Asbury Automotive Group, Inc. (ABG) Q2 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to the Asbury Automotive Group Second Quarter 26 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief Q&A session will follow the formal presentation. If anyone should require operator assistance during the conference, please press As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Reeves, vice president of finance and investor relations.

Thank you, sir.

You may begin.

Thanks, operator, and good morning. As noted, today's call is being recorded and will be available for replay later this afternoon. Welcome to Asbury Automotive Group's second quarter 26 earnings call. The press release detailing Asbury's second quarter results issued earlier this morning and is posted on our website at investors.asburyauto.com. Participating with me today are Daniel Clara, our president and chief executive officer and Michael D. Welch, our senior vice president and chief financial officer. At the conclusion of our remarks, we will open the call for questions and will be available later today for any follow-up questions. Before we begin, we must remind you that the discussion during the call today is likely to contain forward looking statements. Forward looking statements are statements other than those which are historical in nature, which may include financial projections, forecasts and current expectations. Each of which is subject to significant uncertainties. For information regarding certain of the risks that may cause actual results to differ materially from these statements, please see our filings with the SEC from time to time, including our Form 10 ks for the year ended 12/31/2025 and any subsequently filed quarterly reports on Form 10 Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward looking statements. In addition, certain non GAAP financial measures as defined under SEC rule may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non GAAP financial measures the most directly comparable GAAP measures on our website. Comparisons will be made on a year over year basis unless we indicate otherwise. We have also posted an updated investor presentation on our website investors.asburyauto.com. Highlighting our second quarter results. It is my pleasure to now hand the call over to our President and CEO, Daniel Clara. Daniel?

Thank you, Chris, and good morning, everyone. Welcome to our second quarter earnings call. I want to begin my first earnings call as Asbury's CEO, by thanking our team members across the country for the work they do every day to serve our guests and support 1 another. Your commitment, resilience, and focus on continuous improvement are what makes this company strong. As we noted in our prior quarter commentary, 2026 is a year of transition for Asbury as we finalize the rollout of Tekion across our store base. We are focused on growth through operational improvements, and continue our balanced approach to capital allocation. Our results continue to reflect the investment associated with completing the Tekion rollout while simultaneously operating our legacy systems. This investment positions us to capture meaningful operating efficiencies as we anticipate completion of the rollout by October of this year. Rolling out a new DMS at this scale is a significant undertaking. And I am proud of our team members' commitment to making this transition successful. Crossing the 70% implementation milestone is important because an increasing percentage of our store base is now positioned to benefit from a common operating platform. Importantly, the operational improvements we are seeing are not isolated. Markets that have been on Tekion the longest continue to demonstrate better productivity stronger customer pay performance, higher technician efficiency, and improving sales effectiveness. For example, our Koons, Georgia, and Florida markets have at least 5 months postconversion under their belts. Just looking at the month of June, those stores grew average units per salesperson by 12% and increased the dollars per technician by 10%. These are just a few of the operating metrics we expected to improve as stores mature on the platform. Our strategic initiatives, which I will refer to as our 5 pillars, are focused on increasing new vehicle market share, reestablishing consistent growth in customer pay gross profit, driving profitable volume growth in used vehicles, managing SG&A, and leveraging technology. A successful migration to Tekion remains a top priority as we approach our final remaining stores. Collectively, these pillars are not a change in direction. They represent a sharpened way of executing the priorities that will drive growth and returns for our shareholders. On the capital allocation front, we continue deploying capital into our own shares because we believe our stock represents an attractive long term investment while maintaining ample liquidity and flexibility. In the first 2 quarters combined, we have repurchased 7% of our 2025 ending share count. Michael will provide additional details on our approach to capital allocation. Now I will speak to our operational results on a same store basis. Unless otherwise noted. Starting with new vehicles. New units were down 6%. New PVRs were $2.9 thousand on a same store basis $3.12 thousand on an all store basis. With flattening sequential declines indicating we are near normalized levels. We ended the quarter with new day supply of 53 days. A healthy level that supports stabilizing PVR. Next, turning to used vehicles. We earned a used retail PVR of $1.93 thousand. A sequential increase of 5% on effectively the same store volume as the first quarter. Our used vehicle strategy is already producing sequential improvement while positioning us for higher volume over time. As a reminder, our used vehicle strategy has been on maintaining discipline rather than chasing volume for volume's sake. With an emphasis on maximizing gross profit. In May, we began shifting our approach toward driving higher used vehicle volume, while still maintaining healthy PVRs. We are beginning to see positive results from this strategy. As we continue deploying this used vehicle strategy across the organization, I expect to see increased used vehicle volume as we move into the fourth quarter of 2026. We are also continuing to invest in our appraisal and pricing tools while maintaining discipline in our sourcing of vehicles from consumers, off lease channels, along with strategic acquisitions through the auctions. Finally, we ended the quarter with a 37 day supply. Moving to F&I. We earned an F&I PVR of $2.21 thousand. And finally, in the second quarter, our total front-end yield per vehicle was $4.7 thousand. Next, on parts and service. Our customer pay business was flat year over year, and our overall parts and service gross profit was slightly down. As I mentioned earlier, it takes 5 to 6 months to see operational improvements from our DMS change. A large number of transition stores are still within this window, and we expect a return to normalized growth levels in the coming quarters. We did see better traction in June, where total same store fixed gross profit was up 4%. Now I would like to quickly talk about continued focus on operational efficiency. Along with growing gross profit, cost discipline remains a top priority. And we measure ourselves on how well we can manage expenses in order to drive a strong operating margin. Our same store adjusted SG&A as a percentage of gross profit was 65.3% in the quarter. Once all stores are converted to Tekion and we begin to gain all its efficiency, we believe our SG&A can get to the low 60% range by the end of 2027. We also continue to invest in AI across every department in the company. Whether in operations or support, we have seen meaningful opportunities to improve efficiency, assist our team members and enhance the guest experience. As we enter the second half of the year, we have greater visibility into the completion of our technology rollout. Encouraging operational trends in our mature Tekion markets, a healthy balance sheet, meaningful liquidity, significant flexibility to continue investing in our business while returning capital to our shareholders. We believe the foundation we are building today positions us very well for long term value creation. And with that, I will now pass the call to Michael to discuss our financial results for the quarter. Michael?

Thank you, Daniel, and good morning, everybody. I will start with our high level financial results for the second quarter. We generated $4.4 billion in revenue. Earned a gross profit of $753 million and a gross profit margin of 17.2%. And we delivered an adjusted operating margin of 5.3%. Our adjusted net income was $125 million, Our adjusted EBITDA was $235 million. And adjusted EPS was $6.82 for the quarter. In addition, the noncash deferral headwind due to TCA this Q2 was $0.66 per share. Our adjusted EPS would have been $7.48 without the deferral impact. Adjusted net income for the second quarter of 2026 excludes no tax, $4 million related to Tekion implementation expenses, $3 million of noncash asset impairments, $2 million of weather related losses, and $1 million related to duplicate DMS related expenses. Adjusted SG&A as a percentage of gross profit on an all store basis came in at 66%. In line with our expectations and a 260-bp improvement over the first quarter of this year. We expect gradual improvement throughout the year in our SG&A leverage. There are some frictional costs for our Tekion rollout not associated with the onetime implementation duplicative costs that are short term in nature that ease over time as the stores become more proficient with the technology, as Daniel mentioned. With 30% of our store base remaining to be rolled out as of today, the third quarter will be a little heavier lift compared to the second quarter in order to complete the rollout. We have already transitioned 13 stores in July, and we see a path to start realizing some of the cost savings in late 2026 and into 2027. Next, the adjusted tax rate for the quarter was 24.3%. An upside to our initial forecast. We expect the effective tax rate to be approximately 25% for the remainder of the year. DCA generated $5 million of pretax income in the second quarter. The negative non cash deferral impact for the quarter net of tax is about $12 million We anticipate implementing TCA to the Chambers stores in the second half of this year to complete the rollout to the company. We generated $305 million of adjusted operating cash flow year to date. Excluding real estate purchases, we spent $117 million on capital expenditures in the first half of the year and still anticipate approximately $250 million in CapEx spend for the full year 2026. Adjusted free cash flow was $188 million through the end of June. We ended the quarter with $966 million of liquidity, comprised of floor plan offset accounts, availability on both our used line and revolving credit facility, and cash excluding cash and total care auto. Our transaction adjusted net leverage ratio was 3.4x at the end of the second quarter. As Dan mentioned, we took the opportunity to lean more heavily into buybacks during the quarter purchasing 668 thousand shares for $131 million. On a year to date basis, we have bought back 1.35 million shares for $278 million. We made the strategic decision to temporarily take on higher leverage given the valuation of our shares and the performance outlook of our business. Our target of 3.0x is still a priority for us, and we plan to reach it in early to mid-2027. And with that, this concludes our prepared remarks. I will now turn the call over to the operator and take your questions. Operator.

Thank you. We will now be conducting a Q&A session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 1 moment, please, while we poll for questions. Our first question comes from Jeffrey Lick with Stephens Inc. Please proceed with your question.

Congrats on the Tekion on progress. Daniel or Michael, I was wondering if you would start off with just talking about you compare to Q1, what is changed and what is evolved? And if you could build into that, your -- the -6% in same-store new, maybe just drill down into what parts of that are kind of Tekion related versus other type of market factors and whatnot?

Yeah. I think things have changed a little bit. SG first quarter had the noise from the weather in January and February. So this is kind of a, you know, I will call it a normal quarter in terms of weather related and those impacts. We saw a little bit of a decline in new vehicle PVR. So that is, you know, as expected, we still think $3 thousand is probably the right long term number. So we saw a little bit of a decline there, but you know, nothing out of the ordinary. And then on SG and A, with the higher unit gross profit this quarter, and a little bit of an improvement on some of the stores that kind of are in that 5 to 6 month window. We saw the SG&A come down, you know, at 66%. So those are big ones. Fixed ops, you know, we still have a lot of stores. in the heart of the Tekion transition, so we are seeing the impact on fixed ops still. But expect, you know, more positive results that we saw. In June, we talked we talked about the 4% growth in June. And so we expect to see, you know, continued improvement on fixed ops going forward this year. But, again, we are right at the heart of the Tekion rollout phase right now.

Jeffrey, just to add to Michael's comment too. On the new-car side, down 6% to your point. What percentage of that is Tekion, and what could be some market conditions or OEM mix. From a Tekion conversion, as I stated last quarter, it is still -- we do not see the immediate impact that we see with customer pay technicians on the muscle memory, but there is still an adaptation period for sales managers and salespeople on just the basic blocking and tackling of Internet leads, follow-up, etcetera. it is not so much about they know what to do of course, they do. It is more about just learning the new system and navigating through it. So we see a little bit of a dip in sales when we install a new store, but it is a much faster recovery than we do in the fixed side. On the other side of the equation too, is we had an impact on still on the Stellantis portfolio is down 28% over last quarter. We are starting to see improvements on the inventory mix of those stores. But as you know, that takes time for it to really replace the old high priced inventory to the new inventory that is coming in. And then the last 1, that I will mention is also in some of the imports. We have seen a pretty significant drop in volume some of it having to do with the rush that there was last year to buy some of the EVs due to the incentives going away.

And then just a quick follow-up On used, the used grew or shrank faster you call it, you know, same store down 14% versus same store down 6% for new. You know, what A lot of us tend to use that ratio of, hey. You know, you are you know, if your trade ins or your inventory availability should maybe grow at the same rate or shrink at the same rate as new? there is a bit of a spread there. I am assuming there is you alluded to it in the call or your prepared remarks about Tekion. Maybe you can just kind of reconcile that for us and then talk about how the new strategy of ramping up volume a little bit is helping that.

Absolutely. Yes. Part of it, to your point, I mean, part of the decrease in used cars is you sell less new cars, you are going to take in less trades. And so some of that is part of that. But I will tell you the biggest impact is just the slow but very methodical and strategic approach to moving from a strategy that we are not chasing volume and maximizing gross profit to a strategy where we are going to go more aggressively after the volume while maintaining healthy PVRs. And that has to be done in a very slow methodical approach because let's not forget that September is right around the corner We all know what happens to used car valuations when September comes. And so going in and aggressively acquiring inventory just to hit a top line volume number and then having to offload agent inventory come September, October, does not make sense. So the approach that we have taken is strategically acquiring inventory. We bought approximately 6.5 thousand cars from auction last quarter. You can see the impact in our days of supply from a 30 to 37 day supply. And we still have a healthy inventory. We are 70% of our inventory is less than 30 days. So we are starting to see the improvements. You look at also the impact that additional inventories having in our internal gross profit. It is having a nice impact there. As we continue to execute on this methodical approach, that is where I feel comfortable that by the time we go into the fourth quarter, you will start to see the increase in volume in year over year. Thank you, Joe. Thank you.

Our next question comes from Rajat Gupta with JPMorgan. Please proceed with your question.

Great. Thanks for taking the question. Just wanted to follow-up on the SG&A comments and some of the Koons and Florida Stores on Tekion. You know, given, like, those stores have had a bit of a larger period of seasoning with Tekion, are you able to share, you know, what the SG&A-to-gross is for those stores versus pre-Tekion? You know, any directional color on that would be helpful. And then just to clarify, you know, you are suggesting that SG&A to gross will continue to decline in 3Q and 4Q. Just wanted to clarify that, and I have a quick follow-up.

Yeah. I will let Daniel hit a few of the detailed numbers, but, you know, I do not have the we do not have the I do not have the SG&A by store in front of me. But just as a reminder, the Kuhn stores have been on it for about a year. They are the most seasoned of the stores. The Atlanta stores went on December, so they are just hitting that 6 month mark at the very end of the quarter. And then the Florida stores went on in January and February, so they are really in that, you know, right at the end of the quarter, they hit the 5 month mark. So I will say of those 3 buckets that we gave you, 1's seasoned well past the time frame. The other 1 just hit the end of that time frame. Right at the end of the quarter. So, again, as we as we talk about the numbers, those are kind of the spectrum to where we are in the in the kind of process From an SG&A perspective, you know, next quarter is a pretty heavy quarter for implementations, but we still think we will be able to shrink the SG&A percentage of gross in the third quarter. And then you will see continued trial decline in fourth quarter and then on in the first and second quarter. And we think we can get to that low sixties number kind of in the know, toward the end of 2 thousand 27. Kind of where we are projecting. So that is kind of the you will see, you know, steady decline each quarter as we go through from an SG&A perspective. But Dan has a maybe a few more numbers on the on the sales side, but, again, I do not I just do not have the SG&A number of my store in front of me.

Rajat, good morning. I will give you I will share a little bit more information. But before I share that, you know, I cannot stress enough how excited we are that 70% of our stores have already converted to Tekion. We believe this investment will deliver meaningful long term value not just by enhancing the guest experience, but also making us a lot more efficient. And so when you look, I will share with you a few other numbers that we have not quoted in the past. From a units per sales manager, I am just gonna focus on Koons on a quarter over quarter increased 14.2% in productivity. Another number that I will give you also is units per F&I manager, again, on a quarter over quarter sequential increase. This will be Koons increased in F&I's 15.2%. So we are seeing healthy efficiencies coming from both the variable and the fixed side of it. And we just cannot be more excited to finish the completion and have all the stores operating under 1 DMS so that we can gain the efficiencies and get back to normalized growth levels.

Got it. that is helpful color. And then just to follow-up on the parts and service comments. I appreciate the comment on June, you know, +4%. Is it safe to assume that the third quarter should be at least at or above 4% given the run rate? And then just zooming out, is it still safe to assume that the normalized growth rate is like, mid single digit for this business? I mean, we have been hearing I would say, like, some data points around, you know, maybe labor rates are peaking out and, you know, we are seeing consumers, you know, just downshift a bit. Given affordability concerns? Curious to get your thoughts on that and obviously the third quarter. Thanks.

Yeah. I will I will start on the on the service part of it, and then Michael can jump in as well. On the first question was what we expect for Q3. As I mentioned, I shared the month of June of 4%. You know, July is starting pretty similar to what was -- not starting. We are almost done. But it is very similar to what we saw in June. So it is it is very exciting to see some level of consistency there. And as we move into the third quarter, we believe that, that low to mid single digit in customer pay is achievable. Then you had asked me, can you repeat the second question? There was a second part to it, please. Just like 1 of the broader parts and services question. You know, terms of medium- to long-term normalized growth rate. We have been hearing some data points where, you know, we would suggest that, it is becoming harder to increase the labor rates. And also, some impact to traffic because of consumer downshifting due to affordability concern. I am just curious if you are feeling any of that at your stores. Thanks. You know, we have not seen much of that, but I will tell you 1 of the good opportunities is as you roll out a new DMS is it really allows you the opportunity to adjust the labor rates as you need to. And in our approach, is not so much about maximizing the ticket with a consumer where we only see that consumer 1 time. it is more about growing the customer payroll account and growing that retention basis. So that we can have sustainable growth as we move forward. We have been able to adjust labor rates as we are rolling out Tekion. And we see that as a as another 1 of the impacts that we have of rolling out a new DMS. And when I say adjusting labor rates, obviously, it is not about going up on the side of it. it is more about how can we provide a good value for the guests while providing a great guest experience and allowing them to keep coming back from a retention basis and grow the customer payroll count. So there is some pressure on the consumer availability out there, but not that it has been impactful in our service drives. Understood. Thanks for all the color. Good luck.

Thank you. Our next question comes from Alexander Perry with Bank of America. Please proceed with your question.

Hi. Thanks for taking my questions here. I guess, just starting on used. I wanted to dig in a little more on your thoughts around the used vehicle procurement environment and how that should impact volumes, GPUs in the back half. Obviously, you have the sort of shift in strategy internally, but with a lot of the off lease supply coming into the market, maybe you could just talk about how that may sort of impact GPUs and volumes in the back half? Thanks.

You are welcome. Good morning, Alexander. You know, the our approach to going away from not chasing the volume was all well thought out, trying to time with the market as to when the lease returns were gonna start to come back in because we know the 1 thing that you are guaranteed when you go and buy a car at the auction is you are the last person standing. That means you pay the most for that car. And so, realizing the margins that we expect is a little bit tougher or very tough when you are the last person standing at the auction. So, therefore, when you think about our strategic approach, as we start to get these lease turn-ins to come in, it definitely gives us the ability to enhance the amount of inventory that we have, turn it faster, at a better acquisition price point than if we go to the auction. And then that is 1 of the benefits of being a franchise dealer. Those lease returns come in. We get the first rider refusal for a lack of a better term. So that fits straight into our strategy. You know, there is quite a few electric vehicles that are coming off lease right now. Know, we did not plan for the cash prices to be where they are right now, but it is actually a nice a nice mix because we are seeing those cars coming in and also being retail in the used car market. So I see it as a benefit that we have these cars coming in. I do not see a negative impact to the to the gross profit. Now keep in mind, as we get more aggressive and we go after the volume, there will be an impact in the margins, but we are still gonna run a healthy PVR And as I mentioned last quarter, we have done the stress analysis. And for every additional call it, 500 used cars that we sell, we have the ability to drop about $202 thousand dollars a car. So we are we are really managing that accordingly to make sure that we get the best return for our shareholders.

that is incredibly helpful. Really, really good color. I guess just shifting to the new side. You talk a little bit more about sort of the performance by segment, especially, you know, luxury versus non luxury? What you are seeing there, and sort of expectations as we, you know, trend through the balance of the year. On some of the luxury versus non luxury? Thanks.

Yes. In the second quarter, luxury from a volume standpoint, we were down 10% in luxury, where imports from a unit basis, I am quoting same store, we were flat. And then on domestic, we were down 16%. You know, we all know that luxury is really more of a tail end of the third quarter and going into the fourth quarter. Is really where luxury takes off. I do not see anything out there that is of major concern from a luxury standpoint. I believe, you know, Lexus, BMW, Mercedes. I mean, all the OEMs in the luxury arena for the most part are performing well. there is nice influx of inventory coming in. And I expect third quarter to continue to deliver like they always have. From an import standpoint, we are seeing a little bit of margin compression, a little bit slightly in some of the OEMs, but Toyota still averaging, you know, 12 to 15 days supply. It is positioned for a healthy margin. So imports, I think that we have hit a stabilized level and not much fluctuation to come from where we have been. that is incredibly helpful. Best of luck going forward. Thank you.

Our next question comes from Robert Sol-Szyszka with UBS. Please proceed with your question.

Hey, guys. Thanks for taking my question here. Just as the first 1 on the pace of the Tekion rollout. So you are now at 70% of stores. that is first over 50% mentioned on the Q1 call. More than 25% in Q4. So, you know, 20% of total stores added in the quarter. Provide a slight slowdown from that Q1 pace additions. Any reason for that slowdown? Or is that just in line with your kind of internal rollout plan and expectations? I kind of had that extra 30% here between now and in October. Thank you.

Yeah. So that was kind of the plan all along. We rolled out Herb Chambers in March and April. As part of the herb chambers rollout, we also rolled them out on some of our standard processes, our shared service center, So there is a lot of change for that group. So we took the month of May, pretty much off from rolling out stores to just help that group kind of absorb the change. And so that was strategic just to kind of think through the timing and all the change for that new acquisition last summer. There was a lot of change besides just Tekion that we had to do with them. We rolled out Tekion. So that was strategic. Try to take the month of May off. Help support that, you know, that platform, and then kinda kick it back off in June to July. Thanks.

Super helpful. And just 1 for me, which is just be super helpful disclosure just kind of on the efficiencies per tech driven by Tekion kind of in that double digit percent range. Does that mean, you know, if completion goes as planned, all else equal in parts and service, do you see a double-digit revenue growth there. As all of these stacks get rolled on, and exactly what is driving the efficiency per technician within your DMS system kinda get to that double digit level? Thanks so much.

Yep. I will Robert, I will take -- I will start it, and then Michael can add. On the our approach and our guidance continues to be the same, you know, in the single digits growth in fixed operations and customer pay. When you talk about what is driving the efficiencies, it is when you have when we have the old DMS or the stores that still have the old DMS, you have multiple logins to operate what you do as a technician and what you do as an adviser. So you log in to the DMS, but then you also have to log in to bolt on, like my PX time or my car model, whatever you decide to do. All great tools. But it does have because as a technician, you have to migrate from 1 system to the other. And here is all 1 ecosystem. And all the communication flows from the adviser to the technician and to the parts department and vice versa, all through the 1 ecosystem. So that ability to not have to be jumping from 1 to the other has become a lot more efficient. We are seeing the dollars per technician are the numbers that I quoted, where we are seeing the improvement. And keep in mind also, having 1 ecosystem to do the media, whether it is photos or video or both, and that 1 ecosystem just enhances the guest experience. It improves the time to market, meaning the time that we present the information to the guest And we know the faster that we present the information to the guest, the higher the propensity for that guest to approve additional services recommended, and then that leads into additional dollars per ticket or per technician like I have quoted on the previous information. Thank you so much. Appreciate it, guys.

Our next question comes from Daniela Heigen with Morgan Stanley. Please proceed with your question.

Hi, everyone. Thanks for taking my question. I wanted to double click on that used vehicle strategy evolution. You talked a little bit how sourcing has changed, off lease volumes have improved. But are you feeling any impacts from increased competition from used car retailers becoming more price competitive?

I have not no. I have not seen have not felt that impact And you know, the 1 advantage that we have that I did not mention is also another source is we have a big fleet of loaner cars as well. And the loaner cars obviously, we keep them in there to serve our guests, but then at some point, we retire them and put them for sale in the used car in the used car inventory. That gives us a pretty nice advantage. Most of those cars, I would say, the vast majority of them are sold as certified, and that is another key item of being able to be a franchise dealer is we are able to differentiate ourselves from a certified sort of a used car out there. So overall, no. I have not seen any margin pressure from the from the other used-car competitors.

Got it. Yeah. And you can definitely see that in the GPU results. So that is great. I also wanted to ask on the FTC pricing rules. Where do things stand now? Any remaining exposure? Or, you know, have you seen a change in competitive dynamics on advertised pricing versus a year ago with this?

No. We have always conducted business the legal and ethical way. So there is been no change from our perspective. The I think the only change that I would tell you from a market level is excited by the fact that it puts everybody in a level playing field. And I think that it is very well received and the right thing to do not just for the industry, but for the consumer. Great. Thank you.

Our next question comes from John Babcock with Barclays. Please proceed with your question.

Hey, good morning, and thanks for taking my question. I just wanted to quickly hit parts and service here. So obviously, the margin has been quite good for the last year or so. And I am just wondering how much more you might be able to squeeze out of that and especially if you do see a reversal on warranty, which, you know, seems like it is still growing at least in the low single digits. And on top of that, if you could also just talk about because in the slide deck, noticed you provide something that shows the dollars per repair order for plug in hybrid EVs and also battery EVs. And I was just wondering how we should think about gross margins for those like if that necessarily means the gross margins are higher or, you know, maybe we should not look at that way.

Yeah. I think I mean, I think gross margins will try to hang where they are at. The only caveat to that is as we continue to increase used vehicles, because we have to eliminate the revenue on used vehicles but keep the gross profit in there, That has a pretty meaningful impact on increasing the gross you know, the gross margin as we increase the used vehicle volume. So as we get into the fourth quarter and then on to the 2027 and kinda crank up the volume on used, that will help the margin. On parts and service because it is it is kinda gross profit with no revenue. Okay.

John, on the just to give you some color, you know, on the dev dollars per RO. We are averaging about call it, $350 or more higher than the average ICE vehicle. And the margins, I mean, the margins are probably pretty similar between the buckets. it is just you know, the amount of work that has to be done on those EVs right now. We do expect over time as technology gets better and better that the you know, they kinda come more in line with each other. But right now, you know, there is I will call it, lots of early stage repairs that have to be done because of this new technology.

Okay. Thanks for that. And my next and last question is just on the M&A front, and I know you talked have talked in the past about pulling back on that this year, just given leverage and you are at 3.4 times now, so still a little bit above your target. But on the other hand, dealers have talked about how the M&A market looks pretty good, and there is a decent amount of assets out there. And so I was just wondering how you are thinking about the M&A side of things for the balance of the year.

We you know, we review the deals that are out there. We have reviewed a few deals during the quarter. But, again, our priorities are very clear to us. And right now, it is to complete the rollout of Tekion And then number 2 is to improve operational improvement, specifically on our on our same stores. And, you know, the good news is Chambers is about to be counted as the same store here as we go into the fourth quarter. So we continue to see them if and we continue to analyze them but that is where our key priority may are right now on those 2 key topics that I gave you. And I will let Michael expand on it from a capital allocation as well.

And then, you know, we have we have kinda shifted to a more balanced approach on capital allocation between share buybacks and acquisitions. Along with delevering. But right now, you know, we looked at the last quarter in terms of share price. it is kinda hard to justify an acquisition versus buying back your own shares. it is just that the price we are trading at. And so I think as, you know, prices you know, get back to normalized levels, then I think the acquisition for share buybacks equation may change a little bit. But definitely, current, you know, the current pricing, our thinking is share buybacks represent a better return for shareholders than the acquisitions we have seen. Okay. Thanks. Appreciate it.

Our next question comes from David Whiston with Morningstar. Please proceed with your question.

Thanks. Good morning. I was just curious on negative equity. Has that become more of a problem this year than last year as used vehicle pricing has come down just a little. And is it at all particularly a pressure point in certain light truck segments?

David, this is Daniel. You know, for as long as I have been in the industry, when I was selling cars, negative equity has been a part of the business. I have not seen anything of an uptick that is outside of the norms. So no. And, you know, we have as you know, there is there is different ways to help a consumer out of negative equity you are always going to have the 1-off scenario where somebody has much negative equity that they cannot trade at that particular time. Unless it requires a tremendous amount of cash down. Nothing that is out of the ordinary of what the averages have been in the past. Okay. Great. Thank you. that is all I have.

Our next question comes from Ryan Sigdahl with Craig Hallum Capital Group. Please proceed with your question.

When I look at Total Care Auto and I look at your slide of the accounting noncash deferral, Last quarter, you were expecting negative 66¢ or sorry. Excuse me. You are expecting a negative, now positive for the year. I am curious what changed there. And then not putting out the out-years anymore, but I guess is it reasonable to assume that we stay positive in the out-years, or was this just a deferral as you focus on taking on any other things going on?

No. I mean, this is just it is just the volume. You know, as the volume plays out, with the SAR being a little bit lower, and then, used vehicle volume being lower than we anticipated. That had to, you know, a positive impact on TCA deferral. As we crank up the used vehicle volume in the fourth quarter and then on into next year, you will see you know, we will we will probably go back to a negative position at some point. And then, also, we roll out chambers later this year as well, which will have a hit on the deferral. So we still think we are negative in the out years. We are waiting to see kind of a forecast for, you know, 2027, 2027, 2028, 2029. So as we get, you know, toward the you know, third quarter, fourth quarter, as we have a better view of what those out-years' SAAR forecast looks like. We will update the out years at that point. Just right now, it is kind of hard to look and say what is you know, what is SAAR gonna be in 2027 and 2028. So it is more of the volume difference. We are just lower on volume than we anticipated That has a benefit or a results in a lesser deferral impact on TCA. Until that volume kind of starts catching up to us. Makes sense. Thanks, guys.

We have reached the end of our Q&A. I would now like to turn the floor back over to Daniel Clara for closing comments.

Thank you for joining our second quarter earnings call. We look forward to seeing you in the third quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.