AutoNation (AN) Q2 2025 Earnings Call Transcript | The Motley Fool

DATE

Friday, July 25, 2025, at 9 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Mike Manley
• Chief Financial Officer — Tom Szlosek

Need a quote from one of our analysts? Email [email protected]

RISKS

• Chief Financial Officer Tom Szlosek reported a non-cash after-tax impairment charge of $123 million (GAAP) for Q2 2025, with $65 million related to the mobile service business and $54 million concerning franchise-related rights tied to nine stores, noting that “90% of that charge relat[es] to a single domestic brand” (GAAP, as of April 30)
• Management acknowledged aftersales collision revenue declined 6%, attributing the decrease to “that industry has struggled to offset a declining proportion of repair to replace insurance decisioning.”
• CEO Mike Manley noted that “developing an independent mobile service offering … has been both a challenge and a learning,” signaling a revised, slower growth profile for the mobile service business and increased caution regarding technician labor allocation.

TAKEAWAYS

• Total Revenue: $7 billion, up 8% year-over-year on both total and same-store basis.
• Same-Store Gross Profit: $1.3 billion, a 10% increase from a year ago.
• Adjusted Net Income: $209 million, up 29% year-over-year.
• Adjusted EPS: $5.46 adjusted EPS, an increase of 37%, with a sequential gain of 17% from the previous quarter.
• Share Repurchases: Year-over-year share count reduced by 6% to 38.3 million shares, supporting higher per-share results.
• New Vehicle Unit Volume: Up 7% total store and 8% same-store; domestic segment up 17%, import up 4%, premium luxury up 5%.
• New Vehicle Profitability: $2,785 per unit, flat sequentially; Unit profitability rose sequentially across all segments.
• Hybrid and Electric Sales: Hybrid unit sales were up over 40%, battery electric vehicles up nearly 20%, and Internal combustion engine new vehicle sales were up about 1%; hybrids comprised roughly 20% and BEV about 7% of new vehicle mix.
• Days of New Vehicle Supply: 49 days of supply at period-end, 18 days lower year-over-year, but up from 38 days at the end of the previous quarter.
• Used Vehicle Retail Volume: Same-store used vehicle retail unit sales increased 6% year-over-year, with double-digit growth at both sub-$20,000 and above $40,000 price bands on a same-store, year-over-year basis.
• Used Vehicle Profitability: Retail unit profit steady at $1,622 per vehicle; total used gross profit up 13% year-over-year, benefiting from wholesale gains.
• Aftersales: Same-store aftersales revenue up 12%, Same-store aftersales gross profit up 13% from a year ago, and reported aftersales gross margin rate was 49%, up 100 basis points on a total store basis.
• Customer Financial Services (CFS): Gross profit up 13% year-over-year, reflecting a 7% increase in retail sales and a 6% rise in unit profitability; Finance penetration remained near 75%.
• AutoNation Finance Originations: $464 million in loan originations; portfolio reached $1.8 billion with 83% debt funded after ABS issuance.
• ABS Transaction: $700 million issued, upsized due to 7x oversubscription; fixed rate at 4.9% coupon, reducing floating rate exposure.
• Adjusted SG&A: Adjusted SG&A was 66.2% of gross profit, at the low end of the 66%-67% target range.
• Leverage: Quarter-end leverage of 2.33x EBITDA, down from 2.56x at the end of the previous quarter, within the 2x-3x target range.
• CapEx: $154 million for 2025, 15% lower than 2024. CapEx-to-depreciation ratio was 1.2x, down from 1.5x a year ago.
• Free Cash Flow: Adjusted free cash flow of $394 million for the first half of 2025, equaling 100% of adjusted net income.
• Insurance Recovery: $10 million received under the cyber insurance policy related to the prior year’s CDK outage, with additional amounts expected in 2025.
• Technician Workforce: Same-store technician headcount up 3%, accompanied by decreased turnover and improved technician efficiency.
• M&A Activity: One acquisition closed year-to-date totaling two franchise stores, with additional activity expected in the second half.

SUMMARY

AutoNation(AN 0.29%) delivered notable revenue and margin gains across all major business lines, highlighting double-digit percentage improvements in aftersales, customer financial services, and used vehicle operations. Active capital deployment included share repurchases, targeted M&A, and the successful execution of a large, oversubscribed asset-backed securitization to support AutoNation Finance portfolio growth. Management detailed a substantial GAAP impairment charge of $65 million against the mobile service business and $54 million against certain franchise assets, revised expectations for mobile service growth, and acknowledged operating headwinds in collision revenue and supply chain constraints in used vehicle procurement. Strategic responses to tariff-related disruptions, disciplined capital and expense management, and initiatives to enhance technician capacity were underscored as keys to driving operating leverage and positioning for stable margins in the remainder of 2025.

• CEO Mike Manley highlighted that recent US federal statutory changes, specifically citing “interest rate deductibility and auto loans and bonus depreciation for commercial enterprise” are anticipated to be supportive for vehicle demand.
• CFO Tom Szlosek noted that AutoNation Finance’s weighted average origination FICO score improved to 698, up from 675 a year ago, with thirty-day-plus delinquency rates dropping to 2.4%, reflecting strengthened portfolio quality.
• Leadership confirmed a deliberate focus on methodical expansion of AutoNation USA and prioritization of dealership densification to maximize synergy capture through tuck-in M&A.
• Chief Executive Officer Mike Manley stated, “MSRP and invoice prices have been stable,” referencing limited direct pricing pressure from tariffs.

INDUSTRY GLOSSARY

• AutoNation Finance: The captive finance subsidiary of AutoNation, providing and servicing automotive loans originated at company dealerships.
• Asset-Backed Securitization (ABS): A financing structure where pools of AutoNation Finance loans are repackaged and sold as securities, raising funds for further loan originations.
• CFS (Customer Financial Services): Products and services related to vehicle financing, insurance, and associated product attachment at the point of sale.
• CDK outage: A 2024 IT systems disruption affecting dealership operations and transaction processing, cited as a prior-period headwind.

Full Conference Call Transcript

Mike Manley: Hey. Thanks, Derek, and good morning, everyone. Thank you for joining us today. I am going to start on Slide three. Obviously, we are 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. 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 us well for the second half of 2025. Customer financial services gross profit also increased by 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. Tom will take you through the details, but the results were strong on both the sequential and the 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. And we continue to focus on our technician workforce by recruiting, retaining, and, of course, developing our technicians. And I do think 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, enabling continued growth and 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 is 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 US administration to result in clarification and, of course, finalization of the auto tariff structures in the coming period. 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 operate equally with the desire to offset any new tariffs. And as I said previously, we expect that AutoNation, to some extent, will be cushioned into many new tariffs by a cross-shopping effect whereby demands are non-impacted or lesser impacted brands and models will potentially supply those for more affected counterparts. Naturally, in this situation, we hold both sides of the trade with our broad portfolio with brands and models, which I think gives us a distinct advantage.

Now to close, we are encouraged by some of the provisions contained in the recently enacted US federal statute, which includes interest rate deductibility and auto loans and bonus depreciation for commercial enterprise. Although we are not forecasting a ban on sort of new demand, but as you will appreciate, every incremental action to encourage vehicle purchases is very welcome by me and the team. Now I will turn the call over to Tom to take you through our results.

Tom Szlosek: Thank you, Mike. Let me kick off with a quick reminder that our second quarter 2024 operating results were adversely impacted by the CDK outage and that our second quarter 2025 operating results were adversely impacted by the tariff-related shift of volume into the first quarter. So with that, I am on Slide four 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, including 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, 66.2%, improved as expected and was at the lower end of the 66 to 67% range for our ongoing expectation. 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.

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 to $163 million a year ago, up 29%. Total shares repurchased over the past twelve 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 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-related rights related to nine stores, with 90% of that charge relating to a single domestic brand. Slide five provides some more color for new vehicle performance. New vehicle unit volumes were a strong point for the quarter, increasing 7% from a year ago on a total store and 8% on a same-store basis.

Full store unit sales were up across our three segments with import units up 4%, premium luxury up 5%, and domestic up 17%, reflecting favorable supply, better incentives, and good performance by our commercial teams. By powertrain, hybrid new vehicle unit sales, which is about 20% of our volume, were up more than 40% from the second quarter of a year ago. Battery electric new vehicle sales, which is about 7% of our volume, were up nearly 20% from a year ago, reflecting OEM actions with incentives and some pre-buying ahead of the termination of government incentives. Internal combustion engine new vehicle sales were up about 1%.

Our new vehicle unit profitability averaged $2,785 for the quarter, in line with the first quarter, and unit profitability increased for all three segments on a sequential basis. New vehicle inventory ended the quarter at 41,000 units, compared to about 44,000 units a year ago. This represents forty-nine days of supply, down eighteen days from the second quarter of last year and up from thirty-eight days at the March. While we do not expect the first quarter and second quarter same-store unit growth of 7% and 8% respectively, to continue into the second half, we are encouraged by the last couple of weeks of new vehicle sales activity after a slow start to July.

Turning to Slide six. Used vehicle retail unit sales improved on a year-over-year same-store basis by 6%, which was fueled by double-digit growth in lower-priced, i.e., less than $20,000, and higher-priced, i.e., greater than $40,000 vehicles, along with more modest growth in our mid-priced vehicles. On a sequential basis, the number of used vehicle retail units increased by 3%. Average retail prices were stable. Used vehicle retail unit profitability remained stable versus last year and sequentially at $1,622 per unit. We remain focused on optimizing vehicle acquisition, reconditioning, inventory velocity, and pricing. Total used gross profit was up 13% from last year, reflecting the retail unit sales growth, stable retail unit profitability, and better wholesale results.

Although our supply of used vehicles has been at its highest level since June 2022, supply availability remains a constant challenge relative to our sales ambition, driven by lower new vehicle production during COVID. Thankfully, we continue to be competitive in securing used vehicles from our retail, 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 am now on Slide seven, 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 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 eight provides an update on AutoNation Finance, our captive finance company. The business’ 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 $500 million 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 2025 compared to 675 in the second quarter of 2024. Delinquency rates, so thirty-day plus at quarter-end of 2.4% are solid, down from 3.8% a year ago. That benefited from the sale of the mostly subprime legacy CIG portfolio. As the new portfolio continues toward full maturity, we do expect the delinquency rates to normalize to the three percentage range. 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 are also pleased with the 4.9% weighted average coupon rate. Fixed rate securitization also removes floating rate exposure for a substantial portion of our fixed rate loan portfolio. Equally as important is the debt funding rate, meaning the portion of the portfolio that is funded with debt as opposed to by our own retained earnings. Higher debt funding rates lead to higher overall returns for AutoNation shareholders.

The debt funding rate for the ABS transaction was 98%, which helped to bring the debt funding rate for the overall $1.8 billion portfolio from 74% at the end of the first quarter to 83% at the end of the second quarter. As we become a more regular issuer of ABS securities, we expect to further increase the debt funding levels of the overall portfolio. And we are 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 nine.

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 pay, which was up 10%, warranty up 25%, internal work up 14%, and wholesale up 8%. All offsetting a 6% decline in collision revenue as that industry has struggled to offset a declining proportion of repair to replace insurance decisioning. 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 quarter-end technician 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.

To Slide 10, adjusted free cash flow for the first half totaled $394 million or 100% of adjusted net income. That is compared to $519 million and 147% conversion a year ago. As we mentioned last year, the CDK outage impacted the timing of certain payments in 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 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 2025, and we are accounting for these recoveries as income when they are received.

On Slide 11, as we have 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 2025, which was 15% lower than 2024. We continue to actively explore M&A opportunities to add scale and density in our existing markets. So far this year, we have 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 grade balance sheet and the associated leverage level. 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: Yes. Thank you, Tom. So we got off to a great start in the first half of 2025, and I think our quarter performance was strong both on a year-over-year and sequential basis. I think we are 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. 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 impairment that Tom mentioned, specifically around our mobile service business.

Developing an independent mobile service offering has given us the ability to provide 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 has been both a challenge and a 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 is 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 organization. I am very pleased that it is part of our portfolio. It is already helping to facilitate the growth of our emerging fleet service business. And it is now providing flexible labor resources to our dealerships.

And, of course, it has allowed us to insource a number of products and services that previously we had to subcontract. Excuse me, Derek. It is not enough tea this morning, folks. 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 am really also confident that we have the right team in place to do that. We have got some excellent people working in this area. So with that, I am going to direct hand it over to you for Q&A. Thank you. 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. Please ensure that your device is unmuted locally. The first question today will be from the line of Michael Ward with Citi Research. Please go ahead. Your line is open.

Michael Ward: Thank you very much. Good morning, everyone. AutoNation in the past has been less active than the other dealers on the acquisition side. But some of your comments, it sounds like maybe there might be some more opportunities. Could you just talk a little bit about what kind of flexibility you have? What kind of size you might be looking at? The markets 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?

Tom Szlosek: Mike, thanks for the question. I will have a couple of quick comments and then let Mike share his thoughts. But, you know, between M&A and repo, we have spent similar amounts in ’24 versus ’25, roughly $325 to $350 million on repurchases. You know, given the environment and particularly with the tariff uncertainty, we are 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 have 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.

But we are committed to both share repurchases and M&A. It is a strong pipeline. Mike, is there anything else you want to add to that in terms of Mike’s question?

Mike Manley: Well, I just think I will just add some clarity because Michael has asked about, I think, scale and territory as well. You know, 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. So we are 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 does not mean we would not look at a market outside of the US.

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. But 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, Tom, I have nothing to add to that.

Michael Ward: Perfect. Thanks.

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

Rajat Gupta: Great. Thanks for taking the questions. I wanted to follow up on Tom’s comments on just the July pickup. You know, after a slow start to the month. Curious to get a thought, 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 we are also getting some certainty around the tariffs, you know, like with the Japan deal, hopefully we will 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.

Mike Manley: Thanks, Rajat. That is good to hear from you. I am 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 think I still think that. I think that we have seen fluctuations around that trajectory, but I still believe that is where we can end up. It is good to see that we have seen tariffs, certainly in some tariff deals. That is obviously going to continue when the major trading partners are still out there. But I am 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 are doing. We are 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. But I think what we have seen already and what we have seen in the past will be the prevailing approach, and that is to try and maintain their competitive position in the market 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 will also see adjustments over time to OEMs portfolios.

From a margin point of view, I think you know, the quarter is very interesting. We saw sequential improvement in our margin, but I do think that you are going to see stability for the balance of the year. That does not mean to say that you are not going to see periodic changes. For example, we know that the batch 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 is inevitable.

So there are going to be periods where, as we have 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, that there is 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 is 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 are positioned well.

I thought, you know, 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. And I think our used team and our general managers and our regional operators built inventory on used because they are bullish on the used car market. And I do not think I am talking about the overall market because we do not have an influence on that. But we are a relatively small player, and I think they have aspirations to grow that. And we are 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 on the used side. I think that is going to be their focus. So that is kind of how I am viewing the back half. And I think Tom might want to just add a couple of points.

Tom Szlosek: Yeah. Just on July specifically. I mean, we look at the first half of the year, it is 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 gave back some of that pull in May and June and I think also a bit in July. You know? And 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.

And I, you know, it is going to take, you know, a few more weeks to, you know, get under our belt, but it does seem to have turned, you know, in a good direction for us.

Rajat Gupta: Understood. That is helpful. And, obviously, great execution on the used side. Just a quick follow-up on the AutoNation Finance portfolio ramp. Any updated thoughts on just penetration targets, you know, for the rest of the year? You know, 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.

Tom Szlosek: No. I think we do fully expect the business to continue growing its penetration. We have got some new internal initiatives that are in place to drive that even higher. A bolt-on mostly on the used side, but also, you know, where applicable on the new side. And 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 improved by a million dollars year-over-year 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 upfront either required accounting losses behind us, you know, it is going to scale very nicely. You know, pretty stable fixed base of cost. But as long as we can manage that portfolio well, which this business is doing, as I mentioned, with delinquency, it should be a nice grower for us.

Mike Manley: Yeah. But I think you that is also compounded by the results that you and Jeff and your team delivered some time today. Yeah. Right? I mean, it released equity. And I think added to the confidence in terms of how the markets view in that portfolio and view in the credit risk in that portfolio. So I would agree with what you said, and I think that because the demand was so good, it actually gave you more flexibility from a capital point of view than we were thinking. Yeah. So I agree. Yeah. Okay.

Rajat Gupta: Understood. Great. Thanks for all the color.

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

Douglas Dutton: Thank you. My apologies there, Doug. We were getting some background noise on your line. I will just try opening it once more. Apologies, Doug. We are getting a lot of background noise on your line. If you are able to dial back in, that would be great. We will get you back in the queue. Next question today will be from the line of Bret Jordan with Jefferies. Please go ahead. Your line is now open.

Bret Jordan: 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: Yeah. So when I think about our performance in aftersales, broadly, we saw both an increase in volume and an increase 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 vehicle parks that we are responsible for in a very, very sensible way with price. So from our point of view, as we think about pricing, there is 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 a competitive position.

So I think that you are 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 is happening in each market, and that is how it has to be managed. He is managing it with his team in each market. From an OEM point of view, we have seen, obviously, some pricing. Some of that is their normal midyear pricing that they have taken. Some of it, they have been more explicit that it is pricing that they are taking in general as a result of inflationary increases on their side.

We are not that is not clear across all of the OEMs at this moment in time. You know? Reference our earlier conversation, we are beginning they are beginning to get more certainty of their trading conditions, which ultimately they then have to decide how strategically they are going to play it out. But some have shown us that they have taken pricing. I would say that it is, in my view, limited, and in my view, the ones that moved have been very targeted, and they are 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, you know, that represents a significant marketplace that is addressable from us. So, you know, Tom talked about focus on retaining, growing the technician base. Obviously, that is a highly competitive market, big focus for the team there. But also making sure that, as I have 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 we will see how the market plays out. I spent some time talking about expectation with 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 is no doubt that from a macro point of view, I think you are 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 aftersales side. So we are 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 am hoping that what we see is continued volume and pricing where it is appropriate in the marketplace. Tom, do you want to add anything to that?

Bret Jordan: Just a quick follow-up. Can you give us an update on AutoNation USA, sort of obviously, the scarcity of good used inventory. But, yeah, how do you see that strategy going forward the next year or two?

Mike Manley: Well, it goes to what I talked about in terms of market and densification in the market. We know an AutoNation USA is additive once we have got a certain amount of density. And we know that if we have an AutoNation USA that is a long way away from any supporting businesses, it is a very, very tough business. So what we have done now, you know, many years ago, we had this big growth forecast, which I talked about in the past, and we have moderated that. You are going to see additional openings of AutoNation USA businesses this year. For sure, they are already planned. They are already in development.

They are 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. The what the team is working on is obviously to minimize the overlap in terms of what these businesses offer to the marketplace. We are not fully optimized there, to be perfectly frank. I think they are doing a lot of work to make sure that, you know, there is any unnecessary overlap in terms of product offering, warranties, and those things is eradicated because that does not make a lot of sense. And as I said, we have done a lot of work there, but more work to come.

But, as I said, it is very additive when it goes into a market that already has density. It is going to continue to grow, but it is going to be very methodical growth.

Bret Jordan: Great. Thank you.

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

Danielle Hogan: 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 you know, what are you looking out for? And what is the outlook on that top line? Thank you.

Mike Manley: Well, I think you are exactly right. I mean, whether you talk about new vehicle, used vehicle, service, or parts, the primary focus for us in the areas that we can influence is affordability. To make sure that what is not happening is demand getting stifled or snuffed out purely because it has been priced out of the marketplace. We do not have full control of that, as you know, but it is also top of mind for every OEM. Every time we talk to our partners, they are very, very focused on that. And you know the challenges that they are 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 typically, firstly, from a new volume point of view, there is 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 vehicle affordability plays out in the coming months and years. If it does not 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 are thinking about that development.

But there is no doubt that there is and will remain opportunity in the sales side of the business. And it comes with multiple benefits that we have discussed on plenty of occasions. And, 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 is still going to be opportunity for us to go into the future. Hopefully, that has touched on most of the points you wanted us to discuss.

Danielle Hogan: Yes. Absolutely. And then one point, Danielle, you also mentioned you also mentioned you had also mentioned as we have said in the past, we have plenty of physical capacity, and we are continuing to drive the technician workforce up as well.

Danielle Hogan: Great. And then one follow-up on the used 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-$20,000 over $40,000 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 AutoNation to grow and consolidate in this market?

Mike Manley: Yeah. Well, firstly, the market is so large and our share is so small that there is plenty of opportunity for us to grow. Whether that is to increase the turn rate of our display base that physically set our dealerships or whether it is to continue to invest in both the processes and the technology to be able to remove the constraints of a physical dealer infrastructure. And there is no doubt that we are seeing advances from competitors in different areas, whether it is improving their turn rates and holding their margins or whether it is through digital sales channels.

But I think the market is so large and the combined, if you like, public retail, whether they are digital technology play or their technology and physical play, market share is so small that there is plenty of room for all of us to grow. And you know, I think that is regardless of the CEOs you speak to, I think their answer is going to be almost cut and paste of what I have said. I think we all view it as an area that there is opportunity to grow, and we are 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. And that is 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 is a lot of competition out there, but it is a very, very big market. And it is one that we are focused on. And it is one that is much more in our control than maybe some of the other things. So yeah,

Danielle Hogan: Absolutely. Competition makes us all better. Thank you.

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

Jeff Lick: Good morning. Thank you for taking my question and congrats on a great quarter. Just wanted to ask on the SG&A percent of gross, that is a pretty strong performance. I was wondering if you maybe can parse out, you know, the parts where there was, you know, your kind of true real, you know, cost efficiencies, operational improvements, you know, where you are seeing benefits versus the stuff that maybe caused by just the, you know, increase in gross, taking the, you know, percent of gross down. And then a follow-up question. I was wondering if you could also talk about AutoNation Finance and just how the business lives with the legacy business.

And do I know about 80% or so is used. But I am just curious, you know, how those two businesses are kind of, you know, as they are growing, you know, living with one another.

Tom Szlosek: Yeah. Thanks, Jeff. 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 is bringing a lot of interesting new channels for us to explore. But, you know, with the idea of being more productive in that area. You know, compensation, we try and maintain as much variability and incentive structure in place as we can.

I think that is working well for us. And then, you know, on the other SG&A, a number of different categories there. That are a big focus for us. Like, for example, you know, we have a number of initiatives in our physical plant, whether it is 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.

So those are the types of, you know, examples of things that, you know, we have got, you know, that we are working with and will continue to make and drive productivity and other SG&A. In terms of AutoNation Finance in terms of its, you know, coexistence with the business. I mean, Jeff Butler, who runs the business for us, is part of Mike’s leadership team. He is 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. Your perfect example is in CFS, you know, where we talk about 70% of CFS being product attach rates.

AutoNation Finance has a superior, you know, attach rate, you know, relative to, you know, other potential lenders, and it is 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 holders of, you know, 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 business, and, you know, it is working well. So not only are they delivering results in their P&L, but they are helping to influence the rest of the business.

Mike Manley: Just add a little bit to that, please, 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 does not mean to say we cannot obviously put them in a prime position. Clearly, that is 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 is the response rate, the time of response, whether it is their book to look, whether it is 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 manager in store, means they are a valuable partner, and it takes time to build up. But I think Jeff is really establishing that with his team.

There is, you know, from my point of view, obviously, there is right to business, but the way they behave, there is no right to business. It is earned. And that has already yielded great results and remains the cornerstone of their focus.

Jeff Lick: I appreciate all the color. Thanks very much.

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

Douglas Dutton: Hey, team. Apologies for the connection issue earlier. If this does not work, you can feel free to just kick me off. I am going to ask one quick one here. So it is not like you are running your vacuum or something.

Tom Szlosek: Believe it or not, I was not. I am locked in on the model here. But just first question or my only question is just on PP&E CapEx. It looks like it has 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?

Tom Szlosek: Yes. Great question, Doug. We have I do not think it is like a concerted effort to reduce CapEx, and it can be cyclical. You know, most of it, as I was saying, has to do with our franchise stores. And it depends on where you are in, you know, each OEM’s cycle in terms of, you know, their putting out their, you know, their models of their stores. Sometimes you get in lulls, and sometimes you get in peaks. I will say that we, you know, on top of that is a variable.

We have tightened it up, you know, the overall, you know, CapEx process internally trying to be as focused on returns as we can, 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 are a lot of mouths to feed when it comes to, you know, CapEx, and I think we are, you know, prioritizing in the best way we know, which is, you know, return focus where you can.

And where it is compulsory, making sure you are, you know, supporting it in a way that, you know, can be smooth and, you know, over time as is allowed. That is kind of what I would characterize.

Mike Manley: Yeah. I am just going to add something to it because I do not think it reflected the stuff that you and the team are doing. I mean, it is very easy, is it not, under this banner of maintenance capital people to put projects through that, frankly, are not additive to the returns that we deliver, just consume. And 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 would expect from dollars invested in other parts of the business.

It is not always easy to identify that with the same fidelity that you would, for example, with a share repurchase or with an M&A, but that is certainly the discipline that is in place. And to your point, I do not know whether we are in a down cycle at the moment. I know all of the projects that are coming through, but there is 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.

Tom Szlosek: Thanks, Mike.

Douglas Dutton: Amazing. I think that is helpful color and that is all I have got, guys. Congrats on a great quarter.

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

Mike Manley: Yes. Thank you. First, I would 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 get to you. And the idea here is to give you as much insight as we can and as reasonable for the running of the business. I am 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.

And as always, it is 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 do not say it with any frequency at all. I think we have some of the most amazing people in this industry, and I am very pleased to be part of the team with them. And I want to thank them for H1 and just remind them, let us try and do it all again for H2. So thank you, everybody.

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