Thank you for standing by and welcome to AutoNation's Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation. Ma'am, you may begin.

Good morning, and welcome to AutoNation's Second Quarter 2013 Conference Call and Webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; Mike Short, our Chief Financial Officer; and Jon Ferrando, our Executive Vice President responsible for M&A. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Certain non-GAAP financial measures, as defined under SEC rules, will be discussed on this call. Reconciliations are provided in our press release, which is available on our website at investors.autonation.com. And now, I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us. Today, we reported an all-time record quarterly earnings per share from continuing operations of $0.73 in the second quarter, 11% increase, as compared to adjusted EPS of $0.66 for the same period in the prior year. Second quarter 2013 revenue totaled $4.4 billion compared to $3.9 billion in the year-ago period, an increase of 13% driven by stronger performance in all of our business sectors. In the second quarter, AutoNation's new vehicle unit sales increased 11%, and used vehicle unit sales increased 13%. Our coast-to-coast branding rollout unifying over 200 franchises, which began in February, has been completed on time and on budget. The incremental branding cost was $0.06 in the second quarter and $0.09 year-to-date. AutoNation is well positioned to capitalize on the continued auto recovery with an optimal brand and market mix and a disciplined cost structure. We continue to drive strong results during the multiyear recovery in auto retail. Over the previous 12 months, AutoNation has acquired 10 franchises and has been awarded 4 new franchises by manufacturers. The 2012 annual revenue for the 10 acquired franchises, together with the anticipated annual revenue of the newly awarded franchises, once the stores are fully operational, is approximately $1 billion. Now I'll turn the call over to our Chief Financial Officer, Mike Short.

Thank you, Mike. Good morning, ladies and gentlemen. For the second quarter, we reported net income from continuing operations of $90 million or $0.73 per share versus adjusted net income of $82 million or $0.66 per share during the second quarter of 2012, an 11% improvement on a per share basis. There were no adjustments to net income in the second quarter of 2013. Adjustment to net income in prior periods are included in the reconciliations provided in our press release. In the second quarter, revenue increased $522 million or 13% compared to the prior year. Gross profit improved by $68 million or 11%. SG&A as a percentage of gross profit was 71.0% for the quarter, which represents 121 basis point improvement compared to the year-ago period. As part of our AutoNation rebranding initiative, we incurred approximately $11.5 million, or $0.06 per share, of incremental SG&A expense during the second quarter of 2013. Excluding these expenses, our SG&A as a percentage of gross profit would have been 69.3%. We do not anticipate any additional material rebranding expenses in future periods. Net new vehicle floor plan was a benefit of $10.7 million, an increase of $2.5 million from the second quarter of 2012, primarily due to higher floor plan assistance. Floor plan debt increased approximately $200 million during the second quarter to $2.7 billion at quarter end, as we increased our inventory levels due to increasing sales volumes. Non-vehicle interest expense decreased $22 million compared to the $22.5 million in the second quarter of 2012 due to the lower debt balances. At the end of June, we had $400 million of outstanding borrowings under the revolving credit facility and total non-vehicle debt balance of $1.9 billion. This was a decrease of approximately $21 million compared to March 31, 2013. Provision for…

Thanks, Mike, and good morning. In the second quarter, AutoNation delivered a 4.1% operating margin with solid growth in sales and customer care. We noted continued strong recovery of our important Florida and California markets where combined, we had a 12% increase in new and used vehicle sales on a same-store basis. And in June, we completed the rebranding of over 200 franchises under a unified AutoNation name. As I continue, my comments will be on a same-store basis and compared to the period a year ago, unless noted otherwise. Starting with sales. We're pleased with our overall performance. We're on a year-to-date basis. And for the quarter, total gross profit for variable operations, which combines new vehicle gross, used vehicle gross and finance and insurance gross, was up over 7%. And new and used unit volume was also up over 7%. This was driven by continuous improvement in the new vehicle sales pace that also generated more used opportunities. Underneath that, we experienced new vehicle margin compression that was offset by a very strong overall performance in used vehicles and finance and insurance, both for the quarter and year-to-date. I'll provide more detail as I continue. Looking at new vehicles in the quarter. New vehicle revenue increased $202 million or 9% to $2.4 billion, a new vehicle sales volume of 71,700 new vehicles, an increase of 4,700 vehicles or 7%, with increases across all 3 segments. At $33,450 revenue per new vehicle retailed was up $668 with increased average selling prices across all 3 segments. New vehicle gross profit of $143 million was off 2% or $2 million in the quarter. And at $1,996, gross profit per new vehicle retailed was off $176, with compression largely in the Import segment primarily attributable to the whipsaw effect of changing stairstep…

Thank you, Mike. During the second quarter of 2013, AutoNation completed the previously announced acquisitions of Don Davis Toyota Scion in Dallas and SanTan Honda Superstore and Hyundai of Tempe in Phoenix. These acquisitions align with our strategy of offering our customers all of our core vehicle brands in our key markets and they enhance our brand mix in our Dallas and Phoenix markets. The closings were well executed and the acquisition integrations are on track. The stores are now operating as AutoNation Honda Chandler, AutoNation Hyundai Tempe and AutoNation Toyota North Arlington. Also during the second quarter, Mercedes-Benz awarded new franchises to AutoNation in the Atlanta, Georgia, and Tampa, Florida markets. We expect to complete construction and open these Premium Luxury stores by early 2015. The Mercedes-Benz franchises will be excellent additions to our platforms in these markets. Over the last 12 months, AutoNation has completed the acquisition of 10 franchises and has been awarded 4 new Premium Luxury franchises by the manufacturers. The 2012 annual revenue for the 10 acquired franchises, together with the expected annual revenue of the newly-awarded Premium Luxury franchises, once the new stores are fully operational, is approximately $1 billion. We continue to actively look for acquisitions and new store opportunities with a focus on adding new brand representation within our existing markets. We will continue to be selective and prudent with our capital with a focus on investing to produce strong returns and long-term stockholder value. I will now turn it back to Mike Jackson.

Thank you, Jon. During the second quarter, we saw continued strength in the auto industry sales as the auto credit environment remained strong. The consumers continued to benefit from the outstanding vehicle quality and selection available today. In addition, the customer care business will benefit as industry units in operation begin to recover in 2013. We're at the beginning of a broad-based recovery for the economy in auto retail. As we open the rest to 2013, we believe that the improvement in new vehicle sales will continue and continue to expect new vehicle sales to be in the mid-15 unit level. Thank you. With that, we'd be happy to take questions.

[Operator Instructions] The first question is coming from Jamie Albertine of Stifel, Nicolaus. James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division: The first thing I wanted to delve into, it seems like you've -- or your engine hearing somewhat of a transition, as it were, from a capital allocations standpoint. Hearing a lot more about M&A, new franchises, awarded points. Can you help us understand sort of how you're thinking about SG&A? We noticed a little bit more deleverage in this quarter than we had anticipated, and just kind want to think through that process over the short and, quite frankly, the longer term.

This is Mike Jackson. Our capital allocation strategy has not changed at all in 14 years. It's pretty straightforward. We first look at the opportunities within the existing business, both the needs to maintain the standards and the investment opportunities that are there. And you can see, we have a 14-year track record of investing in the existing business. Then, quite frankly, we look at it on an opportunistic basis between buying stock, what's available in the marketplace as far as acquisition, and at times, we have even found debt to be the most attractive thing to buy. And I think if you look at our performance over that -- coming up on 14 years in September for me, it's -- you could see the discipline that's been applied and the shareholder value that's been created. So depending on what period of time you're in and what is the balance and the opportunities there, you see the behavior. Clearly, in '08, '09 and '10, very few acquisitions got done because the gap between what sellers were willing to take and what buyers were willing to pay was too big. So we now have a backlog of the natural arrival in the marketplace each year of deals. So there's a lot of people to talk to and the gap on price is much closer, so you're able to get it to the finish line on more transactions. So we're in discussions with a lot of sellers out there. Whether they will result in deals or not, you never know. You have to keep your discipline on the price side, so that remains to be seen. But at the -- looking backwards, we're -- we have been in a phase where the opportunity on the acquisition side has been there and we have acted on that. That -- or going forward, I can tell you the philosophy will be exactly the same. And what actually happens there will depend on how negotiations go and where the stock goes and price and other variables. On the cost side, I think it's important to keep in mind that we've included in our results here the onetime cost of rebranding the company. We didn't hesitate to make this investment. We think it's a great investment. It's $0.09 so far year-to-date, $0.06 in the second quarter. You could almost double our growth in earnings per share if we hadn't rebranded the company, but we did. And I think it's the right decision for the long term. And if you look at our leverage ratio without that cost, it's below 70%. But I'd ask Mr. Short to give more insight on the cost side.

Just to echo what Mike said in the quarter, we -- our headline number was 71%. If you back out the rebranding costs, that takes you down to 69.3%, which, as I've indicated on previous calls, our in intent is to operate below 70%. So absent those rebranding costs, that's where we were. I do think that there were some headwinds we faced in the quarter. Mike called out some of the PVR pressure that we had on our new vehicles that creates challenges with some of the flow through on the SG&A side. And, of course, with acquisitions, there are always those integration costs that you incur in the first few months of an acquisition that, over the long term, pay off in very strong returns, but you do have those start-up costs. So those were the dynamics that we faced during the quarter. And I think that 69.3% adjusted number is in line with where we'd want to be given the acquisitions that we completed during the quarter.

Your next question is coming from Rick Nelson of Stephens.

I'd like to ask you about market share on the new cars side, that 7% unit growth, how you think that compared to the overall industry and how you'd fare it maybe by -- whether strength was by brand or weakness and geographically as well?

Rick, it's Mike Maroone. I think, from a share perspective, I think we competed strongly. The numbers reported for retail vary tremendously. But I think we're very satisfied with 7%, especially in the midst of rebranding 200 franchises. I think that in terms of who's strong, who's weak, I think we were very strong with Ford on a unit basis. So we had great growth with Chrysler on a unit basis, with Nissan, with BMW. We're very satisfied with our performance across all 3 segments.

Good to hear. I'd like to ask you on the F&I side, too, have you seen any changes in pricing there as a result to the CFPB, some of their comments?

Well, my position remains the same that indirect lending, as it's called, has tremendous added value for all the constituencies, the customer, most importantly, the lender. And we get an appropriate origination fee. We're able to provide a very competitive rate to the customer, often much better than what they could get in the marketplace. And we're able to originate loans for the finance institution at a cost lower than what they could do directly. So when you have a situation like that, it's very sustainable. I would say that even the regulators acknowledge that there's tremendous added value from dealers in indirect lending and that they're due an appropriate compensation for that. I would say their focus is on, of course, disparate impact in a broad range. I think for the big public companies which have had caps in place and procedures in place for a decade, it's not much of an issue. And if lenders were to transition to some sort of flat fee, I don't think for the big public companies, that would be much of an issue. However, if you are a retailer where your model is dependent upon a wide range of markups, I think then you're going to struggle with the transition. I don't think it's an issue for us from everything I've heard.

That counts. And you don't see any effects as of yet? That $1,375 a unit, isn't that quite strong?

Yes, but you have to look at how we do it. We do it with excellent penetration to begin with. Mr. Maroone, I think it's 70% to 75% of the units we sell?

That's correct.

70% to 75% of the units we sell, we arrange the financing for. That's almost $9 billion worth of loans. We originated, for instance, in 2012 our average margin on that is about 120 basis points, which seems to me quite reasonably for all the value that we just delivered. And by the way, there is no discussion with the banks and the regulators that, that is an unreasonable compensation for what we generate. And the number you refer to is only for -- 1/3 of that is for the financing. The other 2/3 is for products that we generate. And, Mike, you can call out a list of the type of products that consumers buy from us. What's interesting to note, of course, is that we only show you the commissions on that. The revenue does not go through on our books so it shows as a 100% margin, but that's because we don't recognize the revenue because we're acting as an agent to originate those products. But they're high-added value for the consumer. We have very narrow, reasonable margins on it so when you have high added value for the consumer and reasonable margins, it's sustainable. So Mike, why don't you talk about some of the products that we sell?

Well, Rick, as you know, the primary products that we focus on is vehicle service contracts and we think it provides excellent value to the customer. It also drives more business into our service departments and allows us to focus on retaining customers in both sales and service. The other product we feature is prepaid maintenance. And just to give you an idea of how the industry looks at that, more and more manufacturers are now including that with the vehicle and we're very happy to see that, Toyota being the leader, along with Premium Luxury BMW, VW and most recently, General Motors is introducing it. So those are the products that we focus on. There's other products like gap insurance and others that have a lesser impact. But as Mike said, 65% of our F&I revenues comes from those value-added products. Our compensation plans are heavily skewed to promote those products and we're very confident that we can sustain this level of performance or even get better.

Though, Rick, there can be, in principle, a debate about the disparate impact whether it's applied to housing, autos or other things and whether that's an appropriate regulatory step or not. I think someone other than us will discuss that. Certainly, for large companies and large financial institutions that have had caps in place for decades, the differences are so narrow and so tight that I really don't see an issue there. And if there is a transition to a different compensation system, I think it will be manageable for us.

The next question is coming from John Murphy of Merrill Lynch.

Just a first question on SG&A, just to follow-up, and I just want to make sure we get this straight because I think we didn't comprehend this as well as we should have in our estimates for the second quarter. There is fully no more expenses coming through in the second half of the year for rebranding. And it would be safe to assume that your SG&A to gross could operate at a similar level to what the adjusted number would have been in the second quarter, meaning in the 69% to 70% range. Is that a fair statement?

Yes. John, you're absolutely correct. And maybe we didn't make it clear enough going into it, that there was a surge of cost and spending around the rebranding, that would be fully expensed and fully completed by the end of the second quarter. So it's not even right to say it was front loaded. It was all expensed in that period of time and all completed in that period of time and will not -- this $0.09 that I'm calling out, will not reoccur in the second half of the year, let alone talking about next year. It will not reoccur starting in the third quarter. So maybe we could have been clearer on that going in and I had a sense that maybe there was some confusion around that and that's why I wanted to be so explicit today.

Well the ongoing number is what matters more. So now that we understand that, I think everybody should be -- should understand it now. That's very helpful. Second question. Obviously, you guys should be trusted on allocating capital given your track record, whether it's making acquisitions or buying back shares. So that's kind of easy to understand why you're making that shift. But I'm just trying to understand, as you look at making these acquisitions or ramping up acquisitions and then getting these ad points, has anything changed in your relationship with the automakers that's making that avenue of capital allocation more attractive than it may have been historically?

No, I don't think the critical path for ever -- for us has ever been the approval with the manufacturers. We have an outstanding relationship with each and every manufacturer today. That's not to say that if I went back to '05, '06, '07, that we didn't have a different view about inventories and where the industry was and where it was going. That was rather contentious, but I think everybody -- every manufacturer acknowledges today that our point of view was correct and where the industry is in a better place today. So we're really back to a sense of partnership, which is selling cars and taking care of customers. And certainly, the manufacturers have seen the advantages of the large group, large publicly traded groups, in that when it comes time to step up to meet standards on facilities, we can do it across the entire enterprise in a very professional way. And then when it comes to investing strategically long term where we think customers will be, we have the scale and the ability to do it. So there's a great sense of partnership. So that is not the critical path. I would say, it's absolutely price. And that may sound simple, price, but I think to lose sight of price around acquisitions vis-à-vis what you can do on share repurchase is a critical mistake in capital allocation. And you can't fall in love passionately with one or the other. It's got to be a cold calculation, looking at where you can get the best return. And that's why I said to the point that even at times we looked at and said, "We can buy our debt at a discount. That's the best place for our capital." So the only thing that's etched in stone for us is that we will invest in the existing business. There will be capital need and capital opportunity in our existing business every year, and every year, that comes first. And then we look at it opportunistically from there. And if you look just at share repurchase, well, the point of share repurchase is, a, to not only why you're improving the operating of the business, is to reduce the share count. So we were very disciplined not to give out shares on acquisition, not to give out options like confetti that you then have to take your capital and buy them all back just to get back to where you were. So I think our track record of creating value is strong. So that philosophy remains the same going forward. We recognize or acknowledge we're in serious discussions with a lot of sellers, but I could easily be sitting here a quarter from now and not have a single deal to talk about because of the -- if we don't come to agreement on price, we're not going to do the deal.

Very refreshing. Last question on the customer care business. We're starting to see a good acceleration there in the same-store sales comps. And I'm just curious if you think we're really just at the early stages of this recovery of UIOs in the 0- to 5-year-old or 0- to 6-year-old range that are your sweet spot. Because it seems like there might be some more to come but we're already seeing some really good benefit. So I'm just trying to understand sort of what inning you think we are in that surge of those vehicles.

For units in operation for customer care, we're in the first inning. And the only thing we have to debate is whether it's the top of the first or the bottom of the first. That's how early we are in units in operation recovery for automotive. And it's a mathematical calculation that we have -- we could literally tell you for which brand on which day the bottom point is and when it turns and moves in the right direction. So we have made a significant investment in customer care, both from the point of view that we think we can genuinely attract more business through convenience, value and security, our proposition to the consumer. At the same time, anticipating the term, which is this year, means it can be a very rewarding period for customer care. Mr. Maroone, what would you like to add?

Well, just that 2 years ago, Mike Jackson challenged our team to refocus more effort, more resources on customer care. We brought in a new leader, a very skilled gentleman out of Mercedes, Alan McLaren. He has rebuilt the team, adding talent from Pep Boys and from inside the industry. So we've added talent, we've added analytic capability and we're now at the stage of making a greater investment in customer-facing technology. The idea being to speed-up the transaction, to provide more accurate information to customer, to have a clearer line of communication between the technician, the advisor and the customer. And we're in, I think, we're at 9 stores into our rollout of that pilot and it's impressive. And I think that commitment is timely. You had asked the question on the UIO. The increase in the UIO of that 0- to 5-year population only increased by 1% from the first quarter to the second quarter, and it's still below where the UIO was a year ago. So I'll call it the top of the first inning, to use Mike Jackson's terms, but we're very optimistic about the opportunity. We've really focused on speeding up the transaction on express service, on tires, extending hours and most importantly, putting more talent in the space. So it's a real bright spot for our business.

The next question is coming from Simeon Gutman of Crédit Suisse. Simeon Gutman - Crédit Suisse AG, Research Division: So, Mike, AutoNation has been pretty transparent on its thoughts regarding the stair steps and so mentioned as a reason this quarter that gross profit was hurt a little. Can you characterize the environment there? Meaning are manufacturers leaning towards stair steps even more than versus a year ago, whatever timeframe? And then the other comment that was made regarding some of the competition, some of the mid-sized imports, is that more a dealer-to-dealer combat in local markets? Or is it that coming vis-à-vis manufacturer price decreases and that's not being passed through in the same way that it was to the dealer before?

So on the epic struggle of stair steps, we have one breakthrough to report, and that's Nissan. And Nissan was very aggressive on stair steps for a very long time and, I think, to the point where the brand was hurt in the sense that they were selling the deal more than they were selling a very fine product. And over time, that erodes your position. And when you paint yourself in a corner like that, it's not so easy to get out of. But there's new determination at Nissan, a real commitment to get it right. And if I look at their actually changing the transaction prices, changing the MSRPs and adjusting their incentives to a more tactical basis rather than a strategic basis, is a bold step. It will take some time to fully get through it but I think they should be applauded and admired for what they've done. So that's a breakthrough. We'll see where it leads. We have other companies that firmly believe stair steps are where to be and so the struggle goes on. And your second point, I would say stair steps unleash whipsaw competition at the retail level where you have basically told the customer, unless the customer shops exhaustively to find out where the greatest stair step is hidden, that the customer's a fool. So you put the customer into the marketplace knowing the customer has to go 5, 6, 7 places to find the weenie, where it's been hidden. And it's not very customer friendly. That's one of the reasons I'm -- it's certainly out of step with today's customer. But if you to tell the customer, "That's what you have to do to get the price," the customer will do it. So it unleashes a vicious competition at retail. And even when stair-step programs and the customer is still trained to do that, so you have a hangover effect, it takes quite some time to clear us out. The white hot spot on this whole issue right now is Japanese midsized sedans, which is a big part of our business, and also subcompact sedans. That's where you really see it. And we applaud the step of Nissan and hope that the level of stair steps mitigates in the future. Mike, you want to add anything?

Just the only thing I'd like to add to it is you've got to take your hat off to the domestics, who now have introduced products, and the Koreans that really give the Japanese imports a run for their money. The Fusion is just hot, hot, hot. The Sonata has been very effective. Chevy is retooling the Malibu. And I just think the competition is really intense. The segment is very large. And Mike's already called out all the challenges of the stair-step programs. Simeon Gutman - Crédit Suisse AG, Research Division: Yes, and I guess, look, we see on a high level, the gross profit per unit over time has given back some. So do you think that this period was unusual and that we could see a bounce back? Or is that memory that Mike Jackson mentioned, is that going to take some time to wean the customer off of?

Well, our philosophy is the diversified approach. And nobody knows the answer for sure, but the challenge to us as a management team is always to find a way to rebalance it. So what I look at it, when I look at our variable result per vehicle retailed, if I take it all in, all units, new, used, financed, insurance, products, we actually had an increase despite the challenge in front-end gross profits on the absolute new car. So we're always -- we always have ways to try to balance. We've successfully done it in here. I think we'll successfully do it in the future. In the meantime, we're doing anything possible to stabilize new car front-end grosses and look for opportunities to improve them, but I can't guarantee you that will happen. Simeon Gutman - Crédit Suisse AG, Research Division: Okay. And just a follow-up on the parts and service side. So the incoming wave of younger cars we're seeing, I think that is a bit easier, more clear-cut, given that the manufacturer warranty, et cetera, and typically, the dealers typically retain a higher percentage in that bucket. But my question's on the older vehicles, the older vintages that you're servicing, which I think your business did a great job during the downturn. But can you talk about now the retention of the older age groups? What's the experience been over the past year or so and anything in particular that you're focused on. Because I think those cars are chunkier from a spending perspective.

Depends on your definition of old. What are you calling out as old? Simeon Gutman - Crédit Suisse AG, Research Division: Not really, like 6 to 10 to 12 years tops, but 6 to 10 years roughly.

The 6 to 10 years is a very small part of our business, I would say -- Mike, what would you say?

It's about 30%. And obviously, you've got a very complex product that's not easy to be serviced. The mechanical breakdown aspect of it is not easy for your independents to handle it. I think our retention activities that we've undergone in customer care, our communication, our marketing efforts, really applies to both segments. So I think we can deal with whatever headwind there is there with this very rapid growth in UIO we're going to experience.

The next question is coming from Rod Lache of Deutsche Bank.

This is Dan Galves standing in for Rob Lache from Deutsche Bank. I have a couple of questions. First one on kind of the combination of new growth plus F&I, what's your view of how that would be impacted as interest rates go higher? I think the benchmark rates for auto loans were up maybe 20, 30 basis points in the quarter. Did you see any impact in the quarter and kind of what's your view if interest rates continue to rise back towards historical levels?

This is Mike Jackson. Obviously, automotive retail very much is in the short end of the yield curve, both for funding our inventory and what the financial -- the instruments the financial institutions use to fund auto loans. No, we're not really impacted by 10, 20, 30 year rates. And I expect it to be quite some time until short-term rates begin to move. And if they do move, it's unequivocal that it'll be because you have a dramatic -- you have an economy that's dramatically strengthening. So if you said, "Mike, what's your choice: a weak recovery with low rates or a strong economy with normalized rates?" I would take the second. I think it's a better place to be. So also for our customers, 100 basis points on an average car loan is $15 a month, so it's manageable. But I think -- and we did not see rates move in the quarter on lending, you mentioned 20, 30 basis points. We didn't see any movement in the quarter. So I think it's -- a, I think it's quite some time until you see material movement on rates on the short end of the curve. And when it does move, it will be because it's unequivocally, indisputably a strong economy.

Okay. I appreciate that, I was just -- I was actually talking about the benchmark, like the 3-year swap rates that were up 30 basis points.

Okay, excellent.

So you know. And the second question has to do with customer care, really 2 parts. Someone brought up the 6- to 10-year age group. It looks like that, units in operation in that group, will fall pretty significantly over the next couple of years. If that's 30% of your business, how does the UIO decline combined with increasing complexity, which probably helps you quite a bit, like what do you see of the impact on that 30% of your business? And if you have any sense of kind of where your capacity utilization is on service space currently? I'd appreciate any color on that, too.

On the capacity issue, we've continued to renovate facilities and add capacity. I think we've got the capacity to handle that business. The 30% that we quoted is of the customer pay and warranty business, not of the total business. And I think given our retention efforts, we're well equipped to grow our market share in that segment.

The next question is coming from Adi Oberoi of Goldman Sachs.

I have another question on the customer pay business. Obviously, a great performance in the quarter from a comp standpoint. But correct me if my understanding is wrong here, but I don't think a big part of that was driven by the increase in UIO. So can you just please elaborate what were the key drivers? Was it more internal or what led to that strong performance in this segment?

Our customer pay business is about 42% of overall of our customer care business. And we've put an incremental marketing spend -- we're going to spend about 30% more in marketing this year. We've done some very good work with our analytics group on pricing and begun to put the tools in place to allow our stores to focus on the pricing. And I think, overall, we're just trying to compete in all segments of that customer pay business, both with a very robust tire program that's now on its second year, a real focus on express service and really modernizing our whole communication and service. So there's a lot of focus, a lot of effort, a lot of talent there to drive that customer pay business in advance of the UIO.

That's very helpful, guys. And just a follow-up on that, like if the mix of tire sales in the overall P&S segment is going to grow, typically, our understanding is that the margins in the tire segment are lower than your average margin in the overall segment. So could it pressure margins in the near term, do you think?

I don't think it that's big of a piece today, but we have really worked hard on the margins in our tire business. Our tire business gross margin is up about 20%. But I think we want to compete in all segments of the service business and whether it's express tires, low margin, high margin, we want to serve the customer and be a full-service provider. So we're willing to compete and I don't think it's going to impact our overall margins. Our margins in the quarter were expanded 50 basis points in spite of a growing tire business.

The next question is coming from Yejay Ying of Morgan Stanley.

I wanted to follow-up again on the interest-rate environment question, but maybe more on how it pertains to your own capital structure. So how do you see this environment impacting your floor plan/corporate debt over the coming quarters? Are there any hedges in place? Or is this just not a concern at this point?

Yejay, it's Mike Short. We don't have any hedges in place. Our corporate debt structure is about 50% fixed, 50% variable -- we're a little bit more fixed, maybe 55%, 45%. And we're happy with that structure. As Mike talked about, well, a lot of our -- the duration, the maturity of our capital structure is fairly short term, so we like the short -- operating on the short end of the yield curve and don't see a reason to want to hedge that. If there is a movement in the yield curve, we see that more at the longer end of the curve. So we're not overly concerned about it. Now on the floor plan side, we're about 50%. It's entirely variable but as Mike pointed out earlier, to the extent that we see rates going up that might drive the short term rates higher, that's going to be coincident with an improving overall economic environment, which we're happy to operate in that setting.

Right. That make sense. Could you give a bit more color on your used inventory as well? So maybe a breakdown how is the late-model used supply looking versus the older, earlier models? And are you starting to see improvements in off-lease supply?

It's Mike Maroone. We've definitely seen some improvements in supply. It's still not where we would like it to be but there is a very robust CPO business. CPO increased 17% for us in the quarter. It's about 30% of our used business and we are seeing more availability there. So even in the last 2 quarters, we've seen some dramatic shifts in product. We've also tried to add capabilities, both buying vehicles online, putting together centralized buying teams and doing some other kind of out-of-the-box things to increase our used-vehicle availability. We're really pleased with our used business and to get a 9% volume growth on a same-store basis is a good step for us. We're hoping there's even more there.

And one final question, if I could sneak it in, more housekeeping. With regards to the F&I growth, F&I per vehicle that you guys saw, could you break out what the contribution was from the financing side and what the contribution was from insurance?

We break it out really from a product versus rate. The rate contributes about 35%, props contribute 65%.

Right. I meant more of how much did the rates, I guess, grow of that 7% year-on-year growth. What was the rate side of it, and maybe what was the product side of it?

There's stronger growth on the product side than there was on the rate side. I don't have it at the tip of my fingers. I'm sure we can get that to you.

The last question is coming from Irina Hodakovsky of KeyBanc.

I wanted to follow up on SG&A expense. Excluding the $11.5 million in cost and the rebranding efforts, your gross profit throughput rate was only 35%, potentially below the 3-year average that you've put out there. And you mentioned integration start-up costs, which impacted the second quarter as well. So where are you in that process? Should we be expecting a normalized run rate going forward or perhaps another quarter of elevated, like slightly elevated expenses?

Irina, I pointed out 2 things in addition to the rebranding costs. One is the front-end gross margin compression that Mike and Mike discussed earlier; and then secondly, the acquisition and integration costs. Those typically come in over the first couple of quarters following an acquisitions as you get systems aligned and people in place. So that's a couple of quarter time period over the first few quarters following an acquisition.

And then my last question is on the used vehicle side. The volume is very, very strong and you’re really delivering on the process to improve the used vehicle sales there, very encouraging. And I wanted to ask you on the gross profit per unit. It pulled back slightly on a year-over-year basis. And what we're picking up in the industry in talking to other dealers, the majority are reporting an increase on a year-over-year basis. Can you detail what is happening in your specific operations?

Yes. We are down $18 on a $1,600 base year-over-year, so it's less than 1%. If I look inside the segments, we grew margins in Domestic, in Import. There was a little more pressure in Premium Luxury as it's a quite a competitive market. There were some shortages in some new products that are caused by some upcoming product launches and so that off-lease Premium Luxury car was in a lot of demand. But all in all, I think that there's -- I think there was a very solid job done in used to drive the volume and the gross at that kind of level.

So more or less a result of, perhaps, driving volume, really improving volume there and will stabilize going forward?

We would like to stabilize or even get better going forward. Again, 2 of the 3 segments grew, 1 put a little pressure. But all in all, our total gross, combining everything, is up 8% on the used side on 9% volume, so pretty comparable.

Thank you, everyone, for joining us today.

This will conclude today's conference. All parties may disconnect at this time.