Bret David Jordan: Our consumers continue to feel the pressure from the current environment.

Speaker Change #111: In response to that you have already talked about the mix shift that we are facilitating and seeing in our used vehicle business.

Michael M. Manley: We're also seeing, I think, from the OEM side, an increase in leasing, which helps affordability. And I think you'll continue to see OEMs responding in an appropriate way with managing net transaction price to help that situation and keep momentum in new vehicle sales. In my view, there's still quite a large pent-up demand for new vehicle sales that will get released over the coming periods with the right pricing in the marketplace.

Speaker Change #109: We're also seeing I think from the OEM side, increasing leasing, which helps affordability and I think youll continue to see Oems.

Bret David Jordan: Bonding.

Bret David Jordan: And in an appropriate way with managing net transaction price to help that situation and keep momentum in new vehicle sales because my view there is still.

Bret David Jordan: Quite a large pent up demand on new vehicle sales that we will get released over the over the coming periods with the right pricing in the marketplace.

Michael M. Manley: That's about it. Thank you. That concludes our question and answer portion. Mike, if you want to make closing comments, Yeah, thank you. And again, thank you for all your questions and for being on the call today. When we came into this year, I said I was certain that the year would continue to bring a normal mix of headwinds and tailwinds. And while the CDK outage was far from a normal headwind, as I said in my early comments, I consider the operational impact of the CKB incident is now behind us as we exit July. And obviously, our daily focus is fully rebuilding the momentum that we lost and regaining any share that we lost, particularly in that last period of June.

Speaker Change: Got it thank you.

Speaker Change: That concludes our question and a portion Mike if you want to close.

Mike: Closing comments here.

Mike: Thank you and again, thank you for truly a questions and for being on the call today.

Speaker Change: When we came into this year.

Speaker Change #112: And then you would continue to bring a normal mix of headwinds and <unk> and while the CD CDK outage was far from a normal headwind.

Speaker Change #108: As I said in my only comments I can say that the operational impact of the sea Tidy incident is now behind us as we exited July and obviously our focus is on fully rebuilding the momentum that we lost to me gaining any share that we lost particularly in that last period of June I'd like to thank all of our associates.

Speaker Change: And employees in the business not just.

Michael M. Manley: For their response to the outage, but also for the work that they've done creating the momentum that we saw through may.

Speaker Change: It's a pleasure to be in the same organization as you. Thank you for what you do every day. Thank you everyone.

Speaker Change: Okay.

Speaker Change: Yeah.

Michael M. Manley: I'd like to thank all of our associates and employees in the business, not just for their response to the outage but also for the work that they've done creating the momentum that we saw through May. It's a pleasure to be in the same organization as you. Thank you for what you do every day. Thank you, everyone. This concludes today's AutoNation second quarter call. Thank you all for your participation. You may now disconnect your line.

Speaker Change #113: This concludes today's auto nation second quarter call. Thank you all for your participation you may now disconnect your lines.