Earnings call transcript: AutoNation Q2 2025 sees revenue rise, stock gains

AutoNation Inc., with a market capitalization of $8.38 billion, reported robust financial results for the second quarter of 2025, with total revenue reaching $7 billion, marking an 8% increase year-over-year. The company also saw a significant rise in adjusted net income, which climbed 29% to $209 million. Adjusted earnings per share (EPS) rose by 37% to $5.46. Following the earnings report, AutoNation’s stock price increased by 2.94%, closing at $215.85. According to InvestingPro analysis, the stock appears overvalued at current levels, trading at a P/E ratio of 13.87.

Key Takeaways

• Total revenue increased by 8% year-over-year to $7 billion.
• Adjusted EPS rose 37% to $5.46.
• Stock price increased by 2.94% after the earnings announcement.
• Hybrid vehicle sales surged 40% year-over-year.
• AutoNation Finance launched successfully, contributing to financial growth.

Company Performance

AutoNation demonstrated strong performance across its business segments in Q2 2025. The company capitalized on a recovering automotive market, gaining market share in domestic, import, and luxury vehicle sales. Notably, hybrid vehicle sales rose by 40%, and battery electric vehicle sales increased by nearly 20%, reflecting a growing consumer interest in sustainable automotive options. InvestingPro data reveals the company maintains a gross profit margin of 17.91%, though this remains below industry averages. Get access to 12 more exclusive ProTips and comprehensive analysis with an InvestingPro subscription.

Financial Highlights

• Revenue: $7 billion, up 8% year-over-year
• Adjusted net income: $209 million, up 29% year-over-year
• Adjusted EPS: $5.46, up 37% year-over-year
• Gross profit margin: 18.3%, up 40 basis points

Market Reaction

AutoNation’s stock price rose by 2.94% following the earnings release, closing at $215.85. This increase reflects investor confidence in the company’s strategic initiatives and strong quarterly performance. The stock’s current price is near its 52-week high of $228.92, indicating positive market sentiment.

Outlook & Guidance

Looking ahead, AutoNation expects stable margins for the remainder of 2025. The company plans to continue focusing on aftersales and the used vehicle market while expanding its AutoNation USA store presence. AutoNation Finance is anticipated to contribute further to the company’s growth, with additional asset-backed securitizations planned.

Executive Commentary

CEO Mike Manley highlighted the company’s broad success, stating, "We’re enjoying strong performance across all of the business lines." CFO Thomas A. Szlosek added, "We have plenty of physical capacity, and we’re continuing to drive the technician workforce up," underscoring the company’s operational strength and growth potential.

Risks and Challenges

• Potential tariff impacts could affect pricing and profitability.
• Market saturation in certain vehicle segments may limit growth.
• Macroeconomic pressures, such as interest rate hikes, could impact consumer purchasing power.
• Supply chain disruptions remain a concern for the automotive industry.

Q&A

During the earnings call, analysts inquired about the impact of tariffs and potential market adjustments. Discussions also covered AutoNation Finance’s portfolio growth strategy and capital allocation priorities. Executives addressed concerns about the mobile service business impairment, providing insights into future operational strategies.

AutoNation’s Q2 2025 performance reflects its strategic focus on innovation and market expansion, positioning it well for continued growth in a recovering automotive market.

Full transcript - AutoNation Inc (AN) Q2 2025:

Operator: Hello everyone and thank you for joining the AutoNation, Inc. 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 1 on your telephone keypad. I will now hand the call over to Derek Fiebig, Vice President of Investor Relations. Please go ahead.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Thank you, Harry, and good morning, everyone, and welcome to AutoNation second quarter 2025 conference call. Leading our call today will be Mike Manley, our Chief Executive Officer, and Thomas A. Szlosek, our Chief Financial Officer. Following their remarks, we’ll open the call to questions.

Mike Manley, Chief Executive Officer, AutoNation: Before beginning, I’d like to remind you.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: 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.

Mike Manley, Chief Executive Officer, AutoNation: Hey, thanks, Eric, 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.

There was a pull ahead of sales in late March and April in reaction to the tariff announcement. 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 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 three quarters of units being sold with financing. The momentum in aftersales 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.

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 AutoNation 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 AutoNation 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 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 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 equally align with the desire to offset any new tariffs. As I said previously, we expect that AutoNation to some extent will be cushioned for 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 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, 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.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: 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. 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 aftersales 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 aftersales 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 aftersales and a 50 basis point improvement for used vehicles, offset by the moderation of new vehicle unit profitability. Adjusted SG&A at 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, floor plan interest expense decreased by $9 million from a year ago as average rates were down approximately 100 basis points combined with lower average outstanding borrowing.

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. 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 an 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 include 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.

Total store unit sales were up across our three segments with import units up 4.4%, premium luxury up 5%, and domestic up 17%, reflecting favorable supply, better incentives, and good performance for 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 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, that is less than $20,000, and higher priced, that is 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 remains 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 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 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, which I mentioned, reflects increased profit per product contract sold and higher product penetration.

The continued unit profitability performance in CFS is even more impressive if you consider the growth of AutoNation Finance, which, while superior in long term profitability, dilutes our CFS unit profitability in the short term. Without this AutoNation 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’s attractive offerings are driving strong customer take up, 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 half a billion dollars 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, so 30 day plus at quarter end of 2.4%, are solid, down from 3.8% a year ago, and that benefited from the sale of the mostly subprime legacy CIG portfolio. As the new portfolio continues toward full maturity, we do expect the delinquency rates to normalize to the 3% 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 seven times oversubscribed. This allowed us to upsize the offering by $200 million to $700 million. We’re also pleased with a 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 financed assets will continue to be included in our consolidated financial statement. Moving to Slide 9, aftersales representing nearly one 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 payment 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.

Aftersales 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 aftersales 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 aftersales business will grow roughly mid single digits each year.

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, 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% as a 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 first quarter, or sorry, 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 totals $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 market. 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 and will continue to be 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 decisioning. We also consider our investment grade balance sheet and the associated leverage levels. At quarter end, our leverage was 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 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.

Mike Manley, Chief Executive Officer, AutoNation: Yeah, thank you, Todd. We got off to a great start in the first half of 2024, and I think our quarter performance was strong both on a year-over-year and sequential basis. I think we’re enjoying strong performance across all of the business lines, as Tom just took you through, and I think the work the teams are doing focused on both growth and efficiency are 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, and 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, and frankly, over the last year or so, it has 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. I do want to be clear. 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 already helping to facilitate the growth of our emerging free service business, and it is now providing flexible labor resource to our dealerships. Of course, it’s allowed us to insource a number of products and services that previously we had to subcontract. Excuse me, Derek, it’s 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 expectation now is that it will deliver a positive contribution as we progress into 2026. 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. With that, I am going to, Derek, hand over to you for Q and A. Thank you.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Yeah, Harry, if you could please remind people how to get in queue for questions.

Operator: Yes, of course. If you would like to ask a question, please dial Star followed by one on your telephone keypad. If you change your mind and would like to exit the queue, please dial Star followed by two. When preparing to ask your question, please ensure that your device is unmuted locally. As a reminder, that is Star one for any questions. The first question today will be from the line of Michael Patrick Ward with Citigroup Inc. Please go ahead. Your line is open.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Thank you very much. Good morning, everyone.

Mike Manley, Chief Executive Officer, AutoNation: Am in the past has been less.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: 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.

Mike Manley, Chief Executive Officer, AutoNation: About what kind of flexibility you have, what kind of size you.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Might be looking at what the market’s like, 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? Yeah, Mike, thanks for the question. I’ll just give a couple quick comments and then let Mike share his thoughts. You know, between M&A and repo, we’ve spent similar amounts in the first half of 2024 versus the first half of 2025. Roughly $325 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 and 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 a quarter basis points. We’re committed to both share repurchases. Matt, it is a strong pipeline. Mike, is there anything else you want to add to that in terms of Mike’s question?

Mike Manley, Chief Executive Officer, AutoNation: I just think I would 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 extract the biggest benefit from the processes and the scale that we bring. We’re 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 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. That has been our guiding capital allocation principle, really understanding the impact of that over time.

On the M&A, we obviously benefit from additional cash and that gives us implications for leverage. 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. Outside of that, I have nothing else to add.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Perfect, thanks. Thank you. Thank you very much.

Mike Manley, Chief Executive Officer, AutoNation: Thanks Mike.

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

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Great, thanks for taking the question. I wanted to follow up on Dom’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.

Mike Manley, Chief Executive Officer, AutoNation: There in terms of just the consumer.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Landscape, as we’re also getting some certainty around the tariffs, like with the Japan deal, hopefully we’ll get some more deals.

Mike Manley, Chief Executive Officer, AutoNation: How do you see the demand outlook?

Thomas A. Szlosek, Chief Financial Officer, AutoNation: 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? I have a quick follow-up.

Operator: Thanks.

Mike Manley, Chief Executive Officer, AutoNation: Good to hear from you. I’m going to go first and then Tom, you can obviously talk about your comments. 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. 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 are still a little bit uncertain in that area, particularly as we go into model year changeover, not just on new vehicle prices, but also on parts prices.

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. 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 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 does not 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 of the marketplace that is going to alter sales patterns and margin patterns for a period of time.

It’s inevitable. There are 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. I am optimistic for the full year. I also believe that, as I said, there is going to be some margin stability for the year. 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 towards the end of last year we may be too low in our day supply, and I think the team have looked at that and managed really quite well, particularly on new vehicle inventory.

I think our used team, our General Managers, and our Regional Operators built inventory on used because they are bullish on the used car market. I don’t think I’m talking about the overall market because we don’t have an influence on that. We’re a relatively small player, and I think they have aspirations to grow that. We’re going to support them and see how well they do and give them the resources. We saw, as Tom went through in the results, a good result in the used side, and I think that’s going to be their focus. That’s kind of how I’m viewing the back half, and I think Tom may want to just add a couple of things.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Yeah, just on July specifically, when 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, you know, unit growth. April was also, you know, very strong as Mike mentioned. We gave back some of that pull in in May and June and I think also a bit in July, you know. As a result, I think the first half may have felt that impact, but it seems to be settling into the mode that Mike mentioned. I, yeah, it’s going to take a few more weeks to get under our belt, but it does seem to have turned in a good direction for us. I understood that’s helpful and obviously great execution on the used car side. Just quick follow up on the AutoNation 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 is. Any changes to the outlook around 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, mostly on the used side, but also where applicable on the new side. I think the profitability of that business continues. I mean we were, you know, a year ago, first half we were like minus six in terms of loss. 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. Pretty stable, fixed base of cost. As long as we can manage that portfolio well, which the business is doing, as I mentioned, with delinquency.

Mike Manley, Chief Executive Officer, AutoNation: It should.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Be a nice grower for us.

Mike Manley, Chief Executive Officer, AutoNation: I think that’s also compounded by the results that you and Jeff and.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Returning to levers in terms of their year.

Mike Manley, Chief Executive Officer, AutoNation: Right. I mean, it released equity, and I think added to the confidence in terms of how the markets view that portfolio and viewing the credit risk in that portfolio.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: I would agree with what you.

Mike Manley, Chief Executive Officer, AutoNation: I think that because the demand was so good, it actually gave you more flexibility from a capital point.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Of view than we were thinking.

Mike Manley, Chief Executive Officer, AutoNation: Yeah, I agree.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Understood. Great. Thanks for all the color. Thanks for joining.

Operator: The next question today will be from the line of Douglas William Dutton with Evercore ISI. Please go ahead. Your line is open.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Thank you.

Operator: 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. If you’re able to dial back in, that would be great and we will get you back in the queue. The next question today will be from the line of Bret David Jordan with Jefferies LLC. Please go ahead. Your line is now open.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Hey, good morning, guys. In the aftersales business, could you talk about car count versus price and maybe what you see in pricing in the second half? Are you starting to see parts inflation passing through in the ticket?

Mike Manley, Chief Executive Officer, AutoNation: Yeah. When I think about our performance in aftersales broadly, we saw both increase in volume and increase in price in different ratios obviously, depending on the segment where we are. One of the big things that Christian is focused on is to balance the penetration of the vehicle parks that we’re responsible for in a very, very sensible way with pricing. From our point of view, as we think about pricing, that’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 what we provide as well as maintaining the competitive position. 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.

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. That is not clear across all of the OEMs at this moment in time. Reference our earlier conversation. 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. Some have shown us that they have taken pricing.

I would say that in my view it 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. I think for us a 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. Tom talked about focus on retaining, growing the technician base. Obviously that’s a 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.

I would say less on the price, hopefully more on the volume, but 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. There’s no doubt that from a macro point of view, I think you’re going to see an inflationary impact to some extent I think is inevitable. What that has done in the past is it helped you in terms of velocity on the aftersales side. 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. A bit of flexibility.

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?

Operator: Great.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: A quick follow up.

Mike Manley, Chief Executive Officer, AutoNation: Can you give us an update?

Thomas A. Szlosek, Chief Financial Officer, AutoNation: AutoNation USA, sort of obviously the scarcity of good used inventory. How do you see that strategy going forward, the next year or two?

Mike Manley, Chief Executive Officer, AutoNation: It goes back to what I talked about in terms of market densification. We know an AutoNation USA is additive once we’ve got a certain amount of density, and we know that if we have an AutoNation USA that’s a long way away from any supporting businesses, it’s a very, very tough business. What we’ve done now, 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 AutoNation USA 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 any unnecessary overlap in terms of product offering, warranties, and those things is eradicated because that doesn’t make a lot of sense. As I said, we’ve done a lot of work there, but more work to come. 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.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Great, thank you.

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

Thomas A. Szlosek, Chief Financial Officer, AutoNation: 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 this 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 SAR-castic stickiness on the service side. What are you looking out for, and what’s the outlook on that top line? Thank you.

Mike Manley, Chief Executive Officer, AutoNation: I think you’re exactly right. I mean, whether you talk about new vehicles, 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. It’s also top of mind for every OEM. Every time we talk to our partners, they’re very, very focused on that and the challenges that they’re working through at this moment in time. As I think about the marketplace and the broad set of products and services that we offer, the reality is, 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. You have to be agile, I think, in terms of how you move between the segments and how you’re thinking about that development. There is no doubt that there is and will remain opportunity in the aftersales side of the business. It comes with multiple benefits that we’ve discussed on plenty of occasions.

Therefore, I think if we can continue to build our internal resource and at the same time convert some of that market that originally came from us back to our service departments, whether it is our physical service departments or our mobile service departments, then there’s still going to be opportunity for us to go into the future.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Hopefully.

Mike Manley, Chief Executive Officer, AutoNation: That’s touched on most of the points you wanted us to discuss.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Yes, absolutely.

Operator: Daniel, you.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Yeah, sorry, you had also mentioned capacity. As we’ve said in the past, we have plenty of physical capacity, and we’re continuing to drive the technician workforce up as well. Great. One follow up on the used side. You spoke to last quarter seeing greater opportunity in lower priced vehicles, and this quarter you definitely saw that with the barbell of strength from sub $20,000, over $40,000 vehicles. How do you view the competition? Are you seeing much competition in the marketplace from the likes of the online pure play retailers? Is there a greater opportunity for AutoNation to grow and consolidate in this market?

Mike Manley, Chief Executive Officer, AutoNation: Yeah, 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 at physical dealerships or whether it is to continue to invest in both the processes and the technology to be able to remove the geography constraints of a physical dealer infrastructure. There’s no doubt that we are seeing advances from our competitors in different areas. Whether it is improving their turn rate and holding their margins or whether it is through digital sales channels. I think the market is so large and the combined, if you like, public retailers, whether they are digital technology play or their technology and physics play, market share is so small that there’s plenty of room for all of us to grow. 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 an area that there’s opportunity to grow and we’re all looking at different ways to try and grow. The advantage we 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. 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. Frankly, we need to do a better job there.

The teams are really focused on that because what comes with that is also a higher propensity to use our service departments. 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 focused on and it’s one that is much more in our control than maybe some of the other things. Yeah, absolutely.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Competition makes us all better. Thank you.

Mike Manley, Chief Executive Officer, AutoNation: Welcome.

Operator: The next question today will be from the line of Jeffrey Francis Lick with Stephens Inc. Please go ahead. Your line is open.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Good morning. Thanks for taking my question and congrats on a great quarter. I just wanted to ask on the SGA % of gross, that’s pretty strong performance. I was wondering if you maybe can parse out the parts where there was true, real cost efficiencies, operational improvements, where you’re seeing benefits versus the stuff that may be caused by just the increase in gross taking the % of gross down.

Mike Manley, Chief Executive Officer, AutoNation: A follow up question, I.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Was wondering if you’d also talk about AutoNation Finance and just how the business lives with the legacy business because I know about 80% or so is used. I’m just curious how those two businesses are, as they’re growing, living with one another. Yeah, thanks. Thanks, Jeff. On the SG&A piece, as you know, our SG&A is comprised of the marketing expense, comp and benefits as well as other SG&A 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, 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. On the other SG&A, a number of different categories there 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 landscape, or to install LED lighting, which is much more efficient in terms of the physical plant. Those are the types of examples of things that we’re working with and will continue to make and drive productivity in other SG&A. In terms of ANF or AutoNation Finance, in terms of its coexistence with the business, Jeff Butler, who runs the business for us, is part of Mike’s leadership team. He’s involved in every single discussion.

They really do an excellent job of driving growth not just in AutoNation Finance, but in other areas of our business. A perfect example is in CFS, where we talk about 70% of CFS being product attach rates. AutoNation Finance has a superior attach rate relative to other potential lenders. It’s because of that knowledge that they bring to the business and what the customer needs are. In addition to being good holders of the company’s capital and driving growth in that portfolio and performance of that portfolio, they have an eye towards influencing outcomes in the overall business. It is working well. Not only are they delivering results in their P&L, but they’re helping to influence the rest of the business.

Mike Manley, Chief Executive Officer, AutoNation: I’ll just add a little bit to that, 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. That doesn’t mean to say we can’t obviously put them in a prime position. Clearly that’s there. 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, that is their customers, is fundamental.

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. Over time, that level of service to our CFS directors in store, the general managers in store, means they are a valuable partner. 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 business.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: It’s earned.

Mike Manley, Chief Executive Officer, AutoNation: That has already yielded great results and remains the cornerstone of their focus.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: I appreciate all the color. Thanks very much. Thanks, Jeff.

Operator: Our final question today will be from the line of Douglas William Dutton with Evercore ISI. Please go ahead. Your line is open.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Hey team, apologies for the connection issue earlier.

Mike Manley, Chief Executive Officer, AutoNation: If this doesn’t work, you can feel.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Free to just kick me off.

Mike Manley, Chief Executive Officer, AutoNation: I’m going to ask one quick one.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Here, like you’re running your vacuum or something. Believe it or not, I wasn’t. I’m locked in on the model here. My only question is just on PPE 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? 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.

Mike Manley, Chief Executive Officer, AutoNation: We’ve, we’ve.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: 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. It depends on where you are in each OEM’s cycle in terms of putting out their models of their stores. Sometimes you get in lulls and sometimes you get in peaks. I will say that on top of that as a variable, we have tightened up the overall CapEx process internally, trying to be as focused on returns as we can, trying to prioritize the cash flows and to sequence the spending in a way that we can absorb.

There’s a lot of mouths to feed when it comes to CapEx and I think we’re prioritizing in the best way we know, which is return focus where you can and where it’s compulsory, making sure you’re supporting it in a way that can be smooth and over time, as is allowed. That’s kind of what I would characterize.

Mike Manley, Chief Executive Officer, AutoNation: Yeah, I’m just going to add something to it because I don’t think it reflected the stuff that you and the team are doing. I mean, 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. I think Tom 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 M&A. That is certainly the discipline that’s in place.

To your point, 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. Congratulations to you and the team for that.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Thanks, Mike.

Mike Manley, Chief Executive Officer, AutoNation: Amazing.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: I think that’s helpful. That’s all I’ve got, guys. Congrats on a great quarter.

Mike Manley, Chief Executive Officer, AutoNation: Thanks, Doug.

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

Mike Manley, Chief Executive Officer, AutoNation: Yeah, thank you. Firstly, I’d like to thank all of you for coming on the call and for your questions. 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. The idea here is to give you as much insight as we can and is 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. We obviously have the balance to go. 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 we have some of the most amazing people in this industry, and I’m very pleased to be part of the team with them. I want to thank them for H1 and just remind them let’s try and do it all again for H2. Thank you, everybody.

Thomas A. Szlosek, Chief Financial Officer, AutoNation: Excellent.

Operator: This concludes the AutoNation, Inc. Q2 earnings call. Thank you for joining. You may now disconnect your lines.

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