Autonation, Inc. Q1 FY2024 Earnings Call

Welcome to the AutoNation First Quarter 2024 Conference Call. My name is Carla, and I will be coordinating your call today. I will now hand you over to your host, Derek Fiebig, Vice President of Investor Relations. You may now begin.

Thank you, Carla, and good morning, everyone. I'd like to welcome you to the First Quarter 2024 Conference Call for AutoNation. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call to questions. Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private 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 of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website located at investors.autonation.com. With that, I'll turn the call over to Mike.

Yes. Thank you, Derek, and good morning, everybody, and thank you for joining us today. I'm going to start on Slide 3, and as usual, provide some opening remarks before Tom takes you through our first quarter results in greater detail. Consumer demand for vehicles in the first quarter was robust. In fact, this is the first time we had a quarterly increase in both new and used vehicle sales since the second quarter of 2021. Now, specific to new vehicles, you might recall that new unit sales were up 8% in the fourth quarter and now we're up 7% in the first quarter. As you know, new vehicles start the flywheel of our various revenue streams. So these continued strong trends are certainly encouraging for our future. Now as expected, the average selling price for new vehicles decreased 5%, resulting in a new vehicle revenue increase of 2% for the quarter. New vehicle margins were down $325 on a sequential basis, modestly better than the rate of decline we experienced in the fourth quarter and the rate I previously signaled for the first quarter. The new vehicle supply chain is in the final stages of recovery, and our inventory is also nearing normalized levels. That does continue to be a wide range of inventory by modeled make and segments, with some approaching stock levels. New vehicle inventory in terms of dollars increased approximately 5% since the beginning of the quarter, compared to a rate of sequential increase of around 25% for the past 8 quarters. You may see that as a signal of a declining rate of increase of new vehicle inventory on the ground. For used vehicles, same-store units decreased 2% from the same quarter a year ago, while total units were up 2%, reflecting the growth of AN USA stores in the year. Sequentially, used vehicle units were up 6%. Now in the fourth quarter earnings release, we discussed the market factors impacting our used vehicle business, including type availability, a return to historical depreciation patterns, and lower demand in higher-priced vehicles. We also discussed our planned action to align inventory levels and the churn rate of the market and shared our view that used vehicle PVRs would improve late in the first quarter. While the same market factors prevail, I'm pleased to note that the team has completed the inventory alignment actions and we have experienced improvement in unit profitability in each month of the first quarter as we had expected. The first quarter PVR of $1,473 was better than the fourth quarter, and we are encouraged with the mass PVR exit rate. Customer Financial Services was again a strong point in the quarter. Our product attachment rates were solid and our team continued to effectively navigate a challenging interest rate environment. After sales delivered another outstanding quarter, congrats to the team, well done. Total store revenue was up 8%, but not evenly across all product categories, and gross profit, as you can see, was up 9%. The greater complexity of vehicles is leading to higher values per repair order, which coupled with an increased number of repair orders from a year ago, resulted in an excellent total performance. The strength of our balance sheet and cash generation continues to give us optionality on capital deployment. CapEx was stable for the quarter. We ended up passing on a number of M&A opportunities that did not meet our return requirements. But make no mistake, our appetite and capacity for acquisitions in our core space is strong. Also, we continue to balance share repurchase opportunities with targeted leverage levels. As of yesterday, we have repurchased $250 million of AutoNation shares in 2024, reducing share count by another 4% since the beginning of the year. Our Board of Directors has approved an additional $1 billion under our share repurchase program. Now aside from the solid quarter from a financial perspective, there are a few other highlights I'd like to touch on. We continue to focus on developing our offerings that enable us to realize a greater share of our customers' transportation spend. AutoNation Finance originated over $160 million of loans during the quarter, and the portfolio balance now exceeds $560 million. We also continued with the rollout of our AN USA footprint with four store openings during the quarter; three were in Florida and one in Nevada, adding density to these markets and bringing our store count to 23. Our business model is clearly resilient, working well, and we continue to deliver strong financial performance. This performance is, of course, made possible by our 24,000-plus dedicated AutoNation associates who take care of our customers every day. With that, Tom, I'm going to pass the call over to you.

Thank you, Mike. Turning to Slide 4 to discuss our first quarter P&L. I'll cover this page in summary fashion, then we'll jump into the individual components on some of the later pages. Total revenue increased 1%, with the growth standing out in parts of service at 8%. Our growth in new vehicle revenues was largely offset by similar declines in used vehicle revenues. Gross profit of $1.2 billion or 18.5% of revenues was, as expected, down in nominal dollars from 2023. The growth in our high-margin parts and service business partially offset the impact of declining new and used vehicle unit profit. Adjusted SG&A was relatively stable at $786 million. Core spending was flat, offset by higher spending for our expanded store footprint and advertising to aid our growth initiatives, as well as used vehicle acquisition efforts. This resulted in an adjusted operating income of $348 million for the quarter, which ended at 5.4% of revenue. Below the operating line, our first quarter results were impacted by higher interest expenses, mainly for floorplan debt, and benefited from lower income tax expense. First quarter floorplan interest expense of $49 million was up from $27 million a year ago, a reflection of higher rates and inventory levels as expected. Net of OEM incentives, which are included in gross margin, new vehicle floorplan expense changed from a benefit of $4 million in 2023 to a cost of $15 million in 2024. Income tax expense for the quarter was $63 million compared to $93 million in 2023, reflecting lower taxable income and a slightly higher tax rate. All in, this resulted in net income of $190 million compared to a net income of $289 million a year ago. Our share repurchase activity helped to partially offset the EPS effects of the net income decline. Total shares repurchased over the past year decreased our average shares outstanding by 11% from Q1 2023 to 42.3 million shares at the end of the first quarter of 2024. This, of course, was a benefit for our EPS, which was $4.49 for the quarter, and historically, the return on our share repurchases has been quite attractive. Let me move to Slide 5 for some insights on new vehicle performance for the quarter. New vehicle volumes saw a 7% increase, with imports up 19% and a 4% decrease in premium luxury. Domestic unit volumes remained flat compared to last year. On average, new vehicle unit revenue fell by 5% this quarter, while new vehicle unit costs decreased by about 1.5%, leading to a moderation in new vehicle gross profit per vehicle retail. The $325 decline in new vehicle gross profit per vehicle from the fourth quarter was largely in line with our expectations and was less than the declines seen in previous quarters, despite the typical seasonal shift away from premium luxury brands in the first quarter. New vehicle inventory levels, including vehicles in transit, rose from 21,000 units at the end of March last year to 38,000 units this past quarter. In terms of days, total new vehicle inventory levels were at 44 days, increasing from 25 days last year and 36 days in the fourth quarter. We reported 69 days of domestic inventory, 44 days of luxury, and 30 days of import brands. In used vehicles, we had a volume unit increase up 2% from a year ago or minus 2% on a same-store basis. These rates improved significantly from the negative 4% total store and negative 8% same-store rates we experienced in the fourth quarter. Average used vehicle selling prices moderated year-over-year by 5%, reflecting the shift to lower-priced used vehicles. Our same-store unit sales of vehicles priced under 20,000 increased 5%. Mike discussed the encouraging outcomes in used vehicle PVRs in the quarter, driven by the team's realignment actions. Used vehicle inventory levels decreased from 39 days in the fourth quarter to 31 days in the first quarter, which we feel positions us well for the second quarter. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing, and speed, while optimizing customer satisfaction. Let me move to Slide 7 on Customer Financial Services, a great story, as Mike mentioned, particularly in a high interest rate environment where fixed monthly budgets can hinder customer ability to pursue value-added offerings. We've been able to maintain product attachment rates, and our gross profit PVRs declined only modestly, the majority of which is related to the shifting economics related to AutoNation Finance lending. As a reminder, the accounting for customer loans from AutoNation Finance requires that we eliminate the upfront fees from CFS PVRs. However, over the course of a loan with AutoNation Finance, the profitability tolerated is expected to be more than 2.5 times that of a non-AutoNation Finance model. Speaking of AutoNation Finance, Mike gave you some of the numbers. I'll expand on that a little bit here. The business is on track for over $700 million in originations in 2024, all from AutoNation stores, and we expect the portfolio to more than double during 2024. It is already the number one lender across the AutoNation enterprise. Its credit profiles, delinquency rates, and profitability continue to improve, and we're finding that AutoNation Finance is deepening the relationship we have with our customers. So far, this acquisition is proving out nicely with attractive cash-on-cash returns on equity. Back on PVRs, we've also seen an increase in leasing, which represented 24% of new sales in the first quarter compared to 17% in the same quarter of 2023. Let me move to Slide 8. After sales represented 46% of our total gross profit for the quarter compared to 40% a year ago and continued to grow. Total store revenue increased 8% to nearly $1.2 billion, and the same-store revenue increased 7%. Warranty and internal pay both experienced double-digit year-over-year growth, and customer pay is also tracking well growth-wise. The value for order is improving, and our total number of repair orders has also increased. Total store gross profit grew 9% year-over-year and by 8% on a same-store basis. Our gross profit margins were up more than 50 basis points to 47%, reflecting higher value repair orders and the scale benefits from an increase in the number of repair orders. This high-margin business is a key part of our continued engagement with our customers, and we're focused on capacity utilization and technician development to support the continued growth of the business. Importantly, our total technician workforce increased 5% from a year ago on a same and total store basis. On Slide 9, our adjusted operating income margin was 5.4% for the quarter, down from last year, but flat sequentially and up approximately 150 basis points from pre-pandemic levels. The decrease from 2023 mostly reflects the moderation in new vehicle gross profit per unit, which was expected, and is consistent with the industry as well as higher SG&A. The growth in SG&A reflects investments for growth, including higher spending to support used vehicle acquisitions, the larger AN USA footprint, increased advertising spend, and inflation. Normalized SG&A as a percentage of gross profit is expected to remain lower than pre-pandemic levels. Moving to Slide 10. Our adjusted free cash flow for the quarter was $257 million, compared to $368 million a year ago. As you can see, conversion relative to our net income improved. During the quarter, we sharpened our focus on our cash cycle times across the business, which helped to achieve these conversion results. We closely monitor metrics for our key operating cycles and have resources and programs in place to drive efficiencies in needs. We expect new vehicle inventory levels to increase as manufacturer supply chains improve; we are focused on continuing to accelerate the velocity with which we turn our overall vehicle inventory. During the quarter, we reduced our used vehicle inventory balances and the related non-trade floorplan financing by more than 15%. Consistent with the expansion of AutoNation Finance, our auto loans receivable related to loans originated in our owned stores increased by approximately $150 million in the quarter; as I mentioned, we expect continued growth in this portfolio. CapEx for the quarter was $94 million, level with a year ago. This resulted in adjusted free cash flow of $250 million and a strong conversion of 135% of our adjusted net income. Being a strong generator of cash provides optionality in terms of capital allocation. Slide 11 shows our capital allocation for the first quarter compared with a similar period in 2023. You'll notice a year-over-year increase of almost $400 million in net debt pay down and an almost $300 million decrease in share repurchases. Some of this shift is timing and that shortly after quarter end, as Mike mentioned, we executed more than $200 million of additional share repurchases. But we are mindful of the need to maintain appropriate leverage levels in this dynamic environment while pursuing maximum share in returns through a combination of M&A in our core space and share repurchases. At quarter end, our leverage was at 2.25 times EBITDA, near the low end of our 2 to 3 times target, and we continue to maintain our investment-grade credit rating. As Mike mentioned, our Board approved an additional $1 billion in share repurchase authorization.

Thank you, Tom. As you mentioned, I'll provide a bit more insight before we open the floor for questions. I want to share our perspective on the current situation and our primary focuses. Let's begin with the new side of the business, where vehicle supply is increasing. I believe inventory levels will rise throughout the entirety of 2024, although not as rapidly as in the past two years. We've observed that leasing and retail incentives are growing, yet both are still below pre-pandemic levels. This gives manufacturers some flexibility as the year progresses, which I view positively for new vehicle sales. There is ongoing conversation about poor product introductions and customer interest in those products. I think this will be a significant factor this year. It seems manufacturers are aligning their strategies more closely with demand, which we believe will be well received. Hybrids are performing well in the market, and our brand portfolio allows us to capitalize on this segment. Regarding new margins, we anticipate they will continue to moderate this year, likely in line with the trends seen in the last two quarters. However, I remain optimistic about new vehicle margins. On the other hand, used vehicle margins are still under pressure due to limited availability of late-model vehicles. Nevertheless, our team has adapted well, focusing on effective vehicle acquisition pricing and inventory turnover. As mentioned earlier, our organization is strong, and I expect it to keep performing well despite ongoing pressures from monthly payment fluctuations and manufacturer actions that affect unit sales. After sales will continue to be a major focus for us this year, and we are already seeing positive results from our team's efforts in the first quarter. While we experienced impressive growth in 2023, comparisons will become increasingly challenging as the year progresses. Nonetheless, we are committed to pursuing growth in dollar terms. Our focus will be on managing controllable factors, including cash flow and capital deployment. With that, let's move on to the Q&A session.

Yes. Carla, if you could please remind people how to get in queue for questions.

Our first question comes from John Murphy from Bank of America.

I have a couple of quick points. Mike, there's a strong emphasis on new GPUs. However, if you look at the front-end growth, specifically the figures for the quarter, there seems to be a somewhat inflated number for new GPUs, alongside a somewhat depressed number for used GPUs and then there's the F&I PVR. It appears there may be some potential to mitigate the pressure on new GPUs through the opportunity presented by the used GPUs. Could you elaborate on that and the potential upside in F&I? Also, how does a general manager navigate these aspects since they are responsible for managing the front-end gross and its components? It seems there could be a concentrated effort to counterbalance the pressure on new GPUs with these other elements. Essentially, can you discuss the opportunities on that front?

Yes. Thank you, John. Well, as we said, we're on the fourth quarter call, used, very much discussed in terms of used margin and our expectation. I was pleased with the way that it developed throughout the quarter. In my mind, we still have upside in terms of the actual pain margin, as I call it, on the vehicle. I’ll come back to the constituent elements of TIN and CFS and how we monetize the business. What's important is a lot of talk about availability of vehicles. One of the things that's changed, and I think I mentioned the agility of the business model, is our percentage sales of vehicles over 7 years old, in that part of the vehicle part is quite healthy and we haven't seen big reductions in terms of vehicle availability going up significantly. So if you look at our used GPU as a percentage, of margin in those vehicles, notwithstanding average selling prices have gone up. You will see an impact of those older vehicles. You are seeing an impact of those kind of older vehicles coming through. I think we took some good actions in Q1, and I believe we're in a good place. I see upside in our used vehicle margin. The CFS, obviously, is a big focus for us. What we ask our general managers and our sales managers to do is to take a very balanced approach in terms of how they view a transaction with the customer. First and foremost, we would love every single customer to walk out in the car of their dreams from our showroom. We aim to structure a great value package for them. Some of that puts emphasis on protection products, some on the focus on the part exchange trade vehicle and where they sit if it's financed. Ultimately, our general managers really focus on delivering good customer service, good market share to create a package that enables our customers to feel that they've got value for their transaction and can return to us. That gives you a wide range of margins spread between TIN and CFS. Outside of that, I would encourage you to visit one of our dealerships this weekend to buy a vehicle and let me know how it went.

I will address that. Also, regarding the buybacks, I acknowledge that your stock is very undervalued, but your approach in the first quarter was not very aggressive. However, after March, you became quite proactive in repurchasing shares. In the first quarter, the average share price was about $147 million, and after the quarter ended, it increased to around $157 million. I'm curious about the process behind the decisions on the timing and amounts of the buybacks. Is there a specific strategy you follow? It seems that even as the stock price went up slightly, you ramped up your buyback activity. I just want to gain a clearer understanding of the reasoning behind that.

I believe you've captured the essence in your previous statement. It's a minor detail. Our primary responsibility is to operate our business with our shareholders' interests in mind, which we take very seriously. When we review our history of buybacks over a reasonable time frame, it's clear we've been fortunate to capitalize on opportunities as we approached the end of the quarter. We were balancing potential M&A opportunities, the current state of our share price, and how we plan to utilize the capital generated from our free cash flow, especially during blackout periods. This strategy allows us to maintain flexibility that aligns with our goals of providing the best value to our shareholders. As we know, the market faced challenges towards the end of the quarter and at the start of this quarter. Thankfully, we anticipated this and implemented a plan that enabled us to return capital to our shareholders. That is our duty. Tom, do you have anything to add?

The only thing I'd add, John, is that the first quarter can be a bit unpredictable. We've had a blackout period lasting six weeks. Yes, we have plans in place that definitely include the grids you mentioned, and they have been implemented. Our opportunities were somewhat restricted, but it remains a vital aspect of our capital allocation strategy.

I had one on the AutoNation Finance. Any updated thoughts on how we should think about the cadence of the net loss there as you ramp up the portfolio through the course of 2024 and maybe into next year? And relatedly, how much equity are you putting in using your balance sheet to fund these receivables, if you can, in the near to medium term? I have a follow-up.

Thank you for the question. We are pleased with the progress of the acquisition this quarter. We financed over $160 million in new originations, and the delinquencies are performing well. The team is doing an excellent job, and the interest margins are favorable. Overall, we are satisfied with our trajectory. Building a portfolio involves stringent accounting for loan loss reserves, which requires us to book these reserves upfront. As we double the size of our portfolio, we will incur significant initial charges, and until the portfolio stabilizes, we will experience those losses. However, from a net margin standpoint, we are happy with the business's performance, exceeding our expectations for the quarter. Our penetration looks promising, and the outlook for the future is encouraging. I anticipate reaching a breakeven point by early 2025. Concerning funding, about 40% to 50% of our portfolio consists of receivables from before the AutoNation acquisition, which have different credit profiles. The funding levels for those will not match the favorable rates we expect once we fully transition to AutoNation-originated loans. I do not foresee significant changes in 2024, but I expect our portfolio to stabilize before the market shows interest. In 2025, I anticipate attractive funding for the AutoNation-related originations, likely exceeding 90% to 95%.

Got it. And just to follow up on parts and service, obviously, pretty strong trends here for the second quarter in a row versus like your peer group. Could you help us quantify how much of the year-over-year growth was driven just by price on the orders versus just the traffic at the stores? And how should we think about the growth rate, at least on a same-store basis for the remainder of the year?

Yes, Tom, if you can answer to the growth rate, if you can give the kind of where the growth came from. And then I'll give a little bit of commentary on how Christian and the team are thinking about these.

Yes. No, it was a solid performance. I mean, I'd characterize it probably as 1/3 related to traffic and volumes across the different revenue streams. I'd say the balance is higher value repair orders. The complexity of the orders that come through creates higher revenue and better profitability. So I'd say it's probably 1/3 of 2/3 is the way I think about it.

Just a little bit of commentary, if I may quickly on how Christian and the teams are thinking about the year. It was a good year last year. No doubt, we added about, I think, from memory, something like 300 net technicians across the various certification brands into the business that now excludes mobile service. That is just purely technicians really in our dealerships. We still have quite a lot of capacity in terms of buys; the investment AutoNation made in their dealerships over the years has created that bank capacity for us, which is great because there's certainly upside in the vehicle park. What we're working on is to try different things to see how we can penetrate older vehicles, bring them back into that franchise environment, and continue to grow. That will require additional technician resource. We are working hard on the career path for those individuals in the business to keep them because as you know, it's a very limited and heavily sought-after resource out there. We need to ensure that we continue to work on those elements as well as communicate well to the vehicle park to bring them into our showroom. So a big focus again for Christian and the team coming off of what I think was a good quarter for them.

Could you talk about the contribution of the mobile service initiative to parts and service? Is that gaining scale?

Yes. Let me cover that. So as you know, towards the end of last year, we rebranded that business. It's now AutoNation Mobile Services. We continue to integrate it into our market areas where we have density. We are still working through the technical integration of that business into all our legacy systems, but I would tell you that it is gaining traction in terms of its revenue. It doesn’t breakeven for us at this moment in time; we never expected it to for the balance of this year. However, it is introducing over 120,000 new customers to AutoNation who are completely new to us, and the programs we've put in place using it to support AN USA are beginning to kick in. That will take some time because that’s a slow burn. People typically need service about 10 to 15 months after purchase. However, it can serve as follow-up support for repairs. So far, AutoNation USA has sold about 75,000 cars; even if you consider that 50% of those cars find their way into one of our franchise businesses, it's creating quite a healthy part for Mobile Services to provide service and warranty for. I believe we're probably behind where I wanted to be with mobile services at this point, but I do see our traction improving and picking up, and I do see how it is beginning to introduce a lot of new customers as we wanted.

Okay. And then can you talk about any regional dispersion? I know there’s a lot of mixed dispersion, but are you seeing some markets performing better than others just as an economic indicator?

From my point of view, we don't see some markets particularly stronger than others. If you think about our core businesses in states like California, Arizona, Texas, and Florida, those states are particularly strong and have been very resilient. This time of year, as we come into spring, is heavy truck season. Trucks have been a big focus, particularly in the domestic franchises that we have. When I look across our businesses, I think we have further opportunity in Texas, but that's more about opportunity for us rather than market-related. Florida continues to be strong for us; our market president here is one of our key talents in the marketplace, and he always looks for improved performance. But Tom, unless I'm missing anything, I think we have a reasonably balanced performance overall.

I just wanted to ask one on SG&A. SG&A remains around that 65% or 66% area, which is understandable given some of the customer-facing initiatives that you're working on. But in a more normalized state, can you remind us where you'd like to see SG&A as a percentage of growth? And maybe what's the time frame you would aim for there?

Absolutely, Tom will be asked to do that.

Yes. You're right. I think short term, the performance in the quarter just north of 66%, I see that sustaining for the next few quarters. We have a fair amount of moderation in the new and used PVRs impacting gross profit. If you look at the SG&A itself, it's actually close to flat year-over-year from a spending perspective. It's set up nicely to have a decent correlation with gross profit when it comes to incentives, as compensation is probably the largest element of the SG&A. Our compensation structures reward excellent performance, and when there's moderation, that moderates as well. The other parts of SG&A have behaved very efficiently. We're seeing good traction in some initiatives that we have to reduce costs, areas where we spend indirectly on things like insurance, real estate, and others. So it's a good focus on driving productivity there. We will continue to have elevated marketing expenses as we pursue some of these new initiatives. On balance, I'd say mid-60s is where I would see SG&A on a longer-term basis as a percentage of gross profit. But again, with a good focus on keeping the fixed elements fixed.

Tom, I'm just going to add a little bit more here to Doug. Just to pick up on that, obviously, there are trade-offs in terms of some of the investments that we're making. Although total SG&A on a dollar basis, Tom provided the right perspective on that. What we've seen is increased investment in certain areas to drive our business. For example, we've made progressive investments over the course of last year and continue into this year in courtesy and loaner vehicles as we try to grow our service offering, which has benefited after sales growth. But we have also seen some reductions in terms of the investments we're making in some of our new initiatives. We spent a reasonable amount of money investing in our micro lease business, for example, last year, and that's now at a stage where we’re going to integrate it more into our business, reducing the standalone investment. We traded that investment for other areas such as courtesy cars. We're trying to balance investing in new initiatives and ensuring that the core business has what it needs as things become more available. Over the last few years, we had very tight vehicle supply with courtesy cars under pressure, but that's easing a bit. We're now able to provide this service to our customers. Additionally, we're making investments in our people, where we’re seeing not just inflationary increases but also additional measures to reduce turnover and improve engagement within our team. It is a balance, but it stays within the range Tom mentioned, and I hope that color helps as well.

No, excellent. That's great detail. I appreciate the detailed answer here. Just a quick one on CFS too. You said there are good attach rates there, about $160 million in new loans this quarter, and the portfolio is now at about $560 million. Do you expect a similar cadence going forward on originations and penetration? Or how should we think about that growth as we progress through the rest of the year into next year?

Great question. Doug, I don’t think you can expect the portfolio to double every year. We are dealing with a captive market, which consists of about 300 AutoNation stores. The goal is to achieve as much penetration as possible on the financing business, but there is a limit to that. I do think that in the earlier years of AutoNation Finance, you'll see outsized growth rates. However, I believe the portfolio doubling this year is not mathematically feasible. While we can expect good growth, I anticipate that once we get to a normalized portfolio size and we begin to execute some securitizations, you will see some nice accretion from an earnings perspective once we stabilize. We are fully invested in this and it's highly supported by our operating teams; it's improving the relationship we have with our customers.

Yes, it’s massive. That business has significant SG&A leverage. The infrastructure is all set. It’s about increasing the throughput in a very deliberate and thoughtful manner.

Can you just remind us your latest thinking on where new gross profits go? I think the comments in the past suggested it would return to historic levels on a percentage basis. Is that still the thinking? And any concern we may overcorrect as things continue to normalize?

Yes, Colin, thanks for the question. I'll answer this one. As I think about new vehicle margins, there are a number of dynamics I will briefly touch on. You’re right regarding percentage margin. What you’ve seen since 2019, the pre-pandemic year, is a significant increase in ASP. Although I see ASP moderating going forward as mix returns to pre-pandemic levels and OEMs gradually increase their incentives to stimulate demand, I don’t see ASPs returning to the 2019 level. Therefore, if we are able to maintain the percentage margin, it means from a dollar perspective on a per-unit basis, we should expect higher dollar margins than we saw pre-pandemic, even if we return to that percentage margin you mentioned. Transitioning as an industry into higher levels of electrified vehicles will continue to have an impact. TIN margins specifically were adversely affected, especially in fully electrified vehicles, as OEMs, dealers, and all of us are trying to stimulate take rates. That said, as I mentioned at the beginning of my opening comments, I believe we're thinking favorably about margins based on the balance I just described. However, it is a dynamic situation that will impact our business until OEMs can lower production costs for those vehicles. On the positive side, leasing rates for electrified vehicles have doubled in the past 12 months, which — in my opinion — better balances the contribution to the ASP from those vehicles that customers are willing to accept.

How does the profitability of certain brands look now? Have they returned to a normalized level of profits, and is this consistent with the idea that, in percentage terms, they are similar to pre-COVID levels for those approaching full recovery?

It's very fluid at this moment in time. If you look at our portfolio, we have 31 brands across our portfolio, providing a broad view of the marketplace. There are manufacturers whose days of supply are not back to 2018–2019 levels, from this perspective, but neither is the overall new vehicle market. We’ve observed different dynamics in margin by OEM, still driven by the supply and demand curve as OEMs successively replenish their pipeline and increase the mix on the ground. You've seen an increase in their incentive offerings through leasing rather than pure finance, which has had an incremental impact on our margin, reflecting in our P&L. However, observing our net result suggests that even with a significant increase in supply that will continue to grow from a dollar perspective per unit, its moderation will occur during the remainder of this year. I don’t see anyone quite yet back to precisely where they were in '18 or '19.

And that was our final question. I will now hand you back over to Mike Manley.

Yes. Thank you, everybody. Thank you for taking the time to join today's call. As we mentioned, I think AutoNation once again delivered solid operating results in the quarter. Our efforts also resulted in strong cash conversion, which provides us with the flexibility to deploy capital for attractive returns. We will continue to invest in the growth of our businesses. We look to optimize our operations, build on the fantastic footprint and portfolio of stores we’ve built. In closing, I would say that although I expect 2024 to bring its normal mix of headwinds and tailwinds, I believe the AutoNation team is exceptionally positioned, focused on our goals of delivering great shareholder returns. Thank you.

And this concludes today's call. Thank you for joining. You may now disconnect your lines.