Good morning. My name is Denise, and I will be your conference operator today. At this time, I'd like to welcome everyone to the AutoNation First Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Rob Quartaro, Vice President, Investor Relations. You may begin your conference.

Thank you. Good morning. And welcome to AutoNation's first quarter 2021 conference call and webcast. Please ensure that your lines are muted until the operator announces your turn to ask a question. Leading our call today will be Mike Jackson, our 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 that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions or 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 will turn the call over to AutoNation's Chief Executive Officer, Mike Jackson.

Good morning and thank you for joining us. Today we reported all-time record quarter results with adjusted EPS from continuing operations of $2.79, an increase of 207% compared to last year. These outstanding results were driven by strong performance in new, used and Customer Financial Services, and disciplined expense management. Demand continues to exceed supply for new vehicles and we expect this to continue through 2021 in part due to the production disruption. More importantly, low interest rates and consumer preference for vehicle ownership versus ride-sharing and public transportation are supporting demand. We expect our shipments from the manufacturers to double in the second quarter compared to the prior year. AutoNation same-store new vehicle units were up 22% year-over-year and up 12% compared to 2019. We remain focused on our pre-owned vehicle procurement strategy. Nearly 90% of our pre-owned vehicles retailed in the first quarter were self-sourced, meaning we acquired them through trade-ins, switch returns, We'll Buy Your Car or service loaners, avoiding auctions. Acquiring vehicles at the right price, speed to the front line, and fair one-price environment and leading digital capabilities are a winning formula for our customers, which is reflected in our results. AutoNation same-store pre-owned units were up 28% year-over-year and 20% compared to 2019. We continue to leverage our digital capabilities to drive cost reductions and increase efficiency. Tools like Customer 360, which has over 10 million active customer records, enable us to provide a truly comprehensive and personal experience for our customers, which leads to higher close rates and increased vehicle sales. These efforts allowed us to deliver adjusted SG&A as a percent of gross profit of 62.7% in the first quarter of 2021, which represents a 1,120 basis point improvement compared to the first quarter of 2020. Our target is to operate at or below 65% SG&A as a percent of gross profit for 2021. We're committed to our business growth strategy through investment in our existing franchise business, expansion of AutoNation USA and future acquisitions. We're on track to open five new AutoNation USA stores in 2021 and 12 additional new stores in 2022. Our target is to have over 130 AutoNation U.S. based stores in operations from coast to coast by the end of 2026. Today, we announced that we signed an agreement to acquire 11 stores and one collision center for Peacock Automotive Group in Hilton Head and Columbia, South Carolina, and Savannah, Georgia, representing approximately $380 million in annual revenue. The brands acquired are Porsche, Jaguar, Land Rover, Audi, Subaru, Chrysler, Dodge, Jeep, Ram, Volkswagen, and Hyundai. This acquisition will increase AutoNation’s footprint from coast to coast to over 325 locations and is set to close in the summer. We've set the target to sell 1 million combined new and pre-owned vehicles annually. AutoNation remains committed to delivering value to our shareholders, which includes opportunistic share repurchases. During the quarter, we bought back 3.8 million shares or 5% of our shares outstanding. I will now turn the call over to Joe Lower, our Chief Financial Officer.

Thank you, Mike, and good morning, everyone. Today, we reported adjusted net income from continuing operations of $234 million or $2.79 per share, versus $82 million or $0.91 per share during the first quarter of 2020. This represents an all-time high quarterly EPS and a 207% increase year-over-year. During the quarter, we sold our remaining stake in Vroom for a gain of approximately $6 million after tax or $0.07 per share, which was excluded from our adjusted results. Turning to operations, our first quarter same-store revenue increased $1.3 billion or 27% compared to the prior year, due to strong growth in new, used and Customer Financial Services. While prior comparisons are impacted by the onset of the COVID-19 pandemic, we continue to see strong consumer demand exceeding supply for new vehicles. Given this backdrop, we remain focused on optimizing our business in the current environment. For the quarter, same-store total variable gross profit increased 52% year-over-year, driven by an increase in total combined units of 25% and an increase in total variable PVR of $767 or 21%. Our customer care business continued to gradually improve with same-store customer care gross profit increasing 1% year-over-year. Taking together, our same-store total gross profit increased 27% compared to the prior year. Moving to cost, first quarter SG&A as a percent of gross profit was 62.7%, as Mike stated, a 1,120 basis point improvement compared to the year-ago period. This strong performance was driven by a combination of strict cost discipline, leverage of our digital capabilities, and healthy vehicle margins. As measured against gross profit, overhead decreased 590 basis points, compensation decreased 320 basis points, and advertising decreased 210 basis points. Based on current business conditions, we project SG&A as a percentage of gross profit to be at or below 65% for the full-year of 2021. Floorplan interest expense decreased to $9 million in the first quarter of 2021 due to lower interest rates and lower average floorplan balances. This, combined with lower non-vehicle interest expense, a lower effective tax rate, and fewer shares outstanding, generated record adjusted EPS. Regarding our balance sheet and liquidity, we have ample capacity to continue investing in our business, including our AutoNation USA expansion, as well as opportunistic share repurchases and acquisitions. Our cash balance at quarter end was $350 million, which combined with our additional borrowing capacity resulted in total liquidity of approximately $2.1 billion. Our covenant leverage ratio of debt-to-EBITDA declined to 1.3 times at the end of the first quarter, down from 1.8 times at the end of the fourth quarter. Including cash and used floorplan availability, our net leverage ratio was 1.1 times at the end of March. Our AutoNation USA expansion continues to provide a very attractive growth opportunity. During the first quarter, our five existing AutoNation USA stores generated over $3 million in pre-tax profit. As Mike referenced earlier, we plan to open five new stores by the end of this year, and 12 new stores in 2022, targeting over 130 total locations by the end of 2026. We're also excited to welcome Peacock Automotive Group to the AutoNation family. We will continue to look for attractive acquisitions to complement our portfolio and meet our return thresholds. During the first quarter, we repurchased 3.8 million shares of common stock for an aggregate price of $306 million. We have approximately $892 million of remaining Board authorization for share repurchases and approximately 80 million shares outstanding. Looking ahead, we will continue our disciplined capital allocation strategy, utilizing our strong balance sheet, robust cash flow generation, and ample liquidity to invest in our business and drive long-term shareholder value. With that, I'll turn the call back over to Mike.

Thank you, Joe. We had another impressive and record-breaking quarter. We remain focused on delivering a peerless customer experience with industry-leading digital capabilities and outstanding associate interactions. Our commitment to the customer experience is why we're number one for the J.D. Power Dealer of Excellence Recognition Program for the third year in a row. Less than 2% of all U.S. franchise dealers achieve this honor. 78 AutoNation stores representing over 20% of our dealerships were recognized. Our associates did not let the pandemic interfere with their ability to provide a great experience. They were in the stores and any offices to meet the needs of our customers. I want to thank each of them for showing up every day for our customers and each other. With that, I'm delighted to take any questions.

Your first question comes from Rajat Gupta from JPMorgan. Your line is open.

Hi. Good morning. Thanks for taking my questions and congrats on a really strong quarter. I just had a question regarding the supply, the days supply. It dropped pretty materially from the fourth quarter to first quarter. You're obviously sourcing a lot directly from consumers and outside the auctions. Just curious as to how you see that more days supply at the end of the quarter impacting your second quarter growth? Are you able to retain the first quarter kind of growth into April? Do you expect that to continue during the second quarter, based on how strong the demand is? I'm just curious as to how much of a constraint the supply is right now for both the new and used? Thanks.

There is no question that there is more demand than supply, that is the headline. On the new vehicle side, the supply is tight, but shipments and production are disrupted with the chip crisis and will be for the rest of the year. But it's nothing like a year ago during the pandemic when we had the factory shutdowns. Our shipments this second quarter will be double what they were a year ago. So, it's on the margin as far as shipments. But the headline is more demand than supply, we've adjusted pricing to reflect that, and you've seen the improvement in our front-end growth. The demand for personal transportation is across the board from price points of $5,000 through $500,000, and we've aggressively moved to increase our availability in pre-owned. We have the capability to source 90% of what we retail ourselves, and that's a core capability. So, the marketplace is good in our combination to perform within that of a brand for experience, digital platform, and operating execution, which includes how we acquire and speed to market, and we can do it profitably. It is all to the benefit of AutoNation. We're in a very good position.

Got it. So it looks like the trends on like just the same-store comps here, and this is comparing versus 2019 level, have continued into April? Or have you seen any slowdown at all? Or is it still pretty solid?

The demand is very strong, and I've been saying it for over a year that there’s been a pivot, seismic shift, you pick the words. But the American spirit is that they want individual transportation, individual personal vehicles. They want to decide where they go, when, who's with them, who's been in the vehicle before them, and who's been in the vehicle after them. This demand shift towards personal vehicle is very strong. You also see it in the housing industry, where people want a bigger, more comfortable home with more electronics in it. The competition for chips between the home industry and the automobile industry underscores this. Of course, underpinning all this are very attractive interest rates for our customers. We expect demand to last for the rest of the year, with low interest rates continuing and the chip disruptions persisting throughout the year. So I think it continues.

Just to follow up on capital allocation, pretty aggressive buybacks here in the last couple of quarters. You have also started to ramp up some M&A activity. Can you give us a sense of how we should expect the balance of capital allocation to be going forward? I mean, do we see bigger pivots towards M&A? And on the M&A side, if you could comment on, what the pipeline is looking like, how the valuations are looking like, would be helpful?

Joe, can you take that please?

Sure. To start it out, we have extremely strong cash flows. In the quarter, we generated $278 million of free cash flow, so we're generating extremely strong cash. Our first priority is always going to be reinvesting in the business. We've communicated expectations on AutoNation USA, and a general timetable, and we can generally project about $10 million per store. In addition, we are going to continue to be opportunistic on M&A. We do have a high threshold for both financial and I'll call it strategic cultural fit. But we're very encouraged by what we're seeing in the marketplace. We remain disciplined and still believe that our stock represents an attractive value. Given our strong free cash flow and balance sheet, we expect to continue to have a balanced deployment across all these categories. Obviously, the hardest to project is the M&A, but that will be opportunistic based on the situation.

Our next question comes from Bret Jordan with Jefferies.

I am thinking about your used retail sourcing going forward? I think you mentioned that was sourced in-house. But given the current environment, should we expect to see a shift in how these used vehicles are sourced? Should we expect to see more sourcing from off lease and direct to customers? Is there ample opportunity in both those channels?

Yes, we intend to source everywhere aggressively and have the capability to do all of that, and we have to be prepared to deal with any developments in the marketplace that would present a challenge. We're very excited about our direct purchases from consumers, which are now running over 5,000 per month. We expect to continue to grow that. Our ability to acquire pre-owned is a core capability. More importantly, we have a system and a process that we can recondition to a very high standard, both cost-effectively and very quickly, and have them frontline-ready. Therefore, we run a very high turn rate on our pre-owned inventory. We're in a good place with the brand, all our pre-owned is one-priced which consumers love. We have a great digital platform where everything is listed. And we have a speed to market and a core ability to acquire pre-owned. Therefore, we're very confident and optimistic about the future of our pre-owned business. Hence, the decision to lay out the additional years of our investment in the USA stores that will take us to 130 USA stores in operation by the end of 2026.

Okay, great. And thinking about SG&A growth, Q1 was another really great quarter in that respect, and obviously a portion of that is due to the higher gross profit you're putting up. But it looks like you updated expectations for the year to 65% from, I think your prior target was below 68%. I'm just wondering what opportunities you're seeing there that contribute to that updated outlook?

Joe, could you please take that?

Sure. We're really seeing the deployment of our digital tools both in the stores and in the back office really helping, where we're seeing greater leverage both in overhead and compensation at advertising. So looking across all three categories, we've seen significant improvement. The only difference is very little, comp which actually increased, which is understandable given the strong growth. But if you look at the underlying drivers, we've continued to see the benefits of strict discipline, fewer heads, lower spending on advertising, and lower discretionary spend. When we look out for the rest of the year, we have a high degree of confidence that we can draw that into that 65% range and below. It's really leveraging the tools and maintaining the discipline on costs going forward.

Your next question comes from Stephanie Benjamin with Truist.

I think following up on the question that was just asked. I wanted to hear a little bit more about the updated USA store investment I believe expanded in store count, but it sounds like you accelerated the timeline as well. Could you elaborate on what happened in the last couple of months that gave you the confidence to accelerate the plans with the performance of your existing stores and the overall market?

So the performance of the existing stores is outstanding and continues to develop really well. Joe, I think the operating profit of the existing stores was over $3 million for the quarter. Is that correct?

Correct, exceeded $3 million.

As far as what we announced, we had already announced 2021 and 2022. I think there's only a slight difference in the store count in those two years. What we announced today was what we're building from 2023 until the end of 2026. That's just an expression of our confidence that we have this combination figured out. The brand, one price, digital platform, operating skills in the market, USA stores serve as both an acquisition point for vehicles and reconditioning center for pre-owned, facilitating speed to market. We're able to build those very cost-effectively, and with a reasonable ramp to profitability. Joe, what would you like to add to that on USA stores?

I think the only thing I would add, Mike, is the success we've had in procuring vehicles, which is where it all starts. If you go back just a year, 80% of our procurement was self-sourced. In Q1, we are up to 90%. The skills we've learned in procuring vehicles directly from customers really differentiate us in the marketplace and something we think we can leverage going forward.

Great. That's really helpful. Do you feel like you saw any impact this quarter from the weather events in Texas? Could you quantify that in any way or do you feel like most of that was recovered at some point later on?

Yes. I think I said at the time that it was a huge challenge for Texas, but they are one of the most resilient states in the country. They were able to recover quickly. Whatever disruption we had, we were able to recover from. Joe, you would know the actual numbers, but there wasn't material impact one way or the other.

There really wasn't. If anything, we did better than the market in Texas, demonstrating our ability to navigate that.

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

Just on new car same-store units, up 22%, up 12% compared to 2019. Are you, in fact, outpacing the industry? What do you think retail did in the first quarter?

I think we are at or close to retail SAAR for new vehicles in the quarter. I think we've clearly outperformed on pre-owned. With limited supply, we made the decision on new to hold margin. There is no reason to rush vehicles out the door. You can't easily replace them. We've increased front-end gross margins on new considerably. But on pre-owned, while our front-end margins are excellent, we're focused on volume and feel the demand is there. Those customers who are looking for a different price point and aren't open to paying what's being asked for new vehicles get shifted to pre-owned, which we can replace. The headline is significant sustainable demand and we're moving with market volume while doing an excellent job on front-end gross margin on new, and going for volume in pre-owned, hence the +28%.

The SG&A target is now 65% or below, I'm curious what that assumes in terms of GPU. Do you think you'll be able to maintain these GPU levels as you move through the year?

Yes. Our front-end growth on new moved from 4% to 6%, correct, Joe? We've been at 6% before in the past. It's not unprecedented or unreasonable. There’s a discussion by the manufacturers about having discipline between demand and supply, which would be intelligent. We will see. The answer won't be clear until 2022, but there is going to be more demand than supply through the balance of this year.

Those supply challenges may be quite eased going further, or they could become more problematic as the year unfolds.

From my perspective, the worst was the factory shutdowns from a year ago. What we're facing now with the chip shortage is absolutely nothing like that. What's very interesting is how much of our incoming shipments are pre-sold. These vehicles are coming in and going out, indicating the level of demand. People are buying up the pipeline before they even get to the dealership. We've gone on our digital platform, AutoNation, where we show everything we have incoming. We're selling these incoming vehicles that have been produced. The predictability of arrival is not exact, but it's remarkable how customers have changed their way of buying in this sense. The demand is high, and they are willing to purchase incoming shipments and switch to pre-owned to secure their personal vehicle.

Your next question comes from John Murphy with Bank of America.

I just wanted to follow up real quickly on that comment you made about the automakers. The dealer body, including AutoNation's dealing is remarkable with the low levels of inventory. You're selling at the SAAR of 16.7 in the first quarter, mostly retail, not a lot of fleet. Do you really think that there's a productive discussion with the automakers to finally understand this balance? They're making a lot of money, too. Are they rumbling for that? Or is this still to be determined until you're confident?

I’ve been having this conversation for 30-plus years in my career, and for the first time ever, I can see a lively constructive conversation about this issue. It has always been theoretical. I would never wish for this pandemic; however, it serves as a case study of what the world looks like if one did it differently. This past year and all of this year demonstrate extensive benefits on both manufacturer and retail levels, with some thoughtful adjustments. Retail is performing well, and part of this is that consumers have excellent trade-in values. Given the current supply constraints due to the chip shortage, there's considerable demand and a relatively sluggish supply chain, but I believe we may see a new way forward.

Regarding acquisitions, it's evident that pricing is going up dramatically. How should we think about that in modeling it, especially when the cost of acquisitions is significant?

We generally think more about acquisitions as a multiple of EBITDA than revenue. It's typically in the high single-digit range, with returns in the mid-teens.

On your AutoNation USA expansions, you're expecting to reach 22 stores by the end of 2022 if my count is correct. That’s a significant pace, especially regarding human capital. How do you handle ramping up management and staff in these stores with significant inventory demands?

You are correct. There are two critical paths for sustaining that level of growth: management talent and building stores in the right locations. We’ve diligently worked for the past two years to solve this. It's why we waited to announce our plans until we were entirely convinced of our capabilities. Regarding human capital, we have an AutoNation General Manager University, which develops high-potential general managers within the company. This pipeline allows us to promote talent from within, ensuring leadership in the new stores.

I noticed parts and service haven't had much focus recently. With the new vehicle supply shocks, combined with competitive demand, when do you expect an inflection point in the parts and service business?

In principle, you're right. The number of miles driven over the past year was reduced, thus the pent-up need for maintenance was also reduced. However, we expect that a turning point will soon come. Joe, could you describe our first-quarter Customer Care growth as well as our outlook?

We saw positive growth in our first quarter Customer Care metrics. The customer pay area is recovering first, while warranty and collision services trailed due to the reduced miles driven. However, March showed our best month in a long time, and we anticipate continued monthly improvement across the sector.

It would be fair to say we're on the verge of a positive inflection point. How positive that is still remains to be seen. Is that a fair characterization?

I think that is fair.

Your next question comes from Adam Jonas of Morgan Stanley.

Mike, I’d like to ask you long-term questions because you have incredible experience and perspectives. Volvo is trying to go direct-to-consumer with their EVs. Can you see their motivation and do you think they could be successful? Or is this an impractical approach?

Thank you, Adam, for the question. I think they will face challenges and may ultimately revert to a more traditional model. Startups proposing direct selling, after initial enthusiasm, often lay out a reservation order bank without operational control over the vehicle delivery. While Tesla has succeeded in a direct model, their service infrastructure may struggle. The franchise model benefits manufacturers and retailers, offering strong returns for efficient retailers. In this evolving market, retailers with unique proprietary digital capabilities will have a competitive edge. I believe the ultimate winners will be those with scale, brand presence, outstanding digital platforms, and profitable operations.

My next question touches on state dealer franchise laws. If these startups find some success in direct sales, could that create a disruptive distribution model, leaving established franchises at a disadvantage? Are the current laws still relevant, or should they be revisited?

AutoNation has never objected to startup manufacturers going direct. If manufacturers also seek exclusivity from dealers in exchange for significant facility investments, some franchise protections are warranted. However, if exclusivity requirements are removed, there's less need for protective laws. We don’t seek to hinder startups; that’s their choice.

Your next question comes from David Whiston of Morningstar.

I know it's too early to discuss SAAR expectations for next year. However, with supply shocks leading to healthy demand, combined with low interest rates, do you see a possibility for explosive growth in new vehicle sales next year?

The principal takeaway is that demand exceeds supply. The pandemic caused a lasting change in preferences, with people increasingly opting for personal transportation. This transition alters how Americans choose to live and work. While predicting demand levels is difficult with current supply constraints, our pipelines indicate strong pre-sold shipments. Customers are willing to buy incoming vehicles directly. Overall, I foresee high demand across all market segments for the rest of the year.

Given the big bond maturities coming in '24 and '25 at 3.5%, do you have any plans to potentially refinance and extend the timeline given the current low rates?

We are currently evaluating that, but it's not a priority in the current environment.

There are no further questions at this time. Mr. Jackson, I'll turn the call back over to you.

I want to thank you for joining us today, and for all your questions. I also want to thank all our associates who put on their masks every day and come to work. Just imagine, through this entire pandemic, 95% of our associates were physically at work to take care of our customers. I'm deeply grateful for this outstanding performance and for the four record quarters in a row, which wouldn’t be possible without the efforts of our associates. At this point, 50% of them are vaccinated. We're working hard to ensure everyone who wants a vaccination can receive it, and we look forward to the day when we no longer have to wear masks.

This concludes today's conference call. You may now disconnect.