Asbury Automotive Group Inc Q2 FY2026 Earnings Call

Greetings, and welcome to the Asbury Automotive Group second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Reeds, Vice President of Finance and Investor Relations. Thank you, sir. You may begin.

Thanks, Operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's second quarter 2026 earnings call. The press release detailing Asbury's second quarter results issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are Dan Clara, our President and Chief Executive Officer, and Michael Welch, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions and will be available later today for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts, and current expectations, each of which is subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10-K for the year-ended December 31, 2025, and any subsequently filed quarterly reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. Comparisons will be made on a year-over-year basis unless we indicate otherwise. We have also posted an updated investor presentation on our website, investors.asburyauto.com, highlighting our second quarter results. It is my pleasure to now hand the call over to our president and CEO, Dan Clara.

Thank you, Chris, and good morning, everyone. Welcome to our second quarter earnings call. I want to begin my first earnings call as Asbury CEO by thanking our team members across the country for the work they do every day to serve our guests and support one another. Your commitment, resilience, and focus on continuous improvement are what makes this company strong. As we noted in our prior quarter commentary, 2026 is a year of transition for Asbury as we finalize the rollout of Techeon across our store base. focus on growth through operational improvements, and continue our balanced approach to capital allocation. Our results continue to reflect the investment associated with completing the Techeon rollout while simultaneously operating our legacy systems. This investment positioned us to capture meaningful operating efficiencies as we anticipate completion of the rollout by October of this year. Rolling out a new DMS at this scale is a significant undertaking and I am proud of our team members commitment to making this transition successful. Crossing the 70% implementation milestone is important because an increasing percentage of our store base is now positioned to benefit from a common operating platform. Importantly, the operational improvements we're seeing are not isolated. Markets that have been on techie on the longest continue to demonstrate better productivity, stronger customer pay performance, higher technician efficiency, and improving sales effectiveness. For example, our Coons, Georgia, and Florida markets have at least five months post-conversion under their belts. Just looking at the month of June, those stores grew average units per salesperson by 12% and increased the dollars per technician by 10%. These are just a few of the operating metrics we expected to improve as stores mature on the platform. Our strategic initiatives, which I will refer to as our five pillars, are focused on increasing new vehicle market share, re-establishing consistent growth in customer paid gross profit, driving profitable volume growth in used vehicles, managing SG&A, and leveraging technology. A successful migration to Techeon remains a top priority as we approach our final remaining stores. Collectively, these pillars are not a change in direction. They represent a sharpened way of executing the priorities that will drive growth and returns for our shareholders. On the capital allocation front, we continue deploying capital into our own shares because we believe our stock represents an attractive long-term investment while maintaining ample liquidity and flexibility. In the first two quarters combined, we have repurchased 7% of our 2025 ending share count. Michael will provide additional details on our approach to capital allocation and now I will speak to our operational results on a same store basis unless otherwise noted starting with new vehicles new units were down 6% new PBRs were $2,896 on a same store basis and $3,124 on an all-store basis with flattening sequential declines indicating we are near normalized levels. We ended the quarter with new day supply at 53 days, a healthy level that supports stabilizing PBR. Next, turning to used vehicles. We earned a used retail PBR of $1,927, a sequential increase of 5%, uneffectively the same store volume as the first quarter. Our used vehicle strategy is already producing sequential improvement while positioning us for higher volume over time as a reminder our used vehicle strategy has been focused on maintaining discipline rather than chasing volume for volume's sake with an emphasis on maximizing gross profit in may we began shifting our approach toward driving higher used vehicle volume while still maintaining healthy pvrs we are beginning to see positive results from this strategy as we continue deploying this used vehicle strategy across the organization i expect to see increased used vehicle volume as we move into the fourth quarter of 2026. we're also continuing to invest in our appraisal and pricing tools while maintaining discipline in our sourcing of vehicles from consumers off-lease channels along with strategic acquisitions through the auctions Finally, we ended the quarter with a 37-day supply. Moving to F&I, we earned an F&I PBR of $2,214. And finally, in the second quarter, our total front-end yield per vehicle was $4,698. Next, on parts and service. Our customer-paid business was flat year-over-year, and our overall parts and service gross profit was slightly down. As I mentioned earlier, it takes five to six months to see operational improvements from our DMS change. A large number of transition stores are still within this window, and we expect a return to normalized growth levels in the coming quarters. We did see better traction in June, where total same-store fixed gross profit was up 4%. Now, I'd like to quickly talk about continued focus on operational efficiency. Along with growing gross profit, cost discipline remains a top priority, and we measure ourselves on how well we contain expenses in order to drive a strong operating margin. Our same store adjusted SG&A as a percentage of gross profit was 65.3% in the quarter. Once all stores are converted to Techeon and we begin to gain all its efficiencies, we believe our SG&A can get to the low 60% range by the end of 2027. We also continue to invest in AI across every department in the company. Whether in operations or support, we've seen meaningful opportunities to improve efficiency, assist our team members, and enhance the guest experience. As we enter the second half of the year, we have greater visibility into the completion of our technology rollout, encouraging operational trends in our mature tech and markets, a healthy balance sheet, meaningful liquidity, and significant flexibility to continue investing in our business while returning capital to our shareholders. We believe the foundation we're building today positions us very well for long-term value creation. And with that, I'll now pass the call to Michael to discuss our financial results for the quarter. Michael?

Thank you, Dan, and good morning, everybody. I'll start with our high-level financial results for the second quarter. We generated $4.4 billion in revenue, earned a gross profit of $753 million and a gross profit margin of 17.2 percent, and we delivered an adjusted operating margin of 5.3 percent. Our adjusted net income was $125 million, our adjusted EBITDA was $235 million, and adjusted EPS was $6.82 for the quarter. In addition, the non-cash deferral headwind due to TCA this quarter was $0.66 per share. Our adjusted EPS would have been $7.48 without the deferral impact. Adjusted net income for the second quarter, 2026, excludes net attack on implementation expenses, $3 million of non-cash asset impairments, $2 million of weather-related losses, and $1 million related to duplicate DMS-related expenses. Adjusted SG&A's percentage of gross profit on an all-store basis came in at 66%, in line with our expectations, and a 260 BIP improvement over the first quarter of this year. We expect gradual improvement throughout the year in our SG&A leverage. There are some frictional costs of our tech home rollout not associated with the one-time implementation or duplicative costs that are short-term in nature that ease over time as the stores become more proficient with the technology as Dan mentioned. With 30% of our store base remaining to be rolled out as of today, the third quarter will be a little heavier lift compared to the second quarter in order to complete the rollout. We have already transitioned 13 stores in July. We see a path to start realizing some of the cost savings in late 2026 and into 2027. Next, the adjusted tax rate for the quarter was 24.3%, an upside to our initial forecast. We expect the effective tax rate to be approximately 25% for the remainder of the year. DCA generated $5 million of pre-tax income in the second quarter. The negative non-cash deferral impact for the quarter net of tax is about $12 million. We anticipated implementing TCA to the chamber stores in the second half of this year to complete the rollout to the company. We generated $305 million of adjusted operating cash flow year-to-date. Excluding real estate purchases, we spent $117 million on capital expenditures in the first half of the year and still anticipate approximately $250 million in CapEx spend for the full year 2026. Adjusted free cash flow was $188 million through the end of June. We ended the quarter with $966 million liquidity comprised of floor plan offset accounts, availability on both our use line and revolving credit facility, and cash excluding cash. Our transaction adjusted net leverage ratio was 3.4 times at the end of the second quarter. As Dan mentioned, we took the opportunity to lean more heavily into buybacks during the quarter purchasing 668 000 shares for 131 million dollars on a year-to-date basis we have bought back 1.35 million shares for 278 million dollars we made the strategic decision for temporarily higher leverage given the valuation of our shares and the performance outlook of our 3.0 times is still a priority for us and we plan to reach it in early to mid-2027 And with that, this concludes our prepared remarks. We will now turn the call over to the operator and take your question.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Jeff Lick with Stephen Zink. Please proceed with your question.

Good morning. Thanks for taking my question. Congrats on the check-in progress. Dan or Michael, I was wondering if you could start off with me. Just talk about, compared to Q1, what's changed and what's evolved, and if you could build into that, the negative six and same-store new. you know, maybe just drill down into what parts of that are kind of techie-on related versus, you know, other types of market factors and whatnot.

Yeah, I think, you know, the things that changed a little bit, you know, as first quarter had the noise from the weather in January and February, so this is kind of a, you know, I'll call it a normal quarter in terms of weather-related and those impacts. You saw a little bit of a decline in new vehicle PBRs, so that's, you know, as expected, we still think $3,000 is probably the right long-term number. So we saw a little bit of a decline there, but nothing out of the ordinary. And then on SG&A, with the hiring of gross profits this quarter, and a little bit of an improvement on some of the stores that kind of are in that five to six month window, we saw the SG&A come down at 66%. So those are the big ones.

Fixed stops, we still have a lot of stores at the heart of the Techeon transition, so we're seeing the impact on fixed stops still. but expect you know more positive results we saw you know June we thought we talked about the 4% growth in June and so we expect to see you know continued improvement on big stops going forward this year but again we're right at the heart of the of the techy on rollout phase right now Jeff just to add to Michael's comment too on the new car side down 6% to your point what percentage of that is tech on and what could be some market conditions or OEM From a take-on conversion, as I stated last quarter, we don't see the immediate impact that we see with customer pay or technicians on the muscle memory, but there is still an adaptation period for sales managers and salespeople on just the basic blocking and tackling of internet leads, follow-up, et cetera. You know, and it's not so much about they know what to do, of course they do, but it is more about just learning the new system and navigating through it. So we see a little bit of a dip in sales when we install a new store, but it is a much faster recovery than we do in the fixed side. On the other side of the equation, too, is, you know, we had an impact on steel on the Stellantis stores down 28 percent over the last quarter. we are starting to see improvements on the inventory mix of those stores but as you know that takes time for it to really replace the old high priced inventory to where to the new inventory that is coming in and then the last one that I'll mention is also in some of the imports we have seen a pretty significant drop in volume some of it having to do with the the rush that there was last year to buy some of the EVs due to the incentives going away.

And then just a quick follow-up on used. Used grew or, you know, shrank faster. You know, call it, you know, same story down 14 versus same story down six for new. You know, a lot of us tend to use that ratio of, hey, you know, your, you know, if your trade-ins or your inventory availability should maybe grow at the same rate or shrink at the same rate as new. There's a bit of a spread there. I'm assuming there's, you know, you alluded to it in the call or your prepared remarks about Techeon. Maybe you can just kind of reconcile that for us and then, you know, talk about how the, you know, the new strategy of ramping up volume a little bit is helping that.

Absolutely. Yeah. You know, part of, to your point, I mean, part of the decrease in used cars is you sell less new cars, you're going to take in less trades. And so some of that is part of that. But I will tell you the biggest impact is just the slow but very methodical and strategic approach to moving from a strategy that we're not chasing volume and maximizing gross profit to a strategy where we are going to go more aggressively after the volume while maintaining healthy PBRs. And, you know, that has to be done in a very slow methodical approach because let's not forget that September is right around the corner. We all know what happens to used car valuations when September comes. And so going in and aggressively acquiring inventory just to hit a top line volume number and then having to liquidate all the agent inventory come September, October does not make sense. So the approach that we have taken is strategically acquiring inventory. We bought approximately 6,500 cars from auction last quarter. You can see the impact in our day supply from a 30 to 37-day supply. And we still have a healthy inventory where 70% of our inventory is less than 30 days. So we're starting to see the improvements. You look at also the impact that additional inventory is having in our internal gross profit. It is having a nice impact there. And as we continue to execute this methodical approach, that's where I feel comfortable that by the point into the fourth quarter, you will start to see the increase in volume in year-over-year.

Thanks very much, and best of luck in Q3 and the rest of the year. Thank you, Joe.

Our next question comes from Rzat Gupta with J.P. Morgan. Please proceed with your question.

Great. Thanks for taking the question. Just wanted to follow up on the SG&A comments and some of the Coons and Florida stores on Takeon. Given those stores have had a bit of a larger period of seasoning with Takeon, are you able to share what the SG&A to gross is for those stores versus pre-Tachyon, you know, any direction color on that would be helpful. And then just to clarify, you know, you are suggesting that SG&A to gross will continue to decline in 3Q and 4Q. Just wanted to clarify that and have a quick follow-up.

Yeah, I'll let Dan hit a few of the detailed numbers, but, you know, I don't have the SG&A by store in front of me. But just as a reminder, the Coons stores have been on it for about a year, so they're the most seasoned of the stores. The Atlanta stores went on in December, so they're just hitting that six-month mark at the very end of the quarter. And then the Florida stores went on in January and February, so they're really in that, you know, right at the end of the quarter, they hit the five-month mark. So I'll say of those three buckets that we gave you, you know, one's season well past the time frame the other one's just hit the end of that time frame right at the end of the quarter so again as we talk about the numbers those are kind of the spectrum to where we are in the in the kind of process from an SG&A perspective you know next quarter is a pretty heavy quarter for implementations but we still think we'll be able to shrink the SG&A percentage of growth in the third quarter and then you'll see continued kind of decline in fourth quarter and then on in the first and second quarter um and we think we can get to that low 60s number kind of in the you know toward the end of 2027 um is kind of where we're projecting so that's kind of the you'll see you know steady decline each quarter as we go through uh from sgna perspective but dan has a maybe a few more numbers on the on the sales side but uh again i don't i just don't have the sgna number by store in front of me rajan good morning i'll give you I'll share a little bit more information, but before I share that, you know, I can't stress enough how excited we are that 70% of our stores have already converted to Techeon.

We believe this investment will deliver meaningful long-term value, not just by enhancing the guest experience, but also making us a lot more efficient. And so when you look, I'll share with you a few other numbers that we have not quoted in the past. From a unit per sales manager, I'm just going to focus on Coons. Coons on a quarter over a quarter increased 14.2 percent in productivity. Another number that I'll give you also is units per F&I manager again on a quarter over a quarter sequential increase. This will be Coons increased in F&I 15.2 percent. So we're seeing healthy efficiencies coming from both the variable and the fixed side of it. And we just cannot be more excited to finish the completion and have all the stores operating under one DMS so that we can gain the efficiencies and get back to normalized growth levels.

Got it. That's helpful, Connor. And then just to follow up on the parts and services comments, I appreciate the comment on June, you know, plus 4%. Is it safe to assume that the third quarter should be at least, you know, at or above 4%, you know, given the run rate. And then just zooming out, you know, is it still safe to assume that the normalized growth rate is like no single digits for the business? I mean, we have been hearing, I would say, like some data points around, you know, maybe labor rates are peaking out and, you know, we are seeing consumers, you know, just downshift a bit given affordability concerns.

I'm curious to get our thoughts on that and obviously the third quarter. yeah I'll start on the on the service part of it and then Michael can jump in as well on the the first question was what do we expect for Q3 as I mentioned as I shared in the month of June of four percent you know July is starting pretty similar to what not starting we're almost done but is very similar to what we saw in June. So it's very exciting to see some level of consistency there. And as we move into the third quarter, we believe that that low to mid single digit in customer pay is achievable. Then you had asked me, can you repeat the second question? There was a second part to it, please.

Just like one of the broader parts and services question, you know, in terms of medium long-term normalized growth rate, you know, we have been hearing, you know, some data points where, you know, we've suggested that it's becoming harder to increase the labor rates and also, you know, some impact to traffic because of consumers downshifting due to affordability concerns. I'm just curious if you're feeling any of that at your stores.

You know, we have not seen much of that, but I will tell you one of the good opportunities as you roll out a new DMS is it really allows you the opportunity to adjust the labor rates as you need to. And in our approach is not so much about maximizing the ticket with a consumer where we only see that consumer one time. is more about growing the customer payroll count and growing that retention basis so that we can have sustainable growth as we move forward. We have been able to adjust labor rates as we are rolling out Techeon, and we see that as another one of the impacts that we have of rolling out a new DMS. And when I say adjusting labor rates, obviously, it's not about going up on the expense side of it. It's more about how can we provide a good value for the guests while providing a great guest experience and allowing them to keep coming back from a retention basis and grow the customer payroll count. So there is some pressure on the consumer availability out there, but not that it is being impactful.

Understood. Thanks for all the color. Good luck.

Our next question comes from Alex Perry with Bank of America. Please proceed with your question.

Hi, thanks for taking my questions here. I guess first just starting on used, I wanted to dig in a little more on your thoughts around the used vehicle procurement environment and how that should impact volumes and GPUs in the back half. Obviously, you have the sort of shifted strategy internally, but with a lot of the off-lease supply coming into the market, it maybe could just talk about how that may sort of impact GPUs and volumes in the back You're welcome.

Morning, Alex. You know, our approach to going away strategy-wise of not chasing the volume was all well thought out, trying to time with the market as to when the least returns were going to start to come back in because we know the one thing that you're guaranteed when you go and buy a car at the auction is you're the last person standing. That means you pay the most for that car. And so realizing the margins that we expect is a little bit tougher or very tough when you're the last person standing at the auction. So therefore, when you think about our strategic approach, as we start to get these lease turnings to come in, it definitely gives us the ability to enhance the amount of inventory that we have, turn it faster at a better acquisition price point than if we go to the auction. And that's one of the benefits of being a franchise dealer. Those lease earnings come in, we get the first right of refusal, for lack of a better term. So that fits straight into our strategy. There's quite a few electric vehicles that are coming off lease right now. You know, we didn't plan for the gas prices to be where they are right now, but it's actually a nice mix because we're seeing those cars coming in and also being retail in the used car market. So I see it as a benefit that we have these cars coming in. I don't see a negative impact to the gross profit. Now, keep in mind, as we get more aggressive and we go after the volume, there will be an impact in the margins, but we're still going to run a healthy PBR. And as I mentioned last quarter, we have done the stress analysis. And for every additional, call it 500 used cars that we sell, we have the ability to drop about $200, $250 a car. So we're really managing that accordingly to make sure that we get the best return for our shareholders.

That's incredibly helpful. Really, really good color. I guess just shifting to the new side, can you talk a little bit more about sort of the performance by segment, especially luxury versus non-luxury and what you're seeing there and sort of expectations as we, you know, trend through the balance of the year on some of the luxury versus non-luxury?

Yes. In the second quarter, luxury, from a volume standpoint, we were down 10% in luxury, where imports from a unit basis, I'm quoting same store, we were flat. And then on domestic, we were down 16%. You know, we all know that luxury is really more of a tail end of the third quarter and going into the fourth quarter is really where luxury takes off. I don't see anything out there that is of major concern from a luxury standpoint. I believe, you know, Lexus, BMW, Mercedes, I mean, all the OEMs in the luxury arena for the most part are performing well. there's nice influx of inventory coming in and I expect third quarter to to continue to deliver like they always have from an import standpoint we're seeing a little bit of margin compression a little bit slightly and in some of the in some of the OEMs but Toyota still averaging you know 12 to 15-day supply. It is positioned for a healthy margin. So imports, I think that we have hit a stabilized level and not much fluctuation to come from where we have been.

That's incredibly helpful. Best of luck going forward. Thank you.

Our next question comes from Robert Saltzman with the UBS.

Please proceed with your question. hey guys thanks for taking my question here just this is the first one on the pace of the techion rollout so you're now at 70 of stores that's first over 50 mentioned on the q1 call and more than 25 in q4 so you know 20 of total stores added in the quarter which is probably a slight slowdown from that q1 pace additions any reason for that slowdown or is that just in line with your kind of internal rollout plan and expectations kind of add that extra 30 here between now and October.

Yeah, so that was kind of the plan all along. We rolled out herb chambers in March and April. As part of the herb chambers rollout, we also rolled them out on some of our standard processes, our shared service center. So there's a lot of change for that group. And so we took the month of May pretty much off from rolling out stores to just help that group kind of absorb the change. And so that was strategic, Just kind of thinking through the timing and all the change for that new acquisition, you know, our acquisition last summer, there was a lot of change besides just TechEon that we had to do with them. We rolled out TechEon, so that was strategic to kind of take the month of May off, help support that, you know, that platform, and then kind of kick it back off in June and July.

Thanks, super helpful. And just one follow-up for me would just be super helpful disclosure just kind of on the efficiencies per tech driving by TechEon kind of in that double-digit percent range. Does that mean, you know, if completion goes as planned, all else equal in parts and service, you see a double-digit revenue growth opportunity there as all of these techs get rolled on? And exactly what is driving the efficiency per technician within your DMS system kind of gets to that double-digit level? Thanks so much.

Yep. Robert, I'll start it and then Michael can add. Our approach and our guidance continues to be the same in the single digits growth in fixed operations and customer pay. When you talk about what is driving the efficiencies, when we have the old DMS or the stores that still have the old DMS, you have multiple logins to operate what you do as a technician and what you do as an advisor. So you log in into the DMS, but then you also have to log into a bolt-on. It might be Xtime or MyKarma, whatever you decide to do, all great tools. But it does have, as a technician, you have to migrate from one system to the other. And here is all one ecosystem, and all the communication flows from the advisor to the technician and to the parts department and vice versa all through the one ecosystem. So that ability to not have to be jumping from one to the other has become a lot more efficient. We're seeing the dollars per technician are the numbers that I quoted where we're seeing the improvement. And keep in mind also, having one ecosystem to do the media, whether it is photos or video or both, in that one ecosystem just enhances the guest experience. It improves the time to market, meaning the time that we present the information to the guest. And we know the faster that we present the information to the guest, the higher the propensity for that guest to approve the additional services recommended. it, and then that leads into additional dollars per ticket or for a technician, like I have quoted on the previous information.

Thank you so much. Appreciate it, guys.

Our next question comes from Daniela Hagen with Morgan Stanley. Please proceed with your question.

Hi, everyone. Thanks for taking my question. I wanted to double-click on that used vehicle strategy evolution. You've talked a little bit how sourcing has changed, off-least volumes have improved, But are you feeling any impacts from increased competition from used car retailers becoming more price competitive?

I have not, no. I have not seen, I have not felt that impact. And, you know, the one advantage that we have that I did not mention is also another source is we have a big fleet of loaner cars as well. And the loaner cars, obviously, we keep them in there to serve our guests. but then at some point we retire them and put them for sale in the used car inventory. So that gives us a pretty nice advantage. Most of those cars, I would say, the vast majority of them are sold as certified, and that's another key item of being able to be a franchise dealer is we're able to differentiate ourselves from a certification versus a non-certified car out there. So overall, no, I have not seen any margin pressure from the other Uscore competitors.

Got it. Yeah, and you can definitely see that in the GPU results, so that's great. I also wanted to ask on the FTC pricing rules, where do things stand now? Any remaining exposure or, you know, have you seen a change in competitive dynamics on advertised pricing versus a year ago with this?

No, you know, we have always conducted this in the legal and ethical way, so there's been no change from our perspective. I think the only change that I will tell you from a market level is excited to the fact that it puts everybody in a level playing field, and I think that it is very well received and the right thing to do, not just for the industry, but for the industry.

Great, thank you.

Our next question comes from John Babcock with Barclays. Please proceed with your question.

Hey, good morning. Thanks for taking my question. I just wanted to quickly hit on parts and service here. So obviously the margin has been quite good for the last year or so, and I'm just wondering how much more you might be able to squeeze out of that, and especially if you do see a reversal in warranty, which seems like it's still growing, at least in the low single And on top of that, if you could also just talk about, because in the slide deck, I noticed you provide something that shows the dollars per repair order for plug-in hybrid EVs and also battery EVs. And I was just wondering how we should think about gross margins for those, like if that necessarily means that gross margins are higher or maybe we shouldn't look at it that way.

Yeah, I think gross margins will kind of hang where they're at. The only caveat to that is as we continue to increase used vehicles, because we have to eliminate the revenue on used vehicles but keep the gross profit in there, that has a pretty meaningful impact on increasing the gross margin as we increase the used vehicle volume. So as we get into the fourth quarter and then on to the 2027 and kind of crank up the volume on used, that will help the margin of a partner service because it's kind of gross profit with no revenue.

John, just to give you some color, you know, on the BEV dollars per RO, we're averaging about, call it $350 or more higher than the average ICE vehicle.

And the margins, I mean, the margins are probably pretty similar between the buckets. It's just, you know, the amount of work that has to be done on those EVs right now. We do expect over time, you know, they kind of come more in line with each other. But right now, you know, there's, I'll call it lots of early stage repairs that have to be done because it's new technology.

Okay, thanks for that. And my next and last question is just on the M&A front. And I know you have talked in the past about pulling back on that this year, just, you know, given leverage. And, you know, you're at 3.4 times now, so it's still a little bit above your target. But on the other hand, dealers have talked about how the M&A market looks pretty good, and there's a decent amount of assets out there.

And so I was just wondering how you're thinking about the M&A side of things for the balance of the year. yeah we you know we we review the deals that are out there we have reviewed a few deals during the quarter but again our our our priorities are are very clear to us and right now it is to complete the rollout of Techeon and then number two is to improve operational improvement specifically on our on our other same stores and you know the good news is Chambers is about to be counted as the same store here as we go into the

into the fourth quarter so we continue to see them if we continue to analyze some but that is where a key priority they are right now on those two key topics that I give you and I'll let Michael expand on it from a capital allocation as well and then you know we've kind of shifted to a more balanced approach on capital allocation between share buybacks and acquisitions along with delivery but very value we looked at the last quarter in terms of share price it's kind of hard to justify an acquisition versus buying back your own shares just at the price we're trading at. And so I think as prices get back to normalized levels, I think the acquisition for share buybacks equation may change a little bit. But definitely the current price, you know, our thinking is share buybacks represent a better return for shareholders than some of the acquisitions we've seen.

Okay, thanks. Appreciate it.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from David Winston with Morningstar. Please proceed with your question.

I was just curious on negative equity. Has that become more of a problem this year than last year as used vehicle pricing has come down just a little? And is it at all particularly a pressure point in certain light truck segments?

Morning, David. This is Dan. And, you know, for as long as I have been in the industry, when I was selling cars, negative equity has been a part of the business. I have not seen anything of an uptick that is outside of the norms. So, no. And, you know, we have, as you know, there's different ways to help a consumer out of negative equity. but you're always going to have the one-off scenario where somebody has too much negative equity that they can't trade at that particular time, unless it requires a tremendous amount of cash down, but nothing that is out of the ordinary of what the averages have been in the past.

Okay, great. Thank you. That's all I have.

Our next question comes from Ryan Sigdal with Craig Halem Capital Group. Please proceed with your question.

Hey, good morning, guys. When I look at Total Care Auto and I look at your slide of the accounting non-cash deferral, last quarter you were expecting a negative, now a positive for the year. I'm curious what changed there, and then you're not putting out the out years anymore, but I guess is it reasonable to assume that we stay positive in out years, or was this just a deferral as you focus on Tachyana and the other things going on?

I mean, this is just the volume. You know, the volume plays out with the SAR being a little bit lower and then used vehicle volume being lower than we anticipated. That has a, you know, a positive impact on TCA deferral. As we, you know, crank up the used vehicle volume in the fourth quarter and then on into next year, you'll see a, you know, we'll probably go back to a negative position at some point. And then also we roll out chambers later this year as well, which will have a hit on the deferral. So we still think we're negative in the out years. We're waiting to see kind of a SAR forecast for the 27, 28, 29. So as we get toward the third quarter, fourth quarter, as we have a better view of what those out years SAR forecast looks like, we'll update the out years at that point. Just right now it's kind of hard to look and say what's SAR going to be in 27 and 28. So it's more the volume difference. We just lower up volume than we anticipated. That has a benefit or results in a lesser deferral impact on TCA until that volume kind of starts catching up to us.

Makes sense. Thanks, Jason.

We have reached the end of our question and answer session. I would now like to turn the floor back over to Dan Clara for closing comments.

Thank you for joining our second quarter earnings call. We look forward to seeing you in the third quarter.

This concludes today's teleconference. conference. You may disconnect your lines at this time. Thank you for your participation.