Good morning. Thank you for joining the AutoNation second quarter 2024 Earnings Call. My name is Elissa, and I will be your moderator. I will now turn the call over to our host, Derek Fiebig, with AutoNation. Please go ahead.

Thank you, Elissa, and good morning, everyone. Welcome to AutoNation's Second Quarter 2024 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call to questions. Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private 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 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.

Thank you, Derek, and good morning, everyone. Thanks for joining us today. As I mentioned in today's press release, the CDK outage masked what was developing into a very positive quarter for AutoNation. April and May new unit sales were up about 5%. Used unit sales were flat or accelerating in June. After sales growth was consistent with first quarter trends and margin trends in many of our business lines are moving positively, and I was certainly encouraged with where the quarter was sitting when the CDK outage hit us on June 19. Now, as usual, Tom is going to take you through more details of our performance during the quarter in his section, but I did want to give you a summary of the scope of the impact on our business. Before I do that, however, I think it's important to state that as of the last week of July, the incident with regard to its operational impact on our business is now behind us. Now to give you a sense of scope, virtually all of our business processes, including CRM deal processing, financial services, inventory management, after sales systems, and accounting, were all impacted. Naturally, we worked with each of our business units to put in place interim solutions, some of which were off the shelf and some of which had to be developed. Each solution returned our business to some level of functionality and productivity, but the workaround processes were largely manual. For example, we manually processed close to 60,000 repair orders during the outage, which certainly slowed things down. Main functionality of CDK was brought back online in late June. However, some ancillary integrations have only recently been restored. As a direct outcome, our second quarter results were adversely impacted by approximately $1.55 per share, which includes the lost revenue and margins during the outage as well as certain one-time costs incurred, including a pay guarantee for our variable compensation-based associates. Notwithstanding the aforementioned, there were a number of really encouraging areas in our performance in the second quarter, which I'm going to highlight. Let me start with new vehicles. You can see that margins are stabilizing. After two quarters of sequential margin decline of more than $300 per quarter, second quarter margins declined to $3,108, or $220 during the period, and were basically flat from May to June. For the quarter, new vehicle sales were down 2%, but even with the outage, we grew units of our import brands by 6%. In used vehicles, total used vehicles for the quarter decreased by 8% from a year ago on a same-store basis, and total units were 5% lower, benefiting from the growth of our AN USA footprint. To date, we've opened four new AN USA stores. Used car demand remains relatively strong and certainly through the quarter, although demand by price point changed to move into lower price bands. Our pace of used car inventory sourcing slowed significantly in the second half of June, now improving, and I expect it to return to normal levels of used car inventory in the second half of August. Our PVRs continued to recover in the quarter, increasing by $165 on a sequential basis. Earlier this year, we discussed the actions our operating teams are taking to better align inventory and increase turns, and I'm pleased to note the continued recovery in margins, which is not coming at the expense of a slowing turn rate. Customer Financial Services, or CFS, continued to deliver in the quarter. We saw some moderation in products sold per unit sale, which dropped approximately 10% from last year. However, we progressively took actions to address this, and we've seen an increase throughout July back to our considered normalized levels. As part of our CFS strategy, we remain focused on driving penetration of automation finance. ANF originated over $240 million of loans during the quarter, almost four times higher than the second quarter of 2023, and the portfolio balance now exceeds $700 million. For our shareholders, this means a shift to a model that, on a lifetime basis, is 2.5 to 3 times more profitable than the traditional third-party finance offering. While this focus can have a short-term adverse impact on CFS PVRs and cash flows, we're pleased with the enhanced long-term value creation by the more regular contact with our customers that this model naturally provides. After sales delivered another good quarter, tracking around 10% growth through May, but it ended basically flat as a result of the loss of productivity in the second half of June. During the quarter, we improved service effectiveness and delivered a positive mix shift, enabling a year-over-year 60 basis point increase in gross margin to 48% for the quarter. This business represents close to half of our profitability and is a key part of our continued engagement with our customers. We continue to focus on technician development, productivity, retention, and capacity utilization to support continued growth of the business, which we expect to deliver increasingly in the second half. Importantly, our total technician workforce increased by 3% from a year ago, achieved in a labor market that remains very competitive. We also joined forces with the U.S. Army to create job opportunities for soldiers through our partnership for your success program. The strength of our balance sheet and cash generation continues to give us optionality for capital deployment. As planned, we're spending more modestly on CapEx. To date, through the second quarter, we purchased $350 million of AutoNation shares at an average price of $1.59 per share, reducing our share count by more than 5% since the beginning of the year. Our leverage remains within our targeted range. Inventory levels of new vehicles are almost fully restored to pre-COVID levels, and I'm happy with where we're positioned in our new vehicle business. As such, I'm expecting to recover our market share in the second half of the year. While new vehicle sales generate a small portion of our gross profit, around 16%, they start the flywheel for all our other businesses, which we are focused on. We acquired trade-in sellers used, we attached product penetration and finance offerings, leading to aftersales business. The continued strong trends for new vehicle sales are encouraging for that. With that, I'm going to hand over to you, Tom.

Thanks, Mike. I'm turning to Slide 4 to discuss our second quarter P&L. Our total revenue of $6.48 million was nearly identical to the first quarter, despite the outage. As Mike mentioned, we were tracking above expectations across the enterprise when the outage hit during one of the highest volume periods of the quarter. When you combine this with the expected year-over-year normalization in vehicle selling prices, our revenue decreased 6% from 2023. Gross profit of $1.2 billion was 18% of revenue and decreased 3% on a sequential basis, reflecting the productivity drag from the outage. As Mike mentioned, the encouraging margin rate trends. Gross margin rates improved 60 basis points from the first quarter in both the used and aftersales businesses, and the rate of PVR moderation in the new business, as Mike mentioned, was also encouraging. Adjusted SG&A was relatively stable at $782 million compared to $786 million in the first quarter. This resulted in adjusted operating income of $319 million, just under 5% of revenue. Below the operating line, our second quarter results were impacted by higher interest expense, mainly for floorplan debt, and benefited from lower income tax expense. The second quarter floorplan interest expense of $54 million was up $21 million from a year ago as expected, reflecting higher inventory levels and, to a lesser degree, higher interest rates. As a reminder, we reflect floorplan assistance received from OEMs in our gross margin, which was slightly down from the second quarter last year. Therefore, net of OEM incentives, the new vehicle floorplan expense changed from a benefit of $3 million in 2023 to a cost of $21 million in 2024. Our second quarter adjusted net income excludes the $43 million of direct costs associated with the CDK outage, and last year's second quarter adjusted net income excludes $16 million of losses from hail storms and natural catastrophes. All in, this resulted in adjusted net income of $163 million compared to $285 million a year ago. Mike talked about our share repurchase activity, which helped to partially offset the EPS effect of the net income decline. Total shares repurchased over the past year have decreased our average outstanding share count by 10% to 40.7 million shares in the second quarter. Let me move to Slide 5 for more color on new vehicle performance for the quarter. New vehicle unit volumes were tracking at approximately 5% growth through May but ended the quarter down 2%, including an increase of 6% for imports, a 5% decrease in domestic, and a 10% decline in premium luxury. The outage disrupted vehicle sales, inventory, and customer relationship management functions in June. We are encouraged by customer demand indications, vehicle supply, and manufacturing support, including manufacturing incentives such as low interest financing and rebates. On average, new vehicle unit revenue decreased 3% in the quarter, while new vehicle unit costs increased modestly, resulting in moderation of new vehicle PVR. As Mike mentioned, we are encouraged with the stabilization of our new PVRs, with a sequential decline of $220 being more modest on an absolute and relative basis than we've experienced over the last several quarters. The new vehicle supply dynamics have significantly improved. New vehicle inventory levels sit at 47,000 units at the end of June, representing 67 days of sales, up from 44 days at the end of the first quarter. Excluding the impact of the outage, we estimate that we would have been closer to 50 days of sales at the end of the second quarter, which continues to track below the mid-60-day levels pre-COVID. Turning to Slide 6 on used vehicles. We were tracking at flat year-over-year volume through May but ended with a unit volume decrease of 8% same-store from a year ago and a 5% decline on a total store basis. This reflects the outage disruption on our vehicle sales, inventory, and CRM functions. Average used vehicle selling prices moderated year-over-year by 5%, reflecting the shift to lower-priced used vehicles. Demand for those lower-priced used vehicles remains resilient. Total unit sales of vehicles priced under $20,000 increased by 4% from a year ago. Mid-priced vehicles were down 5%, and vehicles over $40,000 were down more significantly. With the OEMs taking actions to improve the affordability of new vehicles, there has been some shift away from higher-priced used vehicles. Mike discussed the encouraging outcomes in used vehicle PVRs in the quarter, reflecting the actions we took to better align used vehicle inventory with market demand and optimize pricing. While unit profitability was down year-over-year due to the mix shift to lower-priced used vehicles, these actions helped to increase unit profitability by $165 on a sequential basis. Used vehicle inventory levels are at 30,000 units at the end of June, down 15% from a year ago. This represents 34-day sales, up from 31-day sales at the end of the first quarter. Excluding the impact of the outage, we estimate that we would have been closer to mid-20s day sales, which is less than we would prefer. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing, and speed while optimizing customer satisfaction. I'm on now Slide 7. Customer Financial Services. The outage not only reduced new and used vehicle sales but further limited our ability to attach CFS product and finance offerings to the vehicles we did sell, as Mike mentioned. This was effectively a double whammy in an environment where high interest rates are already consuming more of our customers' monthly budgets. However, our outage workarounds were very effective in this area, and we were able to restore our product attachment rates and finance penetration, keeping CFS unit profitability within 3% of the first quarter rates. We are encouraged by our continued strong performance in this portion of the business. We continue to grow the AN Finance business, as Mike mentioned, which did shift about $85 away from CFS PVRs in the quarter. This is done with purpose, as the profitability to AutoNation over the course of an AutoNation finance loan is expected to be more than 2.5 to 3 times that of a non-AutoNation finance loan. Mike gave you some of the other numbers for AutoNation Finance, and this business is on track to exceed our original expectation of over $700 million in originations in 2024. Reminder, AN Finance now only underwrites AutoNation loans and targets a higher credit quality than it did prior to AutoNation ownership. It is already the number 1 lender across the AutoNation enterprise. Its credit profiles and profitability also continue to improve, with delinquency rates on the business underwritten since the acquisition in line with our expectations. AN Finance is deepening the relationship we have with our customers. This acquisition is proving out with attractive cash-on-cash returns on equity. Moving to Slide 8 on aftersales. We grew at a 9% same-store pace through May. Gross profit in June was down about 20% year-over-year, reflecting the challenges from the outage, and for the quarter, total store gross profit declined approximately 1% from a year ago. Our gross margin rate once again increased, reaching 48% for the quarter, up 60 basis points from both a year ago and sequentially, as the value per repair order has improved and we had a favorable mix shift to higher-margin categories within aftersales. To Slide 9. Adjusted free cash flow for the first half of the year was $519 million compared to $530 million a year ago. The conversion relative to our income improved. The timing of payments during the second quarter was affected by the CDK outage, although conversion would still have been higher than 2023 even without this timing impact. We remain focused on our cash cycles across the business, which has helped us to achieve these results. We closely monitor our metrics for key operating cycles and have resources and programs in place to drive efficiency in each. Capital investments were slightly below 2023 levels and consistent with the expansion of AN Finance. Our auto loans receivable related to the loans originated at our owned stores increased by approximately $370 million in the first half of the year, and we expect continued growth in this portfolio. Slide 10 shows our capital allocation for the first half of 2024 compared to the same six months in 2023. Being a strong generator of cash provides us nice optionality in terms of capital allocation. The debt and M&A lines stand out. For the first half of 2023, we were net borrowers by over $400 million to support M&A. In 2024, we've significantly moderated our borrowing activity in light of the lower M&A activity to date and lower share repurchases. We remain committed to the efficient allocation of our capital to both M&A and share repurchases, balanced with the need to maintain appropriate leverage levels in this dynamic environment to support our investment-grade credit rating. At quarter end, our leverage was 2.5 times EBITDA, which is in line with our 2 times to 3 times EBITDA long-term target. Now let me turn the call back to Mike before we address your questions.

Yes. Thank you, Tom. As you can imagine, we are pleased to move on, particularly from the end of Q2. While we do so, I think it's important not to allow some improvement performance trends we were seeing to be lost in the midst of the outage. I'm encouraged the business delivered reasonably close to what was a strong first quarter despite the difficult circumstances. Margin and cash flow are the highlights, as were the pre-outage volume trends. Looking forward, as I mentioned earlier, I view the current levels of vehicle demand we are seeing as positive. Coupled with our significantly strengthened supply of new vehicles, I expect to regain any share loss in the coming periods. We continue to work on improving our used businesses. This is a very high-term business, and its performance is largely in our control. We have strong self-sourcing capabilities and remain focused on turning the inventory quickly while being pleased with the quarter-over-quarter margin improvement. With that, I'd like to hand it over for any Q&A you may have. Thank you.

Alissa, if you could please open up the lines for Q&A.

The first question is from John Murphy with Bank of America. Please go ahead.

Good morning, guys. I just want to ask one very quick one before a second longer one. What was the reaction that your sales folks had to the $43 million that you paid despite the CDK disruption? I'm just curious how much goodwill that may have been generated with folks.

John, I actually was in the dealerships when we made the announcement. Given the nature of their pay and the dependency on productivity, there was a lot of concern within the businesses about the impact on them and their families. The center of gratitude and recognition and support from the organization was clearly seen when I was there, and we continue to see it in the business, not just for our sales teams but also for our technicians. Given all of the work that we have done, I think it was a very necessary and right investment for us to make. You saw the impact. These incentives are not cheap, but at the end of the day, I genuinely believe the businesses are created and delivered through the people that they employ and the people that they engage. For me, it was a necessary thing to do. Sorry for the long answer to a quick question.

No, I think it will pay dividends for some time to come. Just on capital allocation real quick. I mean, it seems like there might be a slight shift that occurs over time as acquisitions become more realistic on multiples. Might be more capital that goes towards AutoNation USA stores as a 0-year to 6-year-old fleet eventually grows in 1- to 2-year time. How do you think about sort of the shift in potential capital allocation over the coming quarters and potentially coming years as things shift and maybe your shares are less attractive relative to other incremental opportunities to allocate capital accretively?

I'll start, John, and then Tom, I'll ask you to comment on this question. There's no change in our philosophical approach to capital allocation, and it starts with providing the best returns we can give our shareholders. We have a consistent method of assessing investments we make, whether that's in our own stock or investments in dealerships. We are seeing a normalization of asset prices in the marketplace. They become more attractive than they were, for example, 12 months ago. The combination of returning capital to our shareholders and growing our organization organically or through M&A is important. Those two things working in tandem will ultimately deliver the best shareholder return in the future, and that is our focus. You'll see the same view on capital allocation. The resulting allocation of spend may change, but only because assets are attractive and synergistic to what we already have in place. Tom, do you want to add?

I would have been answering the same return-based focus. I don't see a shift. We are just focused on where we get the best returns. We don't think we're at our intrinsic value on the share price, and so that remains attractive to us.

I would definitely agree. Thank you very much, guys. I appreciate it.

The next question is from the line of Rajat Gupta with JPMorgan. Your line is open. Please go ahead.

Great. Thanks for taking my question. I had a question on parts and services. You gave us the April and May commentary, 9% same-store growth. I mean really, that's well above what we've seen at your peers. You mentioned the 3% growth in technician headcount. I'm curious if you could unpack that 9% a bit more in terms of how much is coming from price, mix, and just traffic? And how should we think about how July is tracking right now and expectations for the remainder of the year? And I have a quick follow-up.

When I reflect back, a large amount came from the incremental capacity we had. The aftersales teams in the dealerships really focused on service effectiveness, which is the penetration into the vehicle park. Traditionally, franchise retailers only get 50% of what's out there within a 7-year park and for us, that is the key focus. The majority of what we're seeing is incremental revenue and income per repair order because of some technology improvements we've made and better communication with our customers about their service needs. So, it's a combination of mix change on one hand and incremental revenue per repair order. Tom, any other color to add to that?

No, just to address the question of July, Rajat.

July has returned strongly in the aftersales, service, and parts business. I don't think we will recover all of the hours lost, but the aftersales teams have recovered quickly. I would say we exited July on a good pace.

Got it. That's very clear. And just a follow-up, a bit of a long-term question. With the experience you had with the CDK outage, I'm curious what this means for your long-term systems thinking? Are you considering adding more redundancy, factoring with other lenders, or increasing cybersecurity and cyber insurance expenses? Curious what's your thought process regarding IT expenses or costs structure moving forward?

Looking back, we can see which elements and systems have the most significant impact on us. AutoNation has heavily integrated with the DMS system to drive some productivity levels. This was essential regardless of whether it was CDK or another provider. It's important to evaluate systems and provide backup or redundancy to limit future impacts. We've identified areas for investment moving forward, particularly around CRM systems. Losing CRM systems significantly affects productivity. We aim to strike the right balance between necessary investments, recognizing the nature of the event we experienced was not something to fully structure our business around. Investments in cybersecurity are now an incumbent focus, and we're trying to derive the most beneficial learnings for the company.

It’s an interesting question. We're in the early days of understanding the implications of the outage. Our focus has been on restoring continuity. Considering that 75% of our profitability comes from service and CFS, we want those platforms to be trouble-free to avoid disruptions. Though our workarounds were effective, we see opportunities to enhance operations as we move forward.

The next question is from the line of Douglas Dutton with Evercore. Your line is now open.

Thanks for taking my question here. Just wanted to ask first on SG&A normalization in Q3. Are there still some latent effects from the lost productivity and lack of continuity early in July? Do we expect that percentage to stay elevated, or do we head back towards the more normal mid-60% range as a percent of gross profit?

Encouraging you to look at the overall spend on SG&A. We do think that the impacts we mentioned, roughly $0.76 of lost profit, distort the ratio of SG&A to gross profit. When you look at SG&A itself, it's almost identical from Q1 to Q2, which indicates we are able to hold the line. Probably 70% of it is variable and 30% is fixed. We've done well keeping the fixed part steady, and we expect further opportunities for productivity as we densify and centralize back-office activities. As volume returns, we aim to keep those costs flat and drive productivity in them.

Tom adds color to that. You will see elevated as percentages of SG&A for about 80% of July as we were returning to productivity levels that were affected by the ancillary systems and services integration. I view that behind us now as we enter August, but it will have residual effects on that percentage.

Okay. That's super helpful. I appreciate that, guys. And then just on PVRs, they continue to look better on a deceleration basis. Have you had any internal change in thesis on where these could land once we get to some fully normalized levels, say, when USR grows back above $16.5 million? Has there been any sort of internal discussion on that?

Yes, we always discuss our PVRs internally. I know some of you thought I was relatively pessimistic when I said our expectations are that they'll fully normalize to '19 by the end of the year. I’m moderating that view on our experience over recent months. There will be some continued moderation for the year, but not at the pace we saw before. The mix of battery electric vehicles vs. combustion and hybrid counterparts plays a role, as the margins on BEVs are significantly lower. You're going to see some moderation in our outlook for BEVs this year, which will also moderate our PBR outlook. In summary, we will see some moderation, but not to the level I anticipated early in the year.

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

Good morning, guys. On that PDR question regarding moderation, how much is mix driven? If you think about the outperformance of import vs. domestic, are you seeing maybe a slowing till deterioration of that prior rate, with products like Toyota that are in shorter supply outperforming and supporting PBR? Or is everything generally stabilizing?

There is a mix impact for sure. Year-over-year in the quarter, I estimate that mix contributed somewhere between $70 and $80 to PBR in Q2. I expect that to wash back out as we recover market share, particularly in our premium luxury segments. OEMs recognize they are where they want to be and may need to step into the marketplace to address that because dealers won't achieve the net transaction prices needed for volume momentum. There may be potential for mix improvements in Q3 and beyond impacting us year-over-year in Q2, but several factors play a role, including higher lease levels.

You got it right.

Okay. And then I guess the question is, you're seeing stability in used profits. Does that make you think about re-accelerating AutoNation USA? We didn't really talk about it much in the prepared remarks, but how does that look in the next couple of years from a growth strategy?

We are comfortable with the revised pace of openings. Last year's pace was too rapid, complicating our ability to operationalize openings and source adequate inventory. I would anticipate another 4 to 5 stores this year at maximum, totaling 10 to 11 openings. That's a pace we can absorb and connect into our processes. There are still interesting dynamics in the used market, as mentioned earlier, with important price bucket changes and availability issues. While our used vehicle inventory has dropped due to June disruptions, we're working to recover levels; sales volumes will fully recover once we achieve normal inventory levels.

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

This is Danielle Hogan on for Adam Jonas. So, my question is on vehicle affordability, which continues to be a problem for many Americans, with higher for longer ASPs and rates. What is your view on the state of the consumer? Is there anything you're seeing on the auto credit side that gives you concern?

Affordability is top of mind for many consumers entering the marketplace, whether for new or used vehicles. Our CFS performance has moderated slightly due to product attachment rates, which relate to managing monthly budgets. We see signs that consumers are under pressure from the current environment. We're noticing increases in delinquency rates, but they remain manageable and not as severe as last year. Still, we see a significant pressure on consumers. In response, we facilitate a mix shift in our used vehicle business. We are also observing increased leasing from OEMs, which helps affordability. OEMs are managing transaction prices to maintain momentum in new vehicle sales, addressing pent-up demand that will get released with the right pricing.

Got it. Thank you.

That concludes our question and answer portion. Mike, if you want to make closing comments here?

Thank you, and again, thank you for all your questions and for being on the call today. When we came into this year, I said I was certain that the year would continue to bring our normal mix of headwinds and tailwinds. The CDK outage was far from a normal headwind. As I stated earlier, the operational impact of the CDK incident is now behind us as we exit July. Our daily focus is on fully rebuilding momentum and regaining any share that we lost, particularly in that last period of June. I'd like to thank all of our associates and employees in the business, not just for their response to the outage but for the work they've done creating the momentum we saw through May. It's a pleasure to work with you all. Thank you for all you do every day.

This concludes today's AutoNation second quarter call. Thank you all for your participation. You may now disconnect your lines.