Autonation, Inc. Q2 FY2020 Earnings Call

Good morning and welcome to AutoNation's second quarter 2020 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; and Joe Lower, our Chief Financial Officer. Following their remarks, we will open up the call for questions. I will be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks including economic conditions and changes in applicable regulations 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 earlier today and in our SEC filings including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. And now I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us. AutoNation delivered remarkable results for the second quarter compared to the prior year. Today, we reported an all-time record best-ever quarter adjusted EPS from continuing operations of $1.41, an increase of 18% compared to last year. No question the second quarter is certainly one for the history books. In early April, same-store retail unit sales dropped 50% compared to the prior year when the entire country shut down due to the COVID-19 pandemic. For the month of June, thanks to the monumental effort of our associates, we recovered to achieve unit volume in line with last year. In April, same-store new vehicle unit sales were down approximately 50% and for the month of June, only down 13% compared to last year. Inventory shortages from the manufacturers' plant closures led to strong new vehicle gross profit per vehicle retailed. At the end of the quarter, new vehicle inventory was down 26,000 units or 41% compared to last year. We expect new vehicle margins to normalize as new vehicle inventories recover. At the beginning of April, same-store used vehicle retail unit volume was down approximately 60% and for the month of June increased 14% compared to last year. However, inventory levels are tight, demand is currently outpacing supply. We continue to focus on our 'We'll Buy Your Car' initiative where we sourced over 6,000 units directly from consumers in the quarter. For July, we will source 3,500 units to help build our inventory. Customer care is also seeing improvement in April. Our average same-store customer care gross profit per service day was down approximately 40% and for the month of June, it was down roughly 10% compared to last year. The pandemic has accelerated a shift in consumer behavior towards digital engagement. Our AutoNation Express online selling tools enable customers to buy and sell vehicles online and our store-to-door delivery option allows customers to completely take delivery at home. We're also investing in data and analytics. We have built a proprietary equity mining tool which leverages millions of sales and service transactions into a central system. The tool automatically appraises the customer's current vehicle and identifies a newer replacement vehicle for a similar or lower payment. It shows household vehicle, service history, propensity to purchase, and customer financial service product history. The equity mining tool is linked to our recently launched Customer 360 which has over eight million active customer sales and service records. Customer 360 allows our associates to see the lifetime value and transaction history of our customers. We will continue to invest in digital capabilities that enable us to provide a truly comprehensive and personal experience for our customers. Over the last two years, AutoNation has taken an aggressive approach to streamline the business, the company's continued investment in digital, created greater efficiencies which made possible, position eliminations and reduction in advertising costs. Additionally in 2018, AutoNation implemented a restructuring plan that reduced costs annually, consolidated the regional structure from three to two. This year, we made further reductions to headcount advertising and discretionary spending. These efforts allowed us to deliver adjusted SG&A, as a percent of gross profit of 68.2%, in the second quarter of 2020, which represents a 520 basis point improvement, compared to the second quarter of 2018. We intend to operate below 69% SG&A, as a percentage of gross profit on a long-term basis. Today we announced plans to build at least 20 additional AutoNation USA stores, over the next three years. We'll provide details of the rollout schedule next quarter. We see an opportunity to take a larger share of the used vehicle market, which is substantially larger than the new vehicle market, and benefit from the increased interest in vehicle ownership from consumers. AutoNation's strong brand, first-class digital capabilities, our One Price strategy combined with lower acquisition costs, stable used vehicle retail pricing, make AutoNation USA stores an attractive investment opportunity. I'd now like to turn it over to Joe. Please, Joe?

Thank you, Mike, and good morning, everyone. Today, we reported adjusted net income from continuing operations of $124 million or $1.41 per share, versus $108 or $1.20 per share during the second quarter of 2019. This represents an 18% increase on a per share basis. Second quarter 2020 adjusted results exclude an unrealized gain of $161 million after-tax or $1.82 per share, associated with our equity investment in Vroom, and executive separation charges of $5 million after-tax or $0.05 per share. Going forward, our investment in Vroom will be marked-to-market at the end of each quarter with fluctuations in value included in our GAAP results. During the second quarter, same-store revenue decreased by $726 million or 14% compared to the prior year as the global pandemic and shelter-in-place orders significantly disrupted our business, particularly in April. We did see a significant recovery sequentially from month-to-month throughout the quarter as Mike highlighted earlier, as shelter-in-place orders were lifted and the economy reopened. Despite the economic volatility, our team executed at a high level during the quarter, with same-store gross profit declining only 9% year-over-year, driven by strong PVRs and the resiliency of our used vehicle business. Our same-store variable PVRs were up $585 or up 16%, while same-store used units declined only 3%, all compared to the prior year periods. Limited supply and recovering demand benefited vehicle margins in the second quarter. Looking ahead, we expect margins to normalize as inventory recovers through the second half of the year. Moving to costs, adjusted SG&A as a percentage of gross profit was 68.2% for the second quarter, which represents a 330 basis point decrease compared to a year ago. We drove significant SG&A leverage through extensive cost reduction efforts, including leveraging our digital capabilities to reduce expenses across labor, advertising, and discretionary spend. As Mike stated, we will continue to maintain a discipline in our cost structure going forward, targeting to continue to operate SG&A as a percentage of gross profit below 69%. Due to the strong execution in our stores, recovering demand, and our proactive cost reduction efforts, adjusted operating income was only down 3% compared to the prior year. Further benefiting results, floorplan interest expense decreased to $16 million, as compared to $37 million in the second quarter of 2019, due to both lower interest rates and lower average floorplan balances. Non-vehicle interest expense decreased to $23 million as compared to $28 million in the second quarter of 2019 as we refinanced our 5.5% notes in February with lower-cost debt. Importantly during the second quarter, we strengthened our balance sheet and improved our liquidity position through rigorous expense management, disciplined capital allocation, strong free cash flow generation, and the issuance of new 10-year notes. At the end of June, we had $2.1 billion of non-vehicle debt, a decrease of $432 million compared to the end of the first quarter. Our cash balance at quarter end was $257 million, which combined with our additional borrowing capacity resulted in total liquidity of approximately $1.6 billion at the end of June. This is an increase from $1.2 billion at the end of Q1. Our covenant leverage ratio of debt-to-EBITDA decreased to 2.3 times at the end of the second quarter compared to 2.8 times at the end of the first quarter. Including cash, our net leverage was down to 2.0 at quarter end. During the quarter, we did not repurchase any shares as a result of the uncertainties presented by the global pandemic but under the current Board authorization, the company has approximately $139 million available for additional share repurchase. Capital expenditures were $25 million compared to $67 million in the prior year reflecting the actions we have implemented since March. Looking forward, we will maintain cost and capital discipline while we continue to invest in our business, opportunistically allocating capital to maximize shareholder returns. Our AutoNation USA expansion provides an attractive opportunity to increase our used vehicle market share and drive long-term shareholder value. With that I will now turn the call back over to Mike.

Thank you, Joe. I'm really excited about the great opportunities in front of us as a company. We have an industry-leading brand with scale and proprietary digital capabilities. We're well positioned for the future. We're now happy to take any of your questions.

Your first question comes from John Murphy of Bank of America. Please go ahead.

Good morning, guys and congrats on a great quarter. Mike I just had a first question on AutoNation USA. I'm just curious if you can update us on how the five stores are progressing that are already launched and what's kind of triggered the decision to really accelerate the growth over the next three years to 20 additional stores?

So we built five pilot stores, John. And the key was after building the pilot stores was to pause. And come to conclusions about what we had done right and what we had done wrong. And how do we have a clear understandable path to profitability? And will the stores meet or exceed our return threshold? We did a lot right but we also did a lot wrong. And I'm glad we took the pause. Now we have a very good understanding of what's right with the stores and the stores are solidly profitable and Joe can give you some numbers in a moment. The amount of investment per store will be 20% to 25% lower than what we originally did. This is primarily because we narrowed the focus of the store to being a transactional delivery center for vehicles and a reconditioning center. The number of service capacity we put in the stores simply didn't pan out and we don't want to repeat that in future stores. So that gets our investment per store down to around $10 million or $11 million a store. Then we perfected the processes that were within the stores and learned that the AutoNation one price and all the procedures that we use in our existing stores are actually first rate and first-class; no reason to try to reinvent everything. Now we have a very clear path to profitability on the stores. We expect we'll reach breakeven within 12 months. And within 18 months to two years, we'll be running already at our return threshold we need to greenlight an investment. If you ignore March and April, which were severely disrupted by the pandemic and just look at January and February, we were already on track to greenlight this. I think the pause period was actually longer than we thought it would be. We weren't suddenly accelerating; we wanted to have a high degree of confidence and certainty that we knew exactly what we were doing and that we would hit the return targets. So we're there. Off we go. Joe, do you want to talk about any other numbers?

Yes. The one thing, I guess, I would add, Mike, is if you look at the stores today and again great performance, we're generating about a little over $2 million a quarter on a run rate. I think that's kind of a good estimate of what our existing footprint has done recognizing there are very good performance in that. But a model going forward, as Mike said, to give you some confidence that it is a profitable model that we have now demonstrated success with.

Okay. That's helpful. And then just a second question on M&A and the online efforts. I mean obviously, been doing this for a long time and have a lot of perspective. It seems that there's a loosening of framework agreements and constraints by the automakers allowing networks to potentially grow above and beyond where they used to be limited whether it be in the physical or virtual world. I'm just curious in your interactions with the automakers are they at a point where they're accepting more and more that these larger wealth yields partners and distribution like yourself can get larger without trading issues that they kind of anticipated in the past?

Yes, as the largest player, we still face some challenges that are not entirely resolved. The requirements for approval have significant implications for every store we operate under that franchise, which raises the expectations. When we consider future capital allocation, we value our existing business, as evidenced by its performance. We made a significant investment in digital capabilities, equipping us with robust proprietary tools that prepared us well for the shift in consumer behavior. On the cost side, that investment has been beneficial, enabling us to operate with a lower SG&A percentage now that we are past that initial surge. We've established a new target, and as we've discussed, we aim to get back below 70. We appreciate the returns from our USA stores, where we avoid goodwill and manufacturer restrictions. However, the pricing for new vehicle franchises and the returns we require are not always clear, making it uncertain whether that is the right area for our capital. While we might consider deals, they will likely be smaller rather than large acquisitions. My expectation is that we will focus our capital on ensuring our current business remains first-class. We'll opportunistically look for share repurchase opportunities. In the second quarter, despite the attractive pricing, we decided it was prudent to hold off on share repurchases due to uncertainty about the future. Looking ahead, we will keep an eye out for future opportunities. We will pursue smaller acquisitions in new vehicle franchises and have reviewed our entire footprint thoroughly. The divestiture of new vehicle franchises for AutoNation has been completed.

Okay. That's very helpful. And then just lastly real quick on SG&A. I mean, I know you guys are saying an opportunity to remain below 69%. I'm just curious if there's a greater opportunity to go lower as more sales and more of the process goes online? And then also as AutoNation USA stores ramp-up do they have a lower SG&A to growth so maybe we could blend down over time? So what does online mean? And then what does AutoNation USA mean to that number?

Yes, John. I generally agree with your statement that our efforts continue, but I cannot assure you today that it will be as we discussed. We aim to be below 69%, and our work hasn't ceased. There was definitely significant progress made in the second quarter. You can observe that this is the result of two years dedicated to enhancing both digital effectiveness and efficiency. There’s no reason to halt our efforts.

Okay. Great. Thank you very much…

As far as with USA stores, I don't know the answer to that. I'll have to get back to you.

Your next question comes from the line of Rick Nelson of Stephens. Your line is open.

Thanks. So other car dealers are pointing to a big step change in profitability in June. Curious if you could comment there and whether that's continuing here into 2Q. Maybe you could talk about the SG&A that you saw in June to give us some perspective.

June was an exceptional month. I believe our SG&A in June was at a level you have the number for, Joe. I would assume it's in the 60s, Joe.

It was clearly the low point of the quarter, falling below 68%.

Yes. It was a very good number, but not the run rate we're declaring. We're declaring 69% will be below with opportunity and work to go, and we'll see what the future brings there.

Okay. Got you. So we did see improvement in the service and parts operation. You mentioned minus 40 in April, minus 10 in June. Mike what you're thinking there as we push forward?

Rick let me tell you exactly where we are. Usually, we don't give updates on the current month, but these are extraordinary circumstances. So new unit sales, so far in July are running minus 15%. It's definitely a supply issue. The manufacturers are ramping up and they have challenges. Our shipments of new vehicles to us will be 25% lower than a year ago. I think it's really into the fall before new vehicle inventories normalize. Our used pre-owned sales are running plus 7, plus 8 something like that. Good demand. If we had more, we could sell more. We had a really strong close end of June. So inventories were tight going into July. We're working to get more, but the demand is definitely there. On customer care, the pace continues to improve and we are running on a daily basis at minus 7% compared to a year ago. If the trend continues, I expect customer care will be running equal to prior year at some point during this quarter. There will be a lot of pent-up demand ultimately for maintenance. No maintenance was done during this pandemic period. We only did repairs that had to be done. It's gradually only down 7% in July and still getting a little better each day.

Great. Also, I'd like to ask about the markets where we've seen some COVID outbreaks here at like Texas, Florida, California any commentary about what you're seeing there would be helpful?

Yes. For AutoNation, we are likely the first or perhaps the only large auto retailer to require all employees to wear masks. We began procuring masks in late March and had a sufficient supply by early April, implementing the policy on April 17 along with social distancing measures in our stores. This created a safe environment for our employees, and customers have shown their appreciation. The main feedback from customers is a strong preference for personal mobility over shared mobility. This desire seems to outweigh any hesitations they might have about leaving home. They are eager to improve their personal mobility situation. In the areas we've identified as hotspots, customer behavior has remained steady, with no significant changes in business despite additional outbreaks. While there may be future government actions in these locations before year-end, I believe there will ultimately be a vaccine. Looking ahead to 2021, I expect the demand for personal mobility to persist. The outlook for retail automotive, both new and used, appears very positive and confident. Additionally, I anticipate low interest rates for both us and our customers for the foreseeable future, which gives me a favorable perspective on auto retail sales. It's important to note that I'm focusing on retail, as fleet sales are a different matter entirely and not our area of expertise.

Thanks a lot and good luck.

Thank you.

Thanks.

Your next question comes from the line of Armintas Sinkevicius of Morgan Stanley. Your line is open. You may be on mute, if you don’t hear anything. Your line is open.

Hello.

Hello.

Hello.

That was odd. I didn't have my mute button on, but I'm glad we're connected now. It seems there's a stronger emphasis on digital, especially in the press release and your prepared statements. Could you discuss your plans for digital moving forward? What milestones are you aiming for, or what initiatives do you plan to roll out?

Well, we had a surge investment in digital over the last few years. That was quite remarkable. We felt the customer was on a migration to digital. This pandemic is an inflection point for which we're fully prepared. We have a very robust platform today that performs across the enterprise flawlessly. That is really quite remarkable and we have proprietary tools that we will systematically add to. But now, as I said earlier, we’re on the other side of the mountain. We were rolling the stone uphill, having to make significant investments with the hope and belief that it would give us capabilities and get us to a different cost basis. One of the reasons we're confident on the cost basis is that the surge investment period is past and the tools are working. We can see the effectiveness and efficiency that they bring. We'll just continue to build on the platform that we have. We have very smart talented people, and climbing the mountain and cresting the mountain was the hard part and I'm happy to say we're on the other side.

Okay. And how many of your sales during the quarter and since then have been involving delivery and/or curbside pickup? Have you seen that continue to increase over the last several months?

We have that capability and we do it for our customers both on the sales and service side. Our experience remains that the customer wants to do a substantial amount of the transaction digitally and you better have that capability to interact with the customer, or else you're going to lose them to someone else. Ultimately the customer wants to come in to take final delivery. That's what they want. We're good at it. It's efficient, it's effective, it's a safe environment. The point is we have the capability to move wherever the customer wants to go. Certainly, we demonstrated that during this corona period. If they want to surge to digital, we're ready for it. If they want to surge to home delivery, we're ready for it. We have the capability to do both. But on home delivery and pickup, it's less than 10% of the business.

Okay. And just last one here. Any lessons learned from Vroom? I know it was a financial investment, but anything that you were able to take away from that experience in working with them?

I think Vroom has been a terrific investment and it's a company that we admire. Having been at the table as a Board member and in all the bilateral discussions was constructive for both companies, but it did not lead to any operating partnerships. I would say we are now an investor in Vroom.

Great. Thank you for taking the questions.

Absolutely.

Your next question comes from the line of David Whiston of Morningstar. Your line is open.

Thanks, good morning. In the press release, you highlighted the differences between Customer 360 and the equity mining tool, specifically mentioning that 360 provides a more personalized experience. Could you elaborate on what makes it more personalized and share the insights you're already gaining from the mining tool?

What's remarkable about our 360 approach is that it focuses on the customer rather than just the vehicle. For example, if a customer buys a pre-owned car in Los Angeles for their daughter and then goes to our Mercedes-Benz store in Miami, we can instantly recognize their recent purchase when they enter our store. This approach eliminates silos and creates a comprehensive, real-time view of the customer’s entire history with every AutoNation location. We utilize equity mining and analytical tools to determine when customers are in the best position to consider a new vehicle based on their current ownership. If we see that a customer is several months into their lease with a Toyota and has favorable equity, we can identify special offers for new vehicles that may interest them. When they come in for service, we can inform them of these opportunities, turning a routine visit into a potential sales opportunity with a compelling offer tailored to their interests. This level of personalization is only possible thanks to our extensive customer database and the analytics that accompany it.

That's very helpful. I appreciate the detail. Moving on to new vehicles, unit volume was down 23%, but the profitability at least on a unit basis was up over $400. Your total new vehicle gross profit dollars, I think, we're only down about just under 5%. Is there no price war really going on amongst the few new vehicle customers that are there because it's all just supply constrained?

Yes, it's very reminiscent of 2011 when the Japanese factories closed due to that horrific dichotomy. We looked at our inventory and said there's no reason to rush it out the door unless there's some reason to. We just adjusted our prices and felt that we would get a higher yield on it. That's exactly how it played out, exactly how it developed. But we're not saying it's sustainable open-ended. When inventories normalize and the plants are all humming again, the prices will also normalize. It demonstrates how resilient the auto retail model is that in very challenging circumstances, there's a lot of ways to manage the business. I'm happy to tell you in my 20 years here, we've never had an operating loss at the store level in the company's history, including the month of April. This April was the toughest. Shelter-in-place was tough, but we still made money; there are a lot of different ways to go.

Yes. I agree on your end. F&I has been awesome too. Staying on that shutdown topic though are you worried about California, Texas and Florida possibly shutting down again?

Anyone who says they know the end to the COVID-19 story, I don't believe. I think it still has some twists and turns left. I can tell you just what we hear from customers: they do not want to shelter-in-place again. By and large, people are being responsible. We've seen photographs of those who are not, but the idea of shelter-in-place again is not what we're hearing from customers. What the government decides? I can't predict. The American people are like, okay, let's be responsible one step in front of another. Thank goodness better treatments are here every day and can’t wait for a vaccine. There are still ways to go and it's hard to predict.

I agree. I just want to clarify finally one thing you said on the U.S.A. stores at the beginning. Did you say going forward they would have basically no service or just very limited service?

They're primarily; firstly, they are reconditioning centers. We have two choices: do a centralized reconditioning center, it means we acquire a vehicle, ship it to a central reconditioning center, recondition it, ship it back to the point-of-sale to deliver to a customer. So we've analyzed that model and concluded that we have the ability to do very cost-effective reconditioning and technical expertise at the point-of-sale that we won't need to ship the car multiple times to get it in frontline conditions. Speed to market and frontline sale with point-of-sale reconditioning is a strong advantage. We want to grow our pre-owned business profitably; we want the shortest time from opening a store to breakeven. We now feel it's about one year and the quickest time until we hit our return targets is 18 months to two years. In our return, those losses will have to all be factored in. So when your focus is on profitability, these are the conclusions we came to. There will be some service capability in those stores, but not nearly as much as was in the original plan.

Great. Thanks for all the detail.

Yes.

Your next question comes from the line of Rajat Gupta of JPMorgan. Your line is open.

Hi. Good morning.

Good morning.

Thanks for taking my question and congrats on the quarter. Very well executed. I just had a follow-up on the SG&A question. Could you give us a sense of where your staffing levels are right now? Are you back to a level of staffing that you think you're good at right now, or do you think you need to continue to ramp that up? Just trying to get a sense of how much personnel headcount reduction is likely to be permanent in nature. And related to that, how should we think about how the advertising expense might move forward here? Keeping in mind you're also expanding automation you are seeing. How do those all blend into the spending profile? And I have a follow-up. Thanks.

Yes. So on staffing, I'll just pick up where we entered 2020. We had already taken actions in 2019, but let's just do 2020. We had 25,000 associates when we entered 2020. We have 21,000 associates. Today, there is no plan on a ramp. I would say, we're very certain that 3,000 are permanent reductions. There is a discussion around another 1,000. Maybe the truth is somewhere in between 2021 and 2022. There's no plan to ramp in 2022. That is, what somebody asked me earlier, are you still working on SG&A? Do you still see possibilities in SG&A? It's within that 1,000 there that we're working on right now. For the same level of business that we were tracking at in the first quarter, we can now do that with 22,000 employees rather than 25,000, maybe even less than 22,000 but we'll have to see.

Sure. Maybe just to break down the SG&A pool discussion. Think of SG&A in three big buckets: compensation, advertising, and overhead. Compensation was down about 14%. It's consistent with the headcount reduction. The majority of that is in the store, and the more efficient sales process enables those reductions. It's 100 basis points as a percentage of SG&A year-over-year improvement. The next bucket of advertising is the smallest in dollars but clearly the one that had the biggest impact from a year-over-year perspective. We were down about 40% in advertising year-over-year driven by the environment and our digital capabilities being more efficient in using our advertising dollars, which is a 180 basis point year-over-year improvement. Overhead in the store and in corporate was down again primarily headcount and discretionary spend by 13% or 50 basis points. Each of those buckets have been impacted by the headcount reductions and enabled by our digital capabilities, that cumulative was about 15% down year-over-year or 330 basis points. Looking forward, we see continued leverage particularly as some of the higher-margin customer care type business recovers.

I hope that helps.

Yeah. As for the advertising dollars per unit, if you just divide it by like the new unit sales, I mean, does that move lower here going forward on a normalized basis? Is that fair to assume?

Yes.

Okay. That's super helpful. And on the F&I GPU really very solid numbers in the quarter, was any of that temporary nature you would think? I don't know if there was higher penetration on any of the buckets that helped that, or is that a pretty good sustainable number that we can expect to see in the near-term?

Our remarkable success in F&I is due to the AutoNation products that we've developed that customers are choosing. The amount of finance income over the last few years is relatively stable. I don't know, $500, $600 a car like that. That's not the growth. It's not that we're selling customers more expensive products. Greater percentage of customers are choosing AutoNation service contracts and maintenance contracts, which by the way is building a customer care business for the future. That adoption by customers just continues, and we refine the products and we refine our processes every quarter. It’s a continuous improvement loop. Anything you want to add to that, Joe?

One thing I would add, Mike, I reiterate the point that it's less than a third of financing. Now with much of this being completely digitally enabled makes it even more efficient. I agree with Mike. I would not expect any sort of material reduction and think that is a number that we will continue to see improve.

Got it. That's helpful. Just one last one for me, if I may ask. On the management change, I know you've said that you would be appointing a successor sometime in early 2022. Could you give us a sense of the kind of candidate you would be looking for as a successor? I mean, do you think that process could be accelerated at any point? Just curious as your thoughts there.

Certainly. The second quarter of 2020 will live in my memory forever that in the midst of this pandemic, we achieved the best earnings per share in the history of the company. That was a tremendous performance on behalf of all our employees, and a lot of decisions we as an executive team had to make. We also had to deal with the shock of unexpectedly losing Cheryl as a part of the leadership team here, and I have to tell you, I miss her. I worked side-by-side with her for 10 years and I miss her. Now having said that, I love – as you all know, I'm passionate about auto and auto retail I'm passionate about AutoNation. I love the business. I love the people in the company. I love the Board. I love every day. The Board said, you know Mike, you're not exactly chopped liver and we're in the middle of a pandemic. We think there should be a singular focus by the Board, by the executive team, and by management that not only we get through this pandemic but we emerge stronger than ever. That was the singular mandate from the Board. I think our results show that decision to go for a singular focus was the right one. That's the road we're on and I don't expect much change in the timeline one way or the other.

Got it. Got it. That's helpful. So there is no discussion as of now if like the successor would be internal or external or...

Zero.

The kind of profile. Okay, got it.

Zero, singular focus, run the business.

Great. Thank you. Thanks for the color and congrats, again.

Okay.

Your last question comes from the line of Stephanie Benjamin of SunTrust. Your line is open.

Hi, good morning.

Good morning.

Good morning.

I wanted to touch on, I kind of go back to the digital initiatives and the commentary you said before and I apologize if I missed this, but did you quantify the percentage of units or sales in the quarter that did come from a digital platform or anything like that?

We were for the way we measure it for our metrics, we were somewhere entering the year in the low 30s and if I went back five years ago, we were in the low 20s something like that. Each year there would be a 100, 200 basis point increase. That's the road we were on. With the arrival of Corona in a matter of 10 days that number moved into the low 40s and it hasn't moved back. I think there was an inflection point that lifted the whole digital issue accelerated if you will. I think we go back to increasing 100, 200 basis points a year, but you're going to have this inflection point where it went from the low 30s to low 40s and doesn't go back. I'm happy we made the investments that we were fully prepared for that moment. We didn't expect that moment, but we were able to perform for our customers' expectations and take that moment to move to a different cost basis.

Got it. Thank you. In the same vein, I wanted to hear your thoughts on just your ability to continue to penetrate your F&I products, particularly the warranty and extended service with a fully digital platform. So maybe kind of discuss how you're able to sell those digitally and kind of engage the consumer without it being in person any and then just the adoption rate you've seen with those digital sales?

As discussed earlier, over 90% of our customers, I don't know what the exact number is, Joe may have it. Our customers prefer to take delivery of their vehicle at the store and I think our selection rate from customers for AutoNation branded products is somewhere around 42%, 43% something like that. We have excellent penetration and it's steadily growing. Quite frankly though, achieving that level of penetration digitally, we have not been able to do that successfully yet. We've made various attempts. We do not have the same adoption rate of those products digitally online that we do with an in-store process. With the in-store process, the customers are delighted. They are happy that they have the product. They have the right to walk away. It's something they really choose and are happy to have, but we have it I would say perfected in the stores. There is still work to do in the digital world on those products.

Got it. And that’s all I had, so thank you for your time.

Great. Thank you.

Your last question comes from the line of Bret Jordan of Jefferies. Your line is open.

Hey, good morning, guys.

Good morning.

As you guys deemphasize the customer pay service of AutoNation USA a bit, does that change your strategy around the AutoNation branded parts at all?

The AutoNation branded parts have been a big success. All maintenance parts and mechanical parts certainly have put us on a good basis for reconditioning. It will be AutoNation branded parts we use in the U.S.A. stores for reconditioning; that's a complete success that has made a meaningful contribution to the company's profitability. The whole collision business was very challenged during the second quarter with the dramatic reductions in the amount of miles driven. That business wasn't profitable even before the marketplace got much more difficult. That's a relatively small part of the AutoNation parts world, but I would say that's the only area of concern. Everything else is moving in a very good direction.

Okay. And then one big picture question. It seems most everyone, including all the online startups, are really focusing on building out used volumes and growing units quickly. Do you see a structural change in the inventory sourcing? The world is just going to be more competitive to buy the incremental used car, or is the share just going to shift from independent used car dealers to larger players like yourself? The total number of buyers out there won't escalate.

It's absolutely the second one. First, it's a huge market, $35 million a year. You have private transactions, independent transactions, franchise dealers, and then you have the big players. I think there is a yearning in the pre-owned market for a brand that can be trusted. Scale also brings the consumers' mind an idea of trust. If you have a good experience and stand behind the product, that's where the business is going to consolidate. Whether it's Carvana, CarMax, AutoNation, or Vroom, I think big players that are branded are clearly going to take share. It's share consolidation in a very big ocean. That's how I see it developing. When it comes to making money then in that consolidation, I like our position. We've built the brand. We have the brand, and it's respected. Our reputational score is through the roof. We've figured out how to do reconditioning competitively. I like our acquisition plans and I have a new vehicle business which is huge, with which I'm taking trades, very cost-effectively. Then I have a big pre-owned business where I'm taking trades very cost-effectively. We’re building our world by our car business. We're going to buy directly from consumers another 3,500 in July. Then you have the auction component as the icing on the cake. I'm optimistic about our future in pre-owned and I view the big players as the winners. That's where the yearning is out there.

Great. Thank you. Appreciate it.

Great. Thank you everyone for joining us today. Thank you for all your questions.

There are no more questions at this time. Therefore this concludes today's conference call. You may now disconnect.