Autonation, Inc. Q2 FY2025 Earnings Call

Hello, everyone, and thank you for joining the AutoNation Inc. Q2 Earnings Call. My name is Harry, and I'll be your operator today. I will now hand the call over to Derek Fiebig, VP of Investor Relations. Please go ahead.

Thank you, Harry, and good morning, everyone, and welcome to AutoNation's Second Quarter 2025 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 will open 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.

Thanks, Derek, and good morning, everyone. Thank you for joining us today. I'm going to start on Slide 3. Obviously, we're very pleased to report an outstanding second quarter. We delivered material improvements compared to the second quarter last year, and the numbers were strong even after removing the year-over-year impact from last year's CDK outage. Our sales of new vehicles increased 8%, and we gained share in the markets we serve and grew sales by more than 5% on a sequential basis. This performance was led by our Domestic segment, which increased 19% from a year ago and 14% from the first quarter on a same-store basis. We also increased new unit profitability on a sequential basis across all segments. As was the case with the industry, our unit sales growth was strongest at the start of the quarter and moderated in May and June. And clearly, there was a pull ahead of sales in late March and April in reaction to the tariff announcement, and it stands to reason that some portion of that demand was pulled ahead from the latter part of the second quarter. Used vehicle gross profit increased 13% year-over-year as we benefited from stronger unit sales, stable unit profitability, and improved performance in wholesale. Our unit sales increased 6% from a year ago with stronger performances for the over $40,000 and under $20,000 price points. The team continued to do a great job acquiring vehicles through trade-ins and directly from the consumer through our We'll Buy Your Car effort. These channels accounted for over 90% of the vehicles acquired in the quarter. We ended June with over 28,000 used vehicles in inventory, which positions us well for the second half of 2025. Customer Financial Services gross profit also increased 13%, increasing on a per unit basis sequentially and year-over-year. We continue to attach more than two products per vehicle, with extended service contracts continuing to be the top offering. Our finance penetration is stable with around 3/4 of units being sold with financing. The momentum in After-Sales continued. We delivered record revenue and grew our gross profit by more than 12%, with gross profit margins expanding by 100 basis points to record levels. And Tom will take you through the details, but the results were strong on both the sequential and year-over-year basis. The sequential increase reflects one additional service day as well as improvements for our internal reconditioning, customer pay, and warranty was about flat. Now we continue to focus on our technician workforce by recruiting, retaining, and developing our technicians. And I do think the efforts are paying off. Our turnover has decreased, and technician headcount increased by about 3% from a year ago on a same-store basis. The strong momentum at AN Finance continued. Originations doubled from a year prior. And as the portfolio has grown, the team is delivering on leveraging its fixed cost base, enabling continued growth and profitability. During the quarter, we completed our inaugural AN Finance asset-backed securitization, and the transaction was very well received. We expect to regularly access this market as the portfolio grows. Our Q2 performance, combined with our share repurchases, helped us to grow our adjusted EPS by 37% from a year ago. This was the second consecutive year-over-year increase in adjusted EPS. Excluding the estimated impact from the CDK outage, adjusted EPS was still up mid-teens from 2024. All in all, a great result and performance by the AutoNation team. Now I know tariffs continue to be top of mind. And apart from the volume shifting I mentioned earlier, we saw limited additional impact in our Q2 results from tariffs. MSRP and invoice prices have been stable, and the June CPI report showed continued modest month-over-month declines in new and used vehicle pricing. We do expect the ongoing dialogue between our OEM partners and the U.S. administration to result in clarification and finalization of the auto tariff structures in the coming periods. Now this process also includes our OEM partners' full evaluation of supply chain footprints and planning to optimize tariff efficiency and to establish their forward pricing structures. We believe the objective of maintaining market share, particularly in critical segments, will align equally with the desire to offset any new tariffs. And as I said previously, we expect that AutoNation, to some extent, will be cushioned from many new tariffs by a cross-shopping effect, whereby demand for non-impacted or lesser impacted brands and models will potentially supplant those for more affected counterparts. Naturally, in this situation, we hold both sides of the trade with our broad portfolio of brands and models, which gives us a distinct advantage. To close, we're encouraged by some of the provisions contained in the recently enacted U.S. federal statute, including interest rate deductibility in auto loans and bonus depreciation for commercial enterprises. Although we're not forecasting a bonanza of new demand, every incremental action to encourage vehicle purchases is very welcomed by me and the team. Now I'll turn the call over to Tom to take you through our results.

Thank you, Mike. Let me kick off with a quick reminder that our second quarter 2024 operating results were adversely impacted by the CDK outage and that our second quarter 2025 operating results were adversely impacted by the tariff-related shift of volume into the first quarter. So with that, I'm on Slide 4 to discuss our second quarter 2025 P&L. Our total revenue for the quarter was $7 billion, an increase of 8% from a year ago on both the total and same-store basis. We achieved attractive same-store growth across the entire business, including double-digit growth in After-Sales and Customer Financial Services. We also achieved a 9% increase in same-store new vehicle revenue as we increased new unit volumes across all three segments. The same-store gross profit of $1.3 billion increased by 10% from a year ago. The year-over-year gross profit performance included same-store After-Sales growth of 13%, CFS growth of 13%, and used vehicle growth of 12%. The reported gross profit margin of 18.3% of revenue was up 40 basis points from a year ago, including a 100 basis point increase in After-Sales and a 50 basis point improvement for used vehicles, offset by the moderation of new vehicle unit profitability. Adjusted SG&A, 66.2%, improved as expected and was at the lower end of the 66% to 67% range for our ongoing expectations. Adjusted operating income margin of 5.3% increased from a year ago and from the first quarter. Below the operating line, floorplan interest expense increased by $9 million from a year ago; sorry, decreased by $9 million from a year ago, as average rates were down approximately 100 basis points, combined with lower average outstanding borrowings. Non-vehicle interest expense was approximately flat from a year ago. And as a reminder, we reflect floorplan assistance received from OEMs in gross margin. This assistance totaled $35 million compared to $32 million a year ago. So including these OEM incentives, net new vehicle floorplan expense totaled $9 million, which was down from $21 million a year ago. All in, this resulted in adjusted net income of $209 million compared to $163 million a year ago, up 29%. Total shares repurchased over the past 12 months decreased our year-over-year share count by 6% to 38.3 million shares, benefiting our adjusted EPS, which was $5.46 for the quarter, an increase of $1.47, or 37% from a year ago and $0.78, or 17% from the first quarter of 2025. Before I get into new vehicles commentary, I wanted to point out that our GAAP reported numbers included a non-cash impairment charge of $123 million after tax, or $3.21 per share. Our accounting policies require that we test our goodwill and intangible assets for impairment as of April 30 each year. The charge includes $65 million for our Mobile Service business and $54 million for our franchise rights related to nine stores, with 90% of that charge relating to a single domestic brand. Slide 5 provides some more color for new vehicle performance. New vehicle unit volumes were a strong point for the quarter, increasing 7% from a year ago on a total store and 8% on a same-store basis. Full store unit sales were up across our three segments, with Import units up 4%, Premium Luxury up 5%, and Domestic up 17%, reflecting favorable supply, better incentives, and good performance by our commercial teams. By powertrain, hybrid new vehicle unit sales, which is about 20% of our volume, were up more than 40% from the second quarter of a year ago. Battery electric new vehicle sales, which is about 7% of our volume, were up nearly 20% from a year ago, reflecting OEM actions with incentives and some pre-buying ahead of the termination of government incentives. Internal combustion engine new vehicle sales were up about 1%. Our new vehicle unit profitability averaged $2,785 for the quarter, in line with the first quarter. And unit profitability increased for all three segments on a sequential basis. New vehicle inventory ended the quarter at 41,000 units compared to about 44,000 units a year ago. This represents 49 days of supply, down 18 days from the second quarter of last year and up from 38 days at the end of March. While we don't expect the first quarter and second-quarter same-store unit growth of 7% and 8%, respectively, to continue into the second half, we are encouraged by the last couple of weeks of new vehicle sales activity after a slow start to July. Turning to Slide 6. Used vehicle retail unit sales improved on a year-over-year same-store basis by 6%, which was fueled by double-digit growth in lower-priced, i.e., less than $20,000 and higher-priced, i.e., greater than $40,000 vehicles along with more modest growth in our mid-priced vehicles. On a sequential basis, the number of used vehicle retail units increased by 3%. Average retail prices were stable. Used vehicle retail unit profitability remained stable versus last year and sequentially at $1,622 per unit. We remain focused on optimizing vehicle acquisition, reconditioning, inventory velocity, and pricing. Total used gross profit was up 13% from last year, reflecting the retail unit sales growth, stable retail unit profitability, and better wholesale results. Although our supply of used vehicles has been at its highest level since June 2022, supply availability remains a constant challenge relative to our sales ambitions, driven by lower new vehicle production during COVID. Thankfully, we continue to be competitive in securing used vehicles from our retail operations, including trade-ins, We'll Buy Your Car, service loaner conversions and lease returns. We source more than 90% of our vehicles from these channels and are encouraged by our used vehicle inventories heading into the second half of the year, as Mike mentioned. I'm now on Slide 7, Customer Financial Services. The momentum in CFS performance continued once again during the second quarter. Gross profit was up 13% on a same-store basis, reflecting an approximate 7% same-store increase in retail vehicle sales and a 6% increase in unit profitability. More than 70% of our CFS revenue and profit comes from product attachment, which remains strong at about two products per vehicle sold. Our finance penetration rate for the second quarter continued to be nearly 75% of vehicles sold. The 6% increase in unit profitability that I mentioned reflects increased profit per product contracts sold and higher product penetration. The continued unit profitability performance in CFS is even more impressive if you consider the growth of AN Finance, which, while superior in long-term profitability, dilutes our CFS unit profitability in the short term. Without this AN Finance dilution, our CFS unit profitability would have been approximately $140 per unit higher this quarter. Slide 8 provides an update on AutoNation Finance, our captive finance company. The business' attractive offerings are driving strong customer takeup, and we continue to expect strong ROEs in the business. During the second quarter, we originated $464 million in loans, bringing the year-to-date originations to $924 million, which is up more than $0.5 billion from the first half of 2024. We had approximately $150 million in customer repayments. The portfolio delivered interest income of $48.6 million in the second quarter, which is more than 80% higher than 2024, and operating income more than doubled. The quality of the portfolio continues to improve. Our credit and performance metrics are improving with average FICO scores on originations of 698 for the second quarter of 2025 compared to 675 in the second quarter of 2024. Delinquency rates, at quarter end, of 2.4%, are solid, down from 3.8% a year ago. That benefited from the sale of the mostly subprime legacy CIG portfolio. As the new portfolio continues toward full maturity, we expect the delinquency rates to normalize to the 3%-ish range. As Mike mentioned, we completed our inaugural ABS issuance in the quarter. Demand was very strong. We were seeking $500 million in financing, and we actually received $3.5 billion of confirmed offers, so 7x oversubscribed. This allowed us to upsize the offering by $200 million to $700 million. We're also pleased with the 4.9% weighted average coupon rate. Fixed-rate securitization also removes floating rate exposure for a substantial portion of our fixed-rate loan portfolio. Equally as important is the debt funding rate, meaning the portion of the portfolio that is funded with debt as opposed to by our own retained earnings. Higher debt funding rates lead to higher overall returns for AutoNation shareholders. The debt funding rate for the ABS transaction was 98%, which helped to bring the debt funding rate for the overall $1.8 billion portfolio from 74% at the end of the first quarter to 83% at the end of the second quarter. As we become a more regular issuer of ABS securities, we expect to further increase the debt funding levels of the overall portfolio, and we're planning for another ABS transaction later this year. We expect to continue using ABS funding as a portfolio financing vehicle, not a true sale of assets. So the finance assets will continue to be included in our consolidated financial statement. Moving to Slide 9, After-Sales, representing nearly half of our gross profit. The business continued its revenue and margin momentum, and gross profit was once again a record for AutoNation. Revenues were up 12% year-over-year on a same-store basis with increases in customer pay, which was up 10%; warranty, up 25%; internal work, up 14%; and wholesale, up 8%, all offsetting a 6% decline in collision revenue as that industry has struggled to offset a declining proportion of repair-to-replace insurance decisioning. After-Sales gross profit increased by 13% on a same-store basis from a year ago. The increase was driven by a 7% increase in the volume and content of repair orders and a 5% increase in the gross profit per repair order. For the second quarter, our reported After-Sales gross margin rate was 49%, up 100 basis points on a total store basis from a year ago, reflecting improved parts and labor rates, higher tech efficiency, scale benefits, and higher value orders. We continue to develop and promote our technician workforce. As Mike mentioned, the year-end technician headcount was up 3% from a year ago. I should say the quarter-end headcount was up 3% from a year ago on a same-store basis, and our technician efficiency continues to improve. We expect our After-Sales business will grow roughly mid-single digits each year. To Slide 10, adjusted free cash flow for the first half totaled $394 million or 100% of adjusted net income. And that's compared to $519 million and 140% conversion a year ago. As we mentioned last year, the CDK outage impacted the timing of certain payments in the second quarter of 2024, which resulted in higher adjusted free cash flow and conversion. We view conversion greater than 100% as healthy performance and remain focused on sustaining this level through cycle time enhancement initiatives as well as by prudent allocation of capital to CapEx. For the second quarter, our capital expenditures to depreciation ratio was 1.2x compared to 1.5x a year ago. We continue to expect healthy free cash flow conversion for the full year. And as previously disclosed, we submitted claims under our cyber insurance policy seeking recovery for estimated business interruption and related losses caused by last year's CDK outage. Earlier this month, we received insurance recoveries of $10 million related to these claims. We expect to receive additional insurance recoveries in connection with this matter during the second half of 2025, and we're accounting for these recoveries as income when they are received. On Slide 11, as we've discussed in the past, we consider capital allocation to be an opportunity to either reinvest in the business in the form of CapEx or M&A or to return capital to our shareholders via share repurchase. CapEx is mostly maintenance-related compulsory spending and it totaled $154 million for the first half of 2025, which was 15% lower than 2024. We continue to actively explore M&A opportunities to add scale and density in our existing markets. So far this year, we've closed on one transaction constituting two franchise stores, and we expect additional activity in the second half of the year. Share repurchases have been an important part of our playbook. Year-to-date, we purchased $254 million or 4% of shares outstanding at the beginning of 2024 at an average price of $164 per share. In our capital allocation decisions, we also consider our investment-grade balance sheet and the associated leverage levels. At quarter end, our leverage was 2.33x EBITDA, which was down from 2.56x EBITDA at the end of March and well within our 2x to 3x EBITDA long-term target, which gives us additional dry powder for capital allocation in the back half of the year. Now let me turn the call back to Mike before we address questions you might have.

Yes. Thank you, Tom. So we got off to a great start in the first half of 2025. And I think our quarter performance was strong both on a year-over-year and sequential basis. And I think we're enjoying strong performance across all of the business lines, as Tom just took you through. The work the teams are doing focused on both growth and efficiency is paying off. You can see the results in our operating performance and the cash generation. I do just want to make a couple of comments on the impairment that Tom mentioned, specifically around our Mobile Service business. Developing an independent mobile service offering has given us the ability to provide incredibly convenient service options to our customers. There is no doubt that it is and will continue to be very additive to our brand. It is also clear that it has to be done in an efficient and effective way. If not, particularly with a scarce and valuable resource such as technician labor, we will find better uses for that resource. Over the last year or so, it's been both a challenge and a learning experience. Now that we have a very clear understanding of how to run Mobile Service effectively in a way that we'll retain the majority of the convenience that we offer but contribute much more effectively to our income. Consequently, it's going to have a different growth profile than our original expectation, hence the technical accounting treatment. However, I have no doubt this business has the potential to bring significant benefits to our organization. I'm very pleased that it's part of our portfolio. It's helping to facilitate the growth of our emerging free service business. It is now providing flexible labor resources to our dealerships. It's allowed us to in-source a number of products and services that previously we had to subcontract. Excuse me, Derek. Not enough tea this morning so far. As you can imagine, from my point of view, and from the team's point of view, it remains a very important part of our growth, and the expectation now is that it will deliver a positive contribution as we progress into 2026. I'm really confident that we have the right team in place to do that. We have some excellent people working in this area. So with that, I'm going to, Derek, hand it over to you for Q&A. Thank you.

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

Yes, of course. The first question today will be from the line of Michael Ward with Citi Research.

Thank you very much. Good morning, everyone. AutoNation in the past has been less active than the other dealers on the acquisition side. But some of your comments, it sounds like maybe there might be some more opportunities. Could you just talk a little bit about what kind of flexibility you have, what kind of size you might be looking at, what the market is like, and what your priorities would be? Would you consider going overseas into the U.K. or some of those markets? What is going on in the M&A landscape from your perspective?

Yes, Mike, thanks for the question. I just have a couple of quick comments and then let Mike share his thoughts. But between M&A and repurchases, we've spent similar amounts in the first half of '24 versus the first half of '25, roughly $325 million to $350 million. On repurchases, given the environment and particularly with the tariff uncertainty, we're a little cautious post the tariff announcement. But as I said, that remains a huge part of our playbook. We have seen improvement in the M&A pipeline. Consequently, we built up a little bit of dry powder over the quarter and the residual effect, as I said, was an improvement in our leverage by 0.25 basis points, but we're committed to both share repurchases and M&A. It is a strong pipeline. Mike, is there anything else you want to add to that in terms of Mike's question?

I just think I'll add some clarity as Michael also asked about I think, scale and territory as well. We have a very clear picture of the density we want in marketplaces where we can really subtract the biggest benefit from the processes and the scale that we bring. So we're very focused on, if you like, tuck-ins in those marketplaces to continue to unlock those synergies, but I think we are much more reliable in terms of delivery after M&A. That doesn't mean we wouldn't look at a market outside of the U.S. But our anchor is always what happens to the earnings per share that we deliver to our shareholders. That has been our guiding capital allocation principle, really understanding the impact of that over time. So on the M&A, we obviously benefit from additional cash, and that gives us implications for leverage. We take that into account, but we're very focused on what is the most benefit we can deliver, not immediately, but over the medium to long term to our shareholders from an EPS perspective. Outside of that, Tom, I have nothing else to add.

Great. I wanted to follow up on Tom's comments on just the July pickup after a slow start to the month. Curious to get a thought, Mike, why that might be happening? What are you seeing out there in terms of just the consumer landscape? As we're also getting some certainty around the tariffs like with the Japan deal, hopefully, you'll get some more deals. How do you see the demand outlook playing out for the next few months? And relatedly, how do you see the OEMs reacting to these costs and what the implications could be for dealer margins in the second half? And I have a quick follow-up. Thanks.

First, good to hear from you. As we came into this year, I was kind of thinking a 5 to 10 improvement in size. I still think that we have seen fluctuations around that trajectory, but I still believe that's where we can end up. It's good to see that we're certainly in some tariff deals; that's obviously going to continue, and the major trading partners are still out there. I'm certain they understand the importance of getting to a conclusion. That will translate to more transparency in terms of the OEMs' actions and what they're doing. We're still a little uncertain in that area, particularly as we go into model year changeover, not just on new vehicle prices but also on parts prices. But I think what we’ve seen and what we discussed in the past will be the prevailing approach, and that is to try and maintain their competitive position in the marketplace on their critical models. Because of that, you will see price increases in the marketplace, but very, very measured and deliberate. You'll also see adjustments over time to OEMs' portfolios. From a margin point of view, I think the quarter is very interesting. We saw sequential improvements in our margin. But I do think that you will see stability for the balance of the year. That doesn’t mean to say that we are not going to see periodic changes. For example, we know that the best stimulus is going to come out in the marketplace. That is going to alter sales patterns and margin patterns for a period. There will be periods where you may see a slight improvement in run rate and volume followed by a slight decrease in run rate in volume, but I am optimistic for the full year. I also believe there will be some margin stability for the year, but I do think there will continue to be fluctuations around that general trajectory in both of those areas. From an inventory position, we're positioned well. I thought towards the end of last year, we may be too low in our day supply, but the team managed that really quite well, particularly on new vehicle inventory. Our used team and our general managers and regional operators are building inventory on used because they are optimistic about the used car market. We're a relatively small player and they have aspirations to grow that. We're going to support them and see how well they do and give them resources. We saw, as Tom went through in the results, good results on the used side. That's how I'm viewing the back half.

Just on July specifically. If you look at the first half of the year, it's really robust. I mean, 7% in the first quarter, 8% in the second quarter in terms of unit growth. April was also very strong. As Mike mentioned, we gave back some of that pull-in in May and I think also a bit in July. As a result, I think the first half may have felt that impact. It seems to be settling into the mode that Mike mentioned. It'll take a few more weeks to get under our belt, but it does seem to have turned in a good direction for us.

Understood. That's helpful. And obviously, great execution on the used car side. Just a quick follow-up on AN Finance portfolio ramp. Any updated thoughts on just penetration targets for the rest of the year? How should we think about the cadence there? And any changes to the outlook around your profitability in that segment?

No, I think we do fully expect the business to continue growing its penetration. We have some new internal initiatives that are in place to drive that even higher, mostly on the used side, but also where applicable on the new side. The profitability of that business continues. We improved by $6 million year-over-year from a loss position to where we are year-to-date. I expect that trend to continue as this portfolio grows and we get some of these upfront required accounting losses behind us. It's going to scale very nicely. It's a stable fixed base of cost. We can manage that portfolio well, which the business is doing, as I mentioned, with delinquency. It should be a nice grower for us.

I think that you are correct in your observation. The results and the confidence in terms of how the market is viewing that portfolio and viewing the credit risk in that portfolio add to the positive sentiment regarding growth. I would agree with what you said. Because the demand was so good, it actually gave you more flexibility from a capital point of view than we were originally thinking.

My apologies, Doug. We were getting some background noise on your line. I'll just try opening it once more.

In the After-Sales business, could you talk about car count versus price and maybe what you see in pricing in the second half or if you start to see parts inflation passing through in the ticket?

Yes. So when I think about our performance in After-Sales broadly, we saw both increases in volume and price, with different ratios depending on the segment. One of the big things we focus on is balancing the penetration of the vehicle parts that we're responsible for with pricing. From our point of view, pricing is more within our control, which is clearly our labor. It is constantly checking the marketplace to ensure that we are priced fairly and represent good value for what we provide, maintaining a competitive position. I think you will see limited price increases on average. We have 300 different pricing dynamics happening at any given time, so sometimes when you talk about the average, you lose some context of what's happening in each market, which is how it has to be managed. We're managing that with our teams in each market. From an OEM point of view, we have seen pricing, some of that is their normal mid-year pricing that they've taken. Some of it, they've been more explicit than it is pricing taken as a result of inflationary increases. That's not clear across all OEMs at this moment. They are beginning to get more certainty of their trading conditions, which they then strategically decide how to play it out. Some have shown us they have taken pricing, but it has been limited and targeted, keeping in mind their competitive position, particularly around non-captive parts in the marketplace. Our big focus lies in the penetration. Broadly, one in two vehicles in a seven-year period comes back to a franchise dealership. That represents a significant marketplace that is addressable for us. Tom talked about focusing on retaining and growing the technician base, which is highly competitive, and is a big priority for the team. Better flexibility is expected, but summing it up again, I hope we continue to see volume and appropriate pricing increase in the marketplace.

No, I have nothing further to add.

Well, it's related to market density. We know AutoNation USA is additive once we have a certain amount of density. If we have an AutoNation USA that's far from any supporting businesses, it's very tough. We had a big growth forecast many years ago, which I talked about in the past, and we’ve moderated that. You're going to see additional openings of AutoNation USA businesses this year for sure, as they are already planned and in development. The expansion will be very deliberate. From where they are opening will align with the pattern that I talked about. The team is also working to eliminate overlap in terms of product offerings, warranties, and similar aspects to avoid unnecessary duplication, which doesn't make sense. The work done thus far shows that having AutoNation USA is very beneficial when situated in a market that already has density, and that will continue. It will be a methodical growth process.

You spoke to uplift to parts and service, investments in tech productivity. What does capacity and availability look like to continue to grow the segment? Looking out over the next one to three years, what are the puts and takes for the top line? On one hand, you have vehicle affordability weighing on SAAR, which could create demand for reconditioning, but at the same time could limit the origination of newer cars. What are you looking out for? What's the outlook on that top line?

You're absolutely right. Whether discussing new vehicle or used vehicle service or parts, affordability is paramount. We must ensure that demand doesn't get stifled or eliminated solely due to pricing out of the marketplace. We don't have complete control over that, and it's a priority for every OEM. They are very focused on this issue. As I think about the marketplace and the array of products and services we provide, the reality is, firstly, there is still pent-up demand for new volume; I have no doubt. The economic environment and new vehicle affordability will determine how this demand is released. If it doesn't manifest in new vehicles, some of it tends to move to used vehicles. You need to be agile in transitioning between segments and tracking development. Nevertheless, there will be opportunities on the After-Sales side. The benefits we've discussed before, with the right technician base and the potential for recapturing customers who originally came from us back into service departments, will continue to grow our opportunities in the future.

As we've said in the past, we have plenty of physical capacity. We're continuing to drive the technician workforce up as well.

Great. And then one follow-up on the used side. You spoke to last quarter seeing greater opportunity in lower-priced vehicles. In this quarter, you definitely saw that with the barbell of strength from sub-$20,000 to over $40,000 vehicles. How do you view the competition? Are you seeing much competition from online pure-play retailers? Is there a greater opportunity for AutoNation to grow and consolidate in this market?

Yes, firstly, the market is large and our share is small, which presents plenty of opportunities for us to grow, whether by increasing the turn rate on our display base across dealerships or by investing in processes and technologies to remove the geographical constraints of our physical dealer infrastructure. We're witnessing advances from competitors in various areas regarding both improving turn rates and maintaining margins or through digital sales channels. However, the market is so vast, and combined, if you consider public retailers, whether they are digital technology plays or combinations of technology and physical dealers, our share is still minor, allowing ample room for growth for all of us. I think industry-wide, regardless of whom you ask, you'll find a consistent perspective: there's plenty of opportunity for growth. A significant advantage that is sometimes overlooked is being a franchise dealer representing a manufacturer in a marketplace while selling a late-model used vehicle of the same brand. Customers' confidence is tremendously enhanced if it comes from a franchise dealership with the same OEM brand above the door. We're increasingly collaborating with our OEM partners to leverage this advantage through certified pre-owned programs. We need to improve in this area, and teams are focused on that since it leads to a higher propensity for customers to use our service departments. So yes, while I'm giving a longer, perhaps rambling answer, there is opportunity ahead. The competition is indeed fierce, but we're addressing it in a still-growing market that we can control more effectively than other factors.

Absolutely. Competition makes us all better. Thank you.

Congrats on a great quarter. I just wanted to ask about the SG&A percentage growth; that's a pretty strong performance. Can you parse out where there have been true cost efficiencies and operational improvements versus aspects that may have just come from overall growth?

Yes, Jeff. On the SG&A piece, as you know, our SG&A includes marketing expenses, comp and ben as well as other SG&A to run the dealerships. Each of these areas is a focus for us. We reset our expectations monthly on marketing. We have a new CMO in place, bringing new channels for us to explore but with an emphasis on productivity. We're trying to maintain as much variability and incentive structure in our compensation. We have a number of initiatives to drive productivity, for example, standardizing HVAC equipment and thermostats across the landscape or installing energy-efficient LED lighting in our physical plants. Those are the types of initiatives we're working on. The tightens to the CapEx process internally help prioritize projects related to returns and cash flows. It’s important that we're supporting all necessary expenses while ensuring smooth operations.

I'll just add a little to that. I think it's easy to categorize some projects as maintenance capital, impacting the returns delivered. Tom and the team have implemented oversight and rigor to ensure that requests for capital truly align with delivering returns, similar to our share repurchases and M&A. I cannot definitively state that we are in a down cycle right now, but I can confirm that the team is appropriately scrutinizing each capital request.

Just on PP&E CapEx. It looks like it's come down quarter-over-quarter for the last few quarters, with the exception of Q4 last year. Is that by design? Should we expect a lower run rate moving forward?

I don't believe there being a concentrated effort to reduce CapEx, and it can be cyclical. Most of it relates to franchise stores and varies per OEM's cycle regarding new store models. These cycles can lead to peaks and lulls. Additionally, we are tightening our overall CapEx process to prioritize spending based on returns where possible and supporting obligatory expenditures smoothly.

Yes, I think Tom and the team are doing a wonderful job in maintaining discipline and ensuring that capital requests meet the necessary criteria for delivering expected returns. Congratulations to everyone involved.

This concludes the Q&A session. Mike, I would like to leave the floor to you for any closing remarks.

Yes. Thank you. Firstly, I'd like to thank all of you for joining the call and for your questions. It is greatly appreciated by the team and me. We often finish this call with as much insight from you as we aim to give. I will conclude simply by stating that the first half was a good half for us, but it is only half. There is still more work to do. As always, while Tom and I are the ones speaking, it is all of our team members who make this possible. We have some of the most exceptional people in this industry, and I am proud to be part of this team. I want to thank them for our performance in the first half of the year and remind them that we need to repeat our success in the second half. Thank you, everybody.

This concludes the AutoNation Inc. Q2 Earnings Call. Thank you for joining. You may now disconnect your lines.