Hello everyone and thank you for joining the AutoNation Incorporated Q2 earnings call. My name is Harry and I'll be your operator today. All lines are currently in listen-only mode and there will be an opportunity for Q&A after management's prepared remarks. To enter the queue for questions please dial star followed by one on your telephone keypad. I will now hand the call over to Derek Feebig, 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 Slozik, our Chief Financial Officer. Following their remarks, we'll 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 meeting 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 SEC. Certain non-GAAP financial measures, as defined under SEC rules, will be discussed on this 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.

Hey, thanks, Eric, and good morning, everyone. Thank you for joining us today. I'm going to start on slide three. 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 Buy Your Car efforts. 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 I believe positions as well for the second half of 2025. Customer financial services growth 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 three quarters of units being sold with financing. The momentum and 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 a sequential and a 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, of course, 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 AM Finance continued. Originations doubled from a year prior, and as the portfolio has grown, the team is delivering on leveraging its fixed cost base, enabled continued growth in profitability. During the quarter, we completed our inaugural AM 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 great performance by the alternation 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, of course, finalization of the auto tariff structures in the coming periods. 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 work equally with the desire to offset any new tariffs. As I said previously, we expect that automation to some extent will be cushioned from any new tariffs by a cross-shopping effect, whereby demand for non-impacted or lesser-impacted brands and models will potentially supplant those for more effective counterparts. And actually, in this situation, we hold both sides of the trade with a broad portfolio of brands and models, which I think gives us a distinct advantage. Now, to close, we're encouraged by some of the provisions contained in the recently enacted U.S. federal statute, which includes interest rate deductibility in auto loans and bonus depreciation for commercial enterprise, although we're not forecasting a bonanza of new demand, but as you'll appreciate, 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 were adversely impacted by the CDK outage, and that our second quarter 2025 at P&L. Our total revenue for the quarter was from a year ago, including double-digit growth in the same three segments from a year ago, 13%. CFS growth and used vehicle growth, 18.3% of revenue was up 40 basis points from a year ago, including a 100 basis point increase in improvement for used vehicles. Offset by FEDESC GNA, 66.2% was at the lower end of operating income market increase from a year ago, and below the operating line, floor plan interest expense increased by $9 million from a year ago, sorry, decreased, and with lower average non-vehicle interest expense was approximately flat from a year ago. And as a reminder, we reflect floor plan 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 floor plan 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 a year ago, up 29 percent, decreased to 38.3 million shares benefiting our adjusted EPS, which was $5.46 for the quarter, an increase of over 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 include a non-cash impairment charge of $123 million after tax, or $3.21. These require that we test our goodwill and intangible assets for impairment as of April 30th each year. The charge includes $65 million for our mobile service business and $54 million for the nine stores to a single domestic brand. Supply increasing 7% from a year ago on a total store and 8% of three segments with import units up 4%, premium luxury up 5%, and domestic up 17%, reflecting favorable supply, better incentive, and good performance for our commercial teams. New vehicle unit sales from a year ago, reflecting OEM actions with incentives and some pre-buying ahead of the termination of government incentives. internal combustion engine new be our new vehicle unit processor in line with the first quarter and unit profitability increase for all three segments new vehicle inventory and at 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 well we don't expect for unit growth of seven percent and to continue into the second half we are encouraged by the last couple weeks of new vehicle sales slow start turning slide six used vehicle retail unit sales improved on a year-over-year i.e greater than 40 in our mid-price number of used average retail prices used vehicle retail unit profiters per unit we remain focused on optimizing reconditioning inventory velocity totally used gross profit was up 13 from last year, reflecting the retail unit sales growth, stable retail unit profitability. Supply of used vehicles has June 2022. Supply availability remains a copper new vehicle production. 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. 90% of our vehicles from these channels are encouraged by our used vehicle inventories heading into the second half of the year, as Mike mentioned. I'm now on slide seven. Customers continued once again during the second quarter. Gross profit was up 13% on a same-store basis, reflecting an approximate 7% increase in retail vehicle sales and a 6% increase in unit profitability. More than 70% of our CFS revenue, which remains strong at about two products per vehicle sold, continued to be nearly 70%. Increase in unit profitability, which I mentioned, reflects increased profit. The The continued unit profitability performance in CFS is even more impressive if you consider the growth today in finance, which, while superior in long-term profitability, dilutes our CFS, we continue to expect the year-to-date, which is up more than half a billion dollars from the 50 million in cut 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, improving with average second quarter, today plus 0.8% of the CCIG portfolio, as the new portfolio continues toward the percentage range. As Mike mentioned, we completed our inaugural ABS issuance in the quarter. We were seeking $500 million in financing, and we actually received $3.5 billion of confirm. This allowed us to upsize the offering by $200 million to be pleased with the 4 million. 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 – 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 security, further increase the debt funding levels of the operating for another ABS transaction. If we continue using ABS funding as a portfolio financing vehicle, not a true sale of assets will continue to be included in our consolidated financials. Slide nine, after sales, representing nearly one half, the business continued its revenue and margin momentum, and gross profit was once again a record for automation. Revenues were up 12% year-over-year on a same-store basis, with increases in customer pay. It was up 10%. Warranty, up 25%. Internal work, up 14%. And wholesale, up 8%. Collision revenue, as that industry has struggled to offset a declining proportion of retail. After sales, gross profit increased by 13% on a same-store basis from a year ago. The increase was driven by 7%. For the second quarter, our reported 49% from a year ago, reflecting improved tech efficiency. We continue to develop and promote, as Mike mentioned, the year-end tech 3% from a year ago continues to improve. To slide 10, adjusted free cap, $394 million or net income. And that's compared to $519 million, a 147% 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% and remain focused on sustaining this level through cycle time enhancement. For the second quarter, we continue to expect healthy free cash flow. And as previously disclosed, we submitted claims seeking recovery for estimated business interruption to your CDK out. Related to these claims, we expect to receive additional insurance recoveries in connection with this matter. during the second half of 2000 as income. On the slide 11, as we've discussed, it would be an opportunity to either reinvest in the business in the form of capital to return capital to our next is mostly maintenance-related compulsory spending, and it totals a 15% lower than 2000. We continue to actively explore M&A opportunities and density in our existing markets, including two-franchised additional activities will continue to be an important part of our playbook. Year-to-date, we purchased at the beginning of 2000. In our capital allocation and the associated leverage levels, 2.33 times EBITDA, which was down from 2.56 times EBITDA at the end of March, and well within our two to three times EBITDA long-term target, which gives us additional dry powder before we address questions you might have. Yeah, thank you, Tom.

So we got off to a great start in the first half of 2025, and I think that 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 and I think the work that teams are doing focused on both growth and efficiency are paying off and 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 impairments 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. And there is no doubt that it is and will continue to be very additive to our brand. But 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. And frankly, over the last year or so, it's been both the challenge and the learning. I do think now that we have a very clear understanding of how to run mobile service effectively in a way that will retain the majority of the convenience that we offer but contribute much more effectively to our income. Because of this, it's going to have a different growth profile than our original expectation, hence the technical accounting treatment. But I do want to be clear, I have no doubt this business has the potential to bring significant benefits to our organisation. I'm very pleased that it's part of our portfolio. It's already helping to facilitate the growth of our emerging free service business and it is now providing flexible labour resource to our dealerships And, of course, it's allowed us to insource a number of products and services that previously we had to subcontract. It's not enough team this morning so far. So 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. And I'm really also confident that we have the right team in place to do that. We've got some excellent people working in this area. So with that, I am going to, Derek, hand it over to you for Q&A.

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

Yes, of course. If you would like to ask a question, please dial star followed by one on your telephone keypad now. If you change your mind and would like to exit the queue, please dial star followed by And when preparing to ask your question, please ensure that your device is unmuted locally.

As a reminder, that is star one for any questions now. the first question today will be from the line of mike ward with city research please go ahead your line is open thank you very much good morning everyone um an 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 uh you know what kind of flexibility you have what kind of size you might be looking at what the market's like, what your priorities would be? Would you consider going overseas into the UK or some of those markets? What is going on in the M&A landscape from your perspective?

Yeah, Mike, thanks for the question. I'll just have a couple quick comments and then let Mike share his thoughts. But between M&A and repo, we've spent similar amounts in $325 to $350 million. 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. We've built up a little bit of dry powder over the quarter, and the residual effect, as I said, was an improvement in our leveraged by, committed to both, you know, 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?

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

Thank you. Thank you very much. Thanks, Mike.

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

Great. Thanks for taking the questions. I wanted to follow up, you know, on Tom's comments on, you know, just the July pickup, you know, after a slow start to the month. Curious to get us out, you know, Mike, you know, why that might be happening. you know, what are you seeing out there in terms of just the consumer landscape, you know, as you're also getting some certainty around the tariffs, you know, like with the Japan deal, you know, hopefully we'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, you know, and what the implications could be for dealer margins, you know, in the second half? I have a quick follow-up. Thanks.

That's good to hear from you. I'm going to go first, and then, Tom, you can obviously talk about your comment. I thought as we came into this year, I was kind of thinking a 5% improvement in size. I still think that. I 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 seeing certainty in some tariff deals. That's obviously going to continue when the major trading partners are still out there. But I'm certain that they understand the importance of getting to a conclusion. That will translate to more transparency in terms of the OEM's actions and what they're doing. We're still a little bit uncertain in that area, particularly as we go into a model year changeover, not just on new vehicle prices but also on parts prices. But I think what we've seen already and what we've 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. And I think because of that, you will see price increases in the marketplace, but very, very measured and very, very deliberate. I think you'll also see adjustments over time to OEM's portfolios. from a margin point of view I think you know the quarter is very interesting we saw sequential improvements in our margin but I do think that you're going to see stability for the balance of the year that doesn't mean to say that we're not going to see periodic changes for example we know that the best stimulus for example is going to come out the marketplace that is going to alter sales patterns and margin patterns for a period of time. It's inevitable. So there's going to be periods where, as we've seen before, you may see a slight improvement in run rate and volume followed by a slight decrease in run rate and volume. But I am optimistic for the full year. I also believe that, as I said, there's going to be some margin stability for the year. But I do think that there will be still, even though to your point, and it's very accurate, I still think there are going to be fluctuations around that general trajectory in both of those areas. I think from an inventory position, we're positioned well. I thought, you know, towards the end of last year, we may be too low in our day's supply. And I think the team have looked at that and managed really quite well, particularly on new vehicle inventory. And I think our used team and our general managers and our regional operators built inventory on use because they are bullish on the used car market. And I don't think I'm talking about the overall market because we don't have an influence on that, but we're a relatively small player and I think they have aspirations to grow that and we're going to support them and see how well they do and give them the resources. And we saw as Tom went through in the results, I think a good result in the use side. And I think that's going to be their focus. So that's kind of how I'm viewing the back half. And I think Tom may want to just add a couple of things.

Yeah, just on July specifically, I mean, 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. And April was also, you know, very strong. As Mike mentioned, we, you know, gave back some of that pull-in in May and June, and I think also a bit in July, you know, and as a result, felt that impact. But it seems to be settling into the mode that Mike mentioned. And I, you know, it's going 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 use card side. Just a quick follow-up on the AN finance portfolio ramp. Any updated thoughts on just penetration targets for the rest of the year? How should we think about just the cadence there? and any changes to the outlook around the rest of your profitability in that segment? Thanks.

No, I think we do fully expect the business to continue growing its penetration. We've got some new internal initiatives that are in place to drive that even higher, both on mostly on the used side, but also we're applicable on the new side. I think the profitability of that business continues. I mean, we were, you know, a year ago, you know, first half, we were like minus six in terms of loss. And, you know, we're – or actually we embellished you over here from a loss position to where we are year to date. I expect that trend, you know, to continue as this portfolio grows and we get, you know, some of these up front, the required accounting losses behind us. You know, it's going to scale very nicely with, you know, pretty stable six. As long as we can manage that portfolio, as I mentioned, with delinquency, it should be a nice grower for us.

Yeah, but I think that's also you and Jeff and your team delivered some time today. yeah I think added to the confidence in terms of how the markets view in that portfolio and and view in the credit risk in that portfolio. The demand was so good it actually gave you more flexibility from a capital point of view.

Understood great thanks for all the colour.

Thanks Rebecca.

The next question today will be from the line of Doug Dusson with Evercore ISI. Please go ahead your line is open.

Thank you.

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

Apologies Doug we are getting a lot of background noise on your line um if you were able to dial back in that would be great we'll get you back in the queue the next question today will be from the line of brett jordan with jeffries please go ahead your line is now open hey good morning guys um in the 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 you start to see parts inflation um passing through in the ticket yeah so when I think about our performance in after sales broadly we saw both increase in volume and increase in in price and different ratios obviously depending on the segment where we are but one of the big things that Christian is focused on is to balance the penetration of the of the vehicle parks that we're responsible for in a very very sensible way with with pricing so from our point of view as we think about pricing there's more in our control which is clearly our labor it is constantly checking the marketplace to make sure that we are priced fairly and represent good value for for what we provide as well as maintaining a competitive position so i think that you're going to see from us, limited pricing on average. Remember, we have 300 different pricing dynamics going on at any given time out there. So sometimes when you talk about the average, you obviously lose the context of what's happening in each market, and that's how it has to be managed. He's managing it with his team each market. From an OEM point of view, we have seen obviously some pricing. Some of that is their normal mid-year pricing that they've taken. Some of it they've been more explicit that it is pricing that they're taking in general as a result of inflationary increases on their side we're not that is not clear across all of the OEMs at this moment in time you know reference our earlier conversation we're beginning they are beginning to get more certainty of their trading conditions which ultimately they then have to decide how strategically they're going to play it out but some have shown us that they have taken pricing I would say that it, in my view, is limited. And in my view, the ones that have moved have been very targeted. And they're clearly thinking about their competitive position, particularly around those non-captive parts in the marketplace. And I think for us, our big focus is around that penetration that I alluded to. Broadly, one in two of the vehicles in a seven-year park come back to a franchise dealership. And I think that represents a significant marketplace that is addressable from us. So Tom talked about focus on retaining, growing the technician base. Obviously, that's highly competitive market, big focus for the team there. But also making sure that, as I've said, we are appropriately priced so that we can reconquest some of those customers back into our business. So I would say less on the price, hopefully more on the volume. But, you know, we'll see how the market plays out. I spent some time talking about expectation for the industry. Obviously, if my expectation was, as I said, and you saw a big first half, it means there may be some pressure on new volume in the second half. And there's no doubt that from a macro point of view, I think you're going to see an inflationary impact. It, to some extent, I think is inevitable. And what that has done in the past is it helped you in terms of velocity on the after-sale So we're trying to make sure that we have the resources. We increase our resources that will help us in both those situations should it happen. So a bit of flexibility, but to sum it up again, I'm hoping that what we see is continued volume and pricing where it's appropriate in the marketplace. Tom, do you want to add anything to that? Great.

And a quick follow-up. Can you give us an update on AutoNation USA? Obviously, there's a scarcity of good used inventory, but how do you see that strategy going forward the next year or two?

Well, it goes back to what I talked about in terms of market and densification in the market. We know an ANUSA is additive once we've got a certain amount of density, and we know that if we have an ANUSA that's a long way away from any supporting businesses, it's a very, very tough business. so what we've done now you know many years ago we had this big growth forecast which I talked about in the past and we've moderated that you're going to see additional openings of ANUSA businesses this year for sure they're already planned they're already in development it's going to be much much more deliberate and you will see from where they are opening that it fits into that pattern that I talked about what the team is working on is obviously to minimize the overlap in terms of what these businesses offer to the marketplace. We're not fully optimized there, to be perfectly frank. I think they're doing a lot of work to make sure that there is any unnecessary overlap in terms of product offering, warranties, and those things is eradicated because that doesn't make a lot of sense. And as I said, we've done a lot of work there, but more work to come. But as I said, it's very additive when it goes into a market that already has density. It's going to continue to grow, but it's going to be very methodical growth.

Great. Thank you.

The next question today will be from the line of Daniela Hagian with Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning. 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? And then thinking out next one to three years, what are the puts and takes for the top line? On one hand, you have vehicle and affordability weighing on SAR that could create demand for reconditioning, but at the same time could limit the origination of newer cars that have that stickiness on the service side. So what are you looking out for and what's the outlook on that top line? Thank you.

Well, I think you're exactly Right. I mean, whether you talk about new vehicle, used vehicles, service or parts, the primary focus for us in the areas that we can influence is affordability to make sure that what's not happening is demand getting stifled or snuffed out purely because it's been priced out of the marketplace. we don't have full control of that as you know but it's also top of mind for every OEM every time we talk to our partners they're very very focused on that and you know they you know the challenges that they're working through at this moment in time so as I think about the marketplace and the broad set of products and services that we offer the reality is tip it firstly from a new volume point of view there's still pent-up demand I have zero doubt about that. How that gets released is going to the governor on that is obviously going to be the economic environment and how new vehicle affordability plays out in the coming months and years. If it doesn't manifest itself in new vehicles, some of it tends to move into used vehicles. So you have to be agile, I think, in terms of how you move between the segments and how you're thinking about that development. But there is no doubt that there is and will remain opportunity in the after-sale side of the business and it comes with multiple benefits that we've discussed on plenty of occasions and therefore I think if we can if we can continue to build our internal resource and and at the same time convert some of that market that that originally came from us back to our service departments whether it is our physical service departments or our mobile service departments then then there's still going to be opportunity for us to for us to go into the future hopefully that's touched on most of the

points you wanted us to discuss yeah yeah absolutely one yeah sorry you'd also much you're also much you're also mentioned capacity as we've said in the past there's we have plenty of physical you know capacity and we're continuing to drive the technician workforce up as well.

Great. And then one follow-up on the use side. You spoke to last quarter seeing greater opportunity in lower-priced vehicles. And then this quarter, you definitely saw that with the barbell of strength from sub-20K over 40K vehicles.

How do you view the competition, or are you seeing much competition in the marketplace from the likes of the online pure play retailers and is there a greater opportunity for auto nation to to grow and consolidate in this market yeah well firstly the market is so large and our share is so small there's plenty of opportunity for us to grow whether that is to increase the turn rate of our display bays that physically sit at our dealerships or whether it is to continue to invest in in both the processes and the technology to be able to remove the geography constraints of a physical dealer infrastructure. And there's no doubt that we are seeing advances from our competitors in different areas, whether it is improving their term rate and holding their margins or whether it is through digital sales channel. But I think the market is so large and they combine, if you like, public retailers, whether they are digital technology play or their technology and physical play, market share is so small that there's plenty room for all of us to grow and you know I think that's regardless of the CEOs you speak to I think their answer is going to be almost cut and paste of what I've said I think we all view it as as an area that there's opportunity to grow and we're all looking at different ways to try and grow the advantage to have that I think is often overlooked is when you have the privilege of representing a manufacturer in a marketplace, and you are selling a late-used vehicle of the same brand, it adds tremendously to the customer's confidence, in my view, if it comes from a franchise dealership with the same OEM brand above their door. And that's where we are working increasingly with our OEM partners, because they offer franchise dealers, I think, a phenomenal advantage in their certified pre-owned programs. And frankly, we need to do a better job there. And the teams are really focused on that because what comes with that is also a higher propensity to use our service departments. So again, probably a longer, more wandering answer than ideal, but there is opportunity clearly there's a lot of competition out there but it's a very very big market and it's one that we're we're focused on it and it's one that is much more in our control than maybe some of the other things so yeah absolutely competition makes us all better thank you welcome the next question today will be from the line of jeff lick with stevens please go ahead your line is open uh good morning uh thanks for taking my question and congrats on a great quarter um i just want to ask on the sgna percent of gross that's a pretty strong performance i was

wondering if you maybe can parse out you know the parts where there was you know kind of true real you know cost efficiencies operational improvements uh you know where you're seeing benefits versus the stuff that may be caused by just the you know increase in gross taking the you know percent of gross down um and then a follow-up question i was wondering if you could also talk about auto nation finance and just how the business lives with the legacy business and because i know about 80 or so is used but i'm just curious you know how those two businesses are kind of you know as they're growing you know living with one another yeah um thanks thanks jeff uh on On the SG&A piece, as you know, our SG&A is comprised of, you know, the marketing expense,

Comp and Ben, as well as, you know, other SG&A to, you know, to run the dealerships. Each of those areas has an extreme degree of focus in terms of how the spending plans work. We sit down every month and reset our expectations on marketing, as an example. We have a new CMO in place. It's bringing a lot of interesting new channels for us to explore, but with the idea of being more productive in that area. Compensation, we try and maintain as much variability and incentive structure in place as we can. We think that is working well for us. And then on the other SG&A, there are a number of different categories there that are a big focus for us. For example, we have a number of initiatives in our physical plant, whether it's to standardize on the HVAC side the equipment and the thermostats and the set points that we have across the you know the landscape or to install LED lighting which is you know much more efficient in terms of the physical plant and so those are the types of examples of things that you know we've got you know that we're working with and we'll continue to make and drive productivity and then in other SGA in terms of an F or AutoNation Finance in terms of its, you know, coexistence with the business. I mean, it is – I mean, Jeff Butler, who runs the business, you know, for us is part of Mike's leadership team. He's involved in, you know, every single discussion. They really do an excellent job of driving growth, not just in AutoNation Finance, but in other areas of our business. Your perfect example is in CFS. you know, where we talk about 70% of CFS being product attach rates, Alternation Finance has a superior, you know, attach rate, you know, relative to, you know, other potential lenders. And it's because of that knowledge that they bring, you know, to the business and, you know, and what the customer needs are. So in addition to being, you know, good, good holders of, you know, the company's capital and, you know, driving growth in that portfolio and performance of that portfolio, you know, they have an eye towards, you know, influencing outcomes in the office and, you know, it is working well. So not only are they delivering results in their P&L, but they're helping to influence the rest of the business. I'll just add a little bit to that, Tom, but I thought that was good.

I think one of the things that we established at a very early stage with our finance company is that it was a competitive environment out there. And we wanted to establish that as a cultural issue. Now that doesn't mean to say we can't obviously put them in a prime position. Clearly that's there. But I think from a mindset point of view, they have to recognize that the service levels that they provide to our customers and to the dealerships, i.e. their customers, is fundamental. So whether it's the response rate, the time of response, whether it's their book to look, whether it's their flexibility in terms of structuring deals or their contracts in transit. Jeff holds his team to very, very high standards, above the standards that are being produced by our other partners in that area. And over time, that level of service to our CFS directors in store, the general managers in store, means they are a valuable partner. And it takes time to build up. But I think Jeff's really establishing that with his team. There is, you know, from my point of view, obviously there's right to business, but the way they behave, there is no right to business it's earned and that that that has already yielded great results and and remains the cornerstone of their focus i appreciate all the color thanks very much thanks chef chef our final question today will be from the line of doug dutton with evercore isi please go ahead your line is open hey team apologies for the connection issue earlier if this doesn't work you can feel free to just kick me off um i'm going to ask one quick one

here. It's not like you're running your vacuum or something. Believe it or not, I wasn't. I'm locked in on the model here. But just the first question, or my only question, is 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. You know, is that by design, is there some reason that we should expect a lower run rate going forward? Can you maybe just talk through that?

Yeah, great question. Doug, I don't think it's like a concerted effort to reduce CapEx, and it can be cyclical. Most of it, as I was saying, has to do with our franchise stores, and it depends on where you are in each OEM's cycle in terms of putting out their models of their stores, and sometimes you get in lulls and sometimes you you get in peaks um i will say that we we you know on top of of that as a is a variable um that we have tightened up you know the overall you know capex you know process internally um trying to be as focused on returns as we can uh you know trying to, you know, prioritize, you know, the cash flows and, you know, to sequence the spending in a way that, you know, that we can absorb. There's a lot of miles to feed when it comes to, you know, CapEx, and I think we're, you know, prioritizing in the best way we know, which is, you know, return focus where you can and where it's compulsory, making sure you're, you know, supporting it in a in a way that you know can be smooth and and you know over time as is allowed.

I don't think it reflected the stuff that you and the team are doing I mean they it's very easy isn't it under this banner of maintenance capital for people to put projects through that frankly are not additive to the returns that we deliver just consume capital and I think Tom and and the team have put in place progressively the right level of oversight and the right level of rigor to make sure that even if it is so-called maintenance capex that it comes with the same return that you'd expect from dollars invested in other parts of the business it isn't always easy to identify that with the same fidelity that you would for example with a share repurchase or with a net with M&A but that is certainly the discipline that's in place and to your point I I don't know whether we are in a down cycle at the moment. I know all of the projects that are coming through, but there's no doubt that rigor means that people are thinking very carefully before they just ask for capital in this company. And congratulations to you and the team for that. Yeah, thank you.

Amazing, I think that's helpful color, and that's all I've got, guys. Congrats on a great quarter.

Thanks, Doug.

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

Yeah, thank you. Firstly, I'd like to thank all of you come in on the call and a few questions um it is definitely appreciated by the team and i and often we finish this call with as much insight from you as hopefully we give to you and and the idea here is to give you as much insight as we can and as reasonable for the running of the business i'm just going to end simply today to say that obviously as i mentioned at the beginning the first half was a good half for us but it is only half uh we obviously have the balance to go and as always it's as much as Tom and I are the ones sat in the room taking the calls it is all of the people in the business and I don't say it with any flippancy at all I think I think we have some of the most amazing people in this industry and I'm very pleased to be part of the team with them and I want to thank them for H1 and just remind them let's try and do it all again for H2 so thank you everybody.

This concludes the AutoNation Incorporated Q2 earnings call Thank you for joining. You may now disconnect your lines.