AutoNation, Inc. (AN) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Lisa and I’ll be your conference operator today. At this time, I would like to welcome everyone to the AutoNation Q2 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Robert Quartaro you may begin your conference.

Thank you. Good morning and welcome to AutoNation's second quarter 2019 conference call and webcast. Leading our call today will be Mike Jackson, our Executive Chairman; and Cheryl Miller, our new Chief Executive Officer and President. Following their remarks we will open up the call for questions. Chris Cade and I will 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. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including economic conditions and charges in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued yesterday and in 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. And now I'll turn the call over to AutoNation's Executive Chairman, Mike Jackson.

Good morning. Thank you, everyone for joining us today. And it's a delight to be able to report such a strong performance, a record second quarter for the company earnings per share of $1.12, adjustment impairment of $1.20. And Cheryl will give you the drivers in a minute. The reason I'm on the call today is to officially introduce Cheryl Miller as our new CEO and President of AutoNation. It's an honor and a very exciting step for me to be able to do that. She replaces Carl Liebert. I thank Carl for his commitment and his efforts on behalf of AutoNation. We had an open dialogue that there was risk in coming to a completely new company and a new industry and that we'd have to have a running conversation as to whether this would work, whether it would be a fit. And we came to the mutual conclusion that it simply was not a fit. The story is as simple as that. There's nothing else to report. He'll be with us for the next 30 days to help with transitioning. There's no other shoe to drop. There's no story behind the story. It's as simple as that. I'm excited to work with Cheryl. She's been with us 10 years. She's been in the auto industry almost 20 years. I've worked directly with her for the last four years with her having the responsibility of Chief Financial Officer. I worked hand-in-hand with her on the development of our brand extension strategy and all the planning that goes behind that all of our strategic initiatives. She is CEO-ready. And I'm very excited to ask Cheryl to talk about the drivers of the results in the second quarter. Cheryl?

Thanks, Mike, and good morning, ladies and gentlemen. I'm honored to continue the legacy of AutoNation's great leader Mike Jackson and Wayne Huizenga. AutoNation has a history of excellence and an amazing future. Together with my 26,000 colleagues, we will continue to focus on the core business, while diversifying our future for our brand extension strategy and strategic alliances. In addition, today AutoNation announced that Jim Bender, Executive Vice President of Sales was named Chief Operating Officer. Jim brings a wealth of knowledge to the position and a proven track record of success. I look forward to our continued partnership. Turning to our quarterly results for the second quarter, we reported net income from continuing operations of $101 million or $1.12 per share versus $97 million or $1.07 per share during the second quarter of 2018 a 5% increase on a per-share basis. Net income from continuing operations included after-tax, non-cash franchise rights impairment charges of $7 million or $0.08 per share in the second quarter of 2019, and $6 million or $0.07 per share in the second quarter of 2018. In the second quarter we continued to focus on our new vehicle margin. For the quarter, our same-store and new vehicle gross profit per vehicle retailed was up $165 or 10% compared to the same period a year ago. As a part of this strategy, we continue to manage our inventory levels to meet customer demand in the current retail environment. Year-over-year we have reduced our new vehicle inventory by approximately 9,000 units. Same-store Customer Financial Services delivered another record-breaking quarter with gross profit per vehicle retailed at $1926 which was up $134 or 7%. Same-store second quarter 2019 revenue, totaled $5.3 billion which was relatively flat compared to the year-ago period. Same-store gross profit of $879 million increased by 5% compared to the year-ago period. Same-store customer care gross profit was $405 million, an increase of 7% compared to the same period a year ago, driven by growth in customer pay up 8%. And warranty up 12%. I'd like to provide an update on the five AutoNation USA stores. The AutoNation USA group broke even in the second quarter for the first time and several AutoNation USA stores were profitable for the quarter. While we have no plans to build additional stores in 2019, we continue to make steady progress. SG&A as a percentage of gross profit was 71.5% for the quarter, which represents a 190 basis point improvement, compared to the year-ago period. Strong margins and gross profit growth as well as disciplined cost management drove SG&A leverage in the quarter. As we've previously stated, we expect full year 2019 SG&A to gross profit to improve year-over-year compared to 2018. The pace of the year-over-year improvement will depend on gross margin, seasonality and the timing of certain brand extension expenses. The provision for income tax in the quarter was $37 million or 26.9%. Floorplan interest expense increased to $37 million compared to $32 million in the second quarter of 2018 driven primarily by higher average interest rate which rose in line with 1-month LIBOR. Non-vehicle interest expense decreased to $28 million compared to $30 million in the second quarter of 2018, primarily due to lower average debt balances as we paid down debt from free cash flow. At the end of June, we had $2.4 billion of non-vehicle debt in line with balances as of March 31, 2019. Other operating income was $3.7 million in the second quarter of 2019 compared to $13.9 million in the prior year, a decrease of $10.2 million. Second quarter 2019 other operating income was primarily comprised of gains related to store and property divestitures, and second quarter 2018 other operating income was primarily comprised of gains related to store and property divestitures as well as legal settlements. During the second quarter, we repurchased approximately 283,000 shares for $11 million at an average price of $39.54 per share. AutoNation has approximately $290 million of remaining Board authorization for share repurchase. As of June 30, there are approximately 89 million shares outstanding not including the dilutive impact of certain stock awards. Capital expenditures were $67 million for the quarter compared to $78 million in the prior year. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. Our leverage ratio decreased to 2.8 times at the end of the second quarter compared to 2.9 times at the end of the first quarter and our total liquidity was approximately $836 million at the end of June. I would like to thank Mike and the AutoNation Board of Directors for this opportunity and to congratulate Jim Vendor on his appointment to Chief Operating Officer. I would also like to congratulate the four honorees, who received the Automotive News 40 Under 40 award and our 10 stores that were named to the Automotive News Top 100 Best Dealerships to Work For list. These honors continue to distinguish AutoNation as not only a great place to purchase or service a vehicle, but also a great place to work and an employer who continues to attract top talent. We continue to demonstrate strong performance in the second quarter. AutoNation remains committed to executing the strategy that the executive team is fully aligned with, a focus on new vehicle margins, optimizing the balance between new vehicle pricing and volume, and the company's brand extension strategy. And with that, operator we'd now like to open up the line for questions.

Thank you [Operator Instructions] And our first question comes from the line of David Tamberrino from Goldman Sachs. Your line is open.

Great. Thank you and congratulations Cheryl on the new appointment.

Thank you.

I think we all – we all probably know the answer to this, but would love to hear it from you. Now that you have taken the top job with the company, where you've been in for a while how do you see the strategy and the playbook changing if at all? And if not, where do you expect to spend the most of your time improving the initiatives that have been put in place over the past couple of years?

So the great thing is we've had two great quarters with the strategy that we have in place a record first quarter, a record second quarter. We're going to continue to focus on the core. And I'm pleased with Jim in as COO; and with Scott Arnold, our EVP of Customer Care that we will continue to do that. Customer care was up 7%. Our core business on the variable side was up strongly as well. So I'll continue to make sure we optimize the core that we get the leverage that we're expecting in the business from a cost standpoint and we'll continue to focus on the brand extension strategy. So, as I mentioned, the AutoNation USA stores were breakeven. Some of them are profitable, so we've got a good solid foundation there. And we'll continue to focus on the collision strategy as well as the parts strategy within the business.

Okay. But is there any -- what you've seen so far and the progress to-date, is there anywhere where you believe you need to add additional focus or spend more time in order to bring results in line with where you wanted to track or at least enhance them from high-ROI projects that have been working out so far where there's an opportunity to continue to grow?

Yes. On the collision part side of the business, that's something we're continuing to focus on. And certainly, we've mentioned customer care as a critical part of our brand extension strategy. So that will be a key area of focus for me.

Okay. And maybe sticking there from a parts and services standpoint, I believe you called out customer care as being a positive for the quarter. How was the gross broken down between warranty work customer care and the remainder?

Yes. The warranty was up 12% and customer pay was up 8%. So there's really the strong focal point that led the customer care business for the quarter.

Okay. And the underlying continued growth in warranty, is that I don't know wave 3, wave 4, but to kind of recall? Or is that something else being driven?

It's broader than that. In addition to recall, we've also had improvement in gross margin in that area as well.

Okay. And then my last one because it's really interesting. The F&I, you've seen your used penetration continuing to grow relative to where your new is, but F&I has continued to hit record numbers. I think we would have believed that there would have been a mix down a couple of hundred dollars lower F&I for a used vehicle versus new. What's really been driving that continued strength? Is it the F&I attachment rates? Is it continued education of the AutoNation associates and just ability to upsell? Is there any product to call out where there's been much stronger penetration? Just really curious as to how that's continued to grow and if there's room for that to get maybe above $2000 per vehicle retailed.

So first is, best-in-class associates. So we have consistent training and a great process there. And also, if you recall, that was our first brand extension. So, if you think about the leveraging of the AutoNation brand, we're seeing that performance pulling through in F&I. We certainly have strong F&I attach rates throughout the business as well. And you're right, that as we add additional use or as we like to call it nearly new business in that does blend it down some. But we've been able to outperform that with a talented team of associates combined with having our own products in that area.

Understood. Congratulations again and looking forward to see what you can do. Thank you.

Thanks, David. Appreciate it.

Our next question comes from the line of John Murphy from Bank of America Merrill Lynch. Your line is open.

Hi, good morning everybody and Cheryl congratulations on a very well-deserved promotion. Great to hear.

Thanks.

A first question on what seems to be a slight change in strategy on the new vehicle side where you're a little bit more focused on GPU as opposed to the volume. And it just seemed like that coincided with Carl showing up. So just curious, if that's something you think you'll keep going with -- and sort of the skeptic out there highlighting this might decrease your UIOs over time and might have an impact on your parts and service in used eventually sort of two, three, four, five years down the line. Is this a strategy, you're going to stick with? Or is that something that might change?

This is Mike Jackson. So the strategy was devised last year as far as the new vehicles and we had had several years of declining front-end growth that really needed to be stabilized if not turned. We had a national leadership meeting with all our leadership of the company in January and made the pivot to this direction, had been concentrating on executing it ever since and you can see the results. Now, where we are at the moment is saying, "Okay, is there a middle ground or an adjustment that we need to make where the balance between price and volume we can find an even better line than what we're on?" But the first important step of stabilization and improvement is that we're in control again. We'll probably do some test market to see, but I will not expect any significant adjustment in the strategy through the balance of the year, but we will do some pilots and see if there is a tweak that we could do that would give us an even better volume. As far as units in service, we're not particularly concerned about that. Our pre-owned business is strong, so that's all -- we're bringing units into our marketplace and selling them as pre-owned. So the overall unit movement is not really that great. So we have the time to find the optimal line under the vehicle business and we're working on that.

Okay. But it's fair to say you might be somewhere between where you are right now and where you're operating. It's on fine-tuning right now.

Yeah. I would say that's a fair statement. And -- but for now no change. No different instructions have been sent to the store going into the third quarter.

Okay. And maybe just a follow-up on this. As we think about new vehicle inventory, you've done a great job of managing this. The industry appears to have fairly balanced inventory as well, yet we're hearing some anecdotal stories about vehicles in transit being some excess inventories floating around that may not be reported on field a lot. I'm just curious, how much pressure you're getting from the automakers. Is it more than the past year or two on taking inventory? And are you kind of getting the same kind of impression there might be some excess inventory floating around in the channel?

Yeah. There's always an open dialogue John between us and our manufacturer partners. We've obviously continued to manage the inventory level for the current retail environment down 9,000 units year-over-year. And I think certainly it always becomes a conversation as you look at where the SAR is headed. But we feel like we have an optimal inventory mix, and we'll continue to monitor that and the industry conditions tightly, but we're not in a position of having excess inventory.

And where the market is headed, we're also thinking about that in that, if I go back six months ago, nine months ago and I looked at the forward curve you could -- we could have expected a higher interest rate environment in the second half of 2019 going into 2020. And now from today's perspective, there's a very good chance that we're going to be seeing rate cuts not rate increases. So that's a huge change in mindset. And it will have a significant impact on the consumers' willingness to buy, because they've been struggling with this combination of a high price point with a higher rate. And if indeed it turns out we're going to have lower rates, we would rethink a bit on our inventory and what the forward market looks like, thinking of it in a more positive direction.

Okay. And then just lastly on AutoNation USA used stores, it seems like you're making some good progress there, maybe more than you have been for the past few quarters. I'm just curious why we're looking at sort of a stalled process or process which seems you're hitting pause. When could you reaccelerate your new store openings? Because it sounds like that is actually during the quarter and might be a real driver in the future.

Yeah. I would say John, when we launched the USA stores we put all our forward thinking in them as far as customer experience. And our conclusion after this journey has been that the customer experience we have in our traditional stores in the pre-owned business is actually exactly what the customers want. And so, we're -- this one price in everything that goes around it has now been installed in the USA stores and it's working quite well. So now that the stores are stabilized, the next opportunity is to drive higher volume through the stores. We didn't want to drive volume through the stores, if the profits within the store haven't been sorted out. But we now have that sorted out and we'll take a couple of pilot stores in the third quarter and see how we bring the volume to higher levels, which is right now about 100 a month through the stores. So, that's got us to breakeven with the process we have today. You put some volume through there, stores turn very profitable. But, again, we're not going to build new stores until we completely have validated exactly what process works in the store and what's the marketing stocking plan that leads to higher volume and Cheryl and Jim will lead that effort during the third quarter. And I think we can give you better outlook from there.

Okay. Great. Thank you very much, and congrats to you Cheryl.

Thanks, John.

Our next question comes from the line of Rajat Gupta from JPMorgan. Your line is open.

Hi. Good morning. Thanks for taking my question and congrats Cheryl on the appointment. Great new fit.

Thank You.

Just had a question -- just to follow-up on the parts and services business. Could you help breakout the strength a little bit between parts and services? And then just also between just volumes and transaction prices? If you could just give us a sense of how that's progressing. And then for the rest of the year, is this something -- is this the kind of growth we should be expecting in the near term? Or are there any confidence of that that things move around during end of the year? And I have a follow-up.

Yeah. So the big drivers were obviously customer pay and warranty within the business. And as you see new unit declines that does pressure the internal reconditioning within the business. And where you can see the growth pulling through well, particularly from our parts initiatives is in the percentage of gross profit. So you see a 50 basis point improvement in growth as a percentage of revenue on the customer care line. In terms of outlook, as you know we don't give the forward guidance on it, but we feel very optimistic about the second half of the year with the ability to continue to perform strongly in that business. As you know, recalls are a bit unpredictable, so warranty is always a little bit unpredictable. We certainly have some pressure in new units in the industry as a whole which does affect internal reconditioning. But we feel really good about our customer pay gross profit as we're able to pull through our parts into that part of the business.

Got it. Makes sense. Just changing tracks there. Just can you give us an update on the Vroom investment and how we should expect that partnership to evolve over time? One of your peers made a similar investment the competitor and they've obviously expanded their partnership in many different ways. So, could we expect to hear something in the near future on that partnership? Just an update there would be helpful. Thanks.

Yes. So, I met recently with the Vroom team with Paul and the strong team that he continues to build out there and we continue to have discussions. We'll keep everyone updated on any future opportunities or pieces of that. We are doing some work for them in the customer care part of the business.

Got it. It makes sense. Thanks.

Our next question comes from the line of Chris Bottiglieri from Wolfe Research. Your line is open.

Hi, thanks for taking the questions. I think it's been kind of brought up a few times and I'm taking a crack at it. Just wonder if you could give more color on the 12% warranty growth. How much of that's gross margin versus traffic-driven? I would think the gross margin is probably more labor-intensive than parts-intensive. Maybe you could comment on that. And then just big picture though given like years of flat SAR, what's driving all this increased recall activity? Is it like a number of different campaigns? Is it like one big lumpy one? Like if you can help us think about this perspective it would be helpful. Thank you.

Yes. So, warranty growth did benefit from improved margin performance. So, a lot of that was just playing out as shift in the mix towards some of the higher margin recall and service work and some improved labor and parts rates that we negotiated with certain manufacturers. As you know based on history, warranty can be a little bit unpredictable within the business in terms of timing. Certainly, there were some large recalls in the past. What we're seeing now though is certain recalls that have this higher margin portion of work that was not something that we forecast out into the future. But we do manage our volume with respect to customer pay and trying to drive that customer pay business while making sure that we're taking care of customer issues and safety issues in particular when they come to us for warranty.

That's helpful. And then your SG&A growth has been pretty impressive for the last couple of quarters. Just wonder if you can maybe comment how much the restructuring is benefiting it. And then last quarter you talked about potentially pushing back some of the steps at divestments later in the year. Just maybe you can give some more color there. Then just lastly just big picture like what's left of the brand extensions? I'm trying to understand what the initiatives are currently. You accomplished a lot of it over the last five to 10 years. Just curious what's like left at the table that you're investing in? thank you.

Yes. Absolutely. So, on the SG&A front its two things: The first is delivering the growth. So, when you deliver 7% in customer care used units up 5% and all-time record Customer Financial Services that flows through pretty well. On top of that we did put in place the $50 million annualized restructuring at the beginning of the year. That's actually been helpful for the flow of our business consolidating from three regions down to two. And you see the results of that in a very strong bottom-line for the quarter. We'll continue to make sure that we run cost in a smart manner. We're going to continue, however, to invest in the business invest in digital, invest in brand extension. To your question about what's left. A lot on brand extension, so we started off with Customer Financial Services on our first brand extension. We rolled into the parts business. We are improving the performance of AutoNation USA. We've got four successful auctions up and running. And our big focus continues to be in parts, and in particular, in collision parts and pulling that through the base business as well as the collision part of our business.

That should be helpful. Thank you.

Our next question comes from the line of Michael Ward from Seaport Global. Your line is open.

Thanks very much. Good morning, everyone.

Hi, Mike.

Cheryl was there restructuring costs included in SG&A in the second quarter?

No, we did not have restructuring costs in the second quarter but we did have the benefit of the restructuring that we put in place flowing through in the second quarter.

Okay. So how far along are you in the $50 million savings?

So we've completed all of the actions. So all of those actions have been completed and that's what you're seeing now is the flow-through of those initiatives hitting the bottom line. So there's no more action to be taken to effectuate the $50 million. You're just seeing the benefits of that. And when you add some additional gross profit on top of it you see the very strong SG&A performance improvement.

Okay. So the cost for completed is as of the first quarter. So that's done. So now it's just the savings flow-through.

Correct.

Awesome. Thank you very much.

Okay. Thanks, Mike.

Our next question comes from the line of Derek Glynn from Consumer Edge Research.

Good morning. Thanks for taking my question and again, congratulations, Cheryl.

Thank you.

It looks like that other income line decreased from prior quarters presumably from smaller gains or less store divestitures. What kind of pace of divestitures can we expect moving forward? And what inning are we in with respect to you optimizing your footprint?

So we're in the late innings of that. You'll see some select divestitures going forward, but not at the pace of what you've seen in the prior two years. And you're correct that was part of the change as well as last year's results included a legal settlement which are not in this year's results. So we'll have select divestitures but they certainly will flow from prior periods.

Got it. And then in looking across your segment mix between domestic import and Premium Luxury it appears Premium Luxury's gained share within your portfolio over time. And just curious if that's a function of any strategic change you're making where you want more exposure to that segment or if this is just a function of natural market share changes we're seeing in the broader market. Thanks.

That's a function of two things. I'd say first we love the balance within our portfolio so we love the fact that we're roughly one-third domestic, one-third import and one-third Premium Luxury and we like our geographic footprint as well. Premium Luxury did grow based on its organic growth within the actual business performance. But in addition over the last couple of years we had a series of add points from different manufacturers where we had built that out. And so you saw us selectively increase our concentration within the Premium Luxury part of the business, which performs extremely well not only from a sales standpoint, but also certainly from a customer care margin standpoint.

Got it. Thanks for all the color.

Our next question comes from the line of Rick Nelson from Stephens. Your line is open.

Thanks. Good morning and my congrats to Cheryl as well. Very well deserved.

Thank you, Rick.

Thank you.

I'd like to follow-up on the used car volume same-store sales really picked up this quarter. 7.6% strongest we've seen in four quarters and against a tough compare. If you could discuss the drivers there, anything that changed this quarter versus the last few quarters?

So, it varies in driving the play and use. So we definitely see continued opportunity with an exceptional customer experience. We continue to leverage one play, no haggle pricing strategy and we're going to continue to build off the success of We'll Buy Your Car program. So we're seeing some traction in our We'll Buy Your Car programs. So all those things combined, as well as the good inventory mix helped us drive those used results.

Got you. And capital allocation, we're seeing more in the way of debt reduction, not much in the way of buybacks activity or acquisitions. If you could discuss the go-forward plan there.

Yes. So, nothing's really changed with respect to capital allocation, Rick. As you know, we've remained very opportunistic on that. From a leverage standpoint we were getting close to three times. We certainly value our investment-grade rating. We do keep a focus on that. But we do have the capital from our free cash flow, particularly with the results that we've been generating to continue to invest. And so, we'll look at continued investment in brand extension strategy, including a focus on collision, a focus on our parts initiative. We have not been as active in the dealership M&A space recently. And we will continue to look at pricing, with respect to our shares and be opportunistic at the right moments.

Okay. And then, final one for Mike. It's great to hear you on the calls again. And curious if you're planning to take any different sort of -- or more active role now in the business and on the calls in the future.

So, I remain Executive Chairman. And as far as being on the call in the future, no I will not. Not that I don't love everybody, but Cheryl is the CEO and President of the company and perfectly capable of handling the call. As far as Executive Chairman now, on the big issues I'm definitely here at the table and know the situation, have a point of view expresses it and the team takes it to heart. And certainly as far as the decision as to who is the Chairman and CEO of this company, there's no question, as far as the discussion with the Board and the Board's decision that I was at the table. And I think the right decision was made between Carl and I that it wasn't a fit. And again, I'm thankful for his commitment, his efforts. It just wasn't a good fit to come into the company in automotive retail; it was a bridge too far. And I'm certainly -- I have to say, it was Cheryl -- Cheryl was the finalist the last time this position was made and it was a close call. I explained all the reasons why we took the risk. We face up to it that it wasn't working. I don't believe in dragging things out, once we come to a conclusion that it's not working, let's be decisive. And then that led to a unanimous decision for Cheryl from the Board. She's supported by our large shareholder and she has my full support and mentorship as Executive Chairman. And I would absolutely say it's a mentorship. She is -- I think you see it, I think you hear it, I think you feel it, she is CEO-ready day 1, and I have every confidence that she's a winner, and will be an outstanding CEO of this company. And by the way, I will remark that I'm very proud that with the Board, I got to participate in the decision that we have a woman leading the largest automotive retail enterprise in America, and it's a first for a company-traded auto retail companies. I'm thrilled that we have a Hispanic leading our company. But first and foremost, she is CEO-ready day 1. She's a winner. She has the confidence. She inspires confidence. She's unflappable, and she's a joy to work with.

I agree. [indiscernible]. Thanks a lot.

Thanks, Rick.

Our next question comes from the line of Stephanie Benjamin from SunTrust. Your line is open.

Hi. Good afternoon, and just to echo everyone else, congratulations Cheryl again on the new appointment. Looking forward to working with you in the future. I just wanted to follow-up a little bit on if we could just kind of go through some of the investments on the additional strategies. So maybe just kind of what is in the initial stakes there for it to build out that strategy, and kind of what we can look for going forward that would be helpful. Thanks.

Yeah. From a digital perspective, the way we think about that is both the front-end and the back-end. So investments in the customer experience with respect to sales. And as you know, with autonation.com our upfront ability to reserve the vehicle there, all the way through to how we're thinking about activating in digital within customer care. And I think that's an important component that's sometimes overlooked when people think about digitizing the front. We're also focused on how to continue to invest to digitize the back as well.

And then just kind of following-up on the questions on SG&A, is there anything that we need to be aware of in the first or even second quarter in terms of some of those investments in the digital strategy as well as the brand diversification strategy that may not continue or should pick up in the second half that wasn't just kind of different going into the second half? Thank you.

I'd say there is nothing in particular to call out. As you know, SG&A varies. These got different insurance reserves and other drivers in the background that can move things slightly in each quarter. But I would say there's nothing particularly notable in one quarter of this year to point out. I always mention that seasonally the fourth quarter of the year is typically the strongest from an SG&A perspective, but there's nothing in particular to call out or carve out from SG&A results for this year.

Great. I really appreciate your time. Thanks so much.

Great. Thanks, Stephanie.

Our next question comes from the line of Bret Jordan from Jefferies. Your line is open.

Hi. Good morning.

Good morning, Bret.

Quick question I guess on the parts strategy, maybe where you are in parts coverage versus your target parts coverage or sort of SKU count. And secondarily, I guess when Carl was brought in he was talked about sort of a supply chain expert, but might help in that parts strategy. And I guess is it something that you're going to need to add additional supply chain expertise given his departure?

Yes. On the first side, I would say there's two parts of the parts coverage. One is really the mechanical parts coverage, and we're certainly pulling that through well at our store location today, and you see that in the gross profit. On the collision parts side, we still have more work to do to build out our broader coverage there and I think we will continue to look at the organizational model and how we activate with supply chains. So as we talk about brand extension investment, we're going to continue to be investing heavily in that area.

Great. Thank you.

Our next question comes from the line of Armintas Sinkevicius from Morgan Stanley. Your line is open.

Great. Thank you for taking the question. Good morning. My first question is first congratulations to Cheryl and also Jim. When I look at the press release, Jim was credited with some successful initiatives with regards to the first and the second quarter. Just curious what those initiatives were and how we should think about them going forward?

So Jim is a terrific executor and if you think about the new vehicle profitability, so as Mike noted, we had new vehicle profits under pressure for the better part of the 1.5 to two years. Jim drove that execution in the field to make sure that we were balancing the equation with respect to new vehicle TDR and volume. We'll Buy Your Car as well is another initiative that Jim helped drive in addition to improving the profitability of the AutoNation USA stores. So Jim is a tremendous executive with fantastic experience and he is a very hands-on executor and was able to drive those initiatives and you see the pull-through of those results with a record first quarter and a record second quarter.

Great. And then the investment in Vroom, I understand it's financial in nature at the moment and there's constant dialogue. But you've had it for a little while here and I'm just curious how lessons learned from the investment are impacting your thought process with regards to your own digital initiatives?

I think it's an ongoing dialogue and anytime you have a strategic partnership or investment whether that's Vroom or whether that's the relationship we have with Waymo, you're always learning a lot in a way. And as I mentioned, we are doing some customer care work with them. So we're testing and learning and understanding where they are in their journey as well. So I would say it's a very iterative process.

Okay. And Cheryl, Mike's been very forward thinking in how he approached the company and you've been credited with building and cultivating that partnership with Waymo. How are you thinking about sort of unique areas to position AutoNation strategically with partners and otherwise going forward?

Yes, I think the great thing about having been in the automotive business for 20 years is I get a lot of inbound. And I think that between Mike and I a strong Board and a great management team, we continue to operate in the present while focusing on the future and I think strategic partnerships are a great way to do that. And so we're going to continue to cultivate those opportunities as we think about our growth initiatives for the future in particular brand extension strategy. So as we think about collision, as we think about parts, as we think about the AutoNation USA stores, we're going to continue to be broad in our discussions.

Great. Much appreciated.

Thank you.

Our next question comes from the line of David Whiston from MorningStar. Your line is open.

Thanks, good morning. Cheryl, congratulations. I guess a similar question, but going beyond strategic partnerships. Is there -- are there some things whether it's on people, the structure, the balance sheet operations Any aspects of the company that over the years, you've perhaps given a nudge to Mike and to Carl to and it never got done and you wanted to see it get done. And now that you're the boss, you have the opportunity to make some changes. I don't -- I'm not saying you need to go on a radically different direction or anything. But is there just some aspect that you guys haven't done that you'd like to see more attention to?

Well the great news is when I nudge my key lessons. Sometimes he says, I heard you the first time. But I tell them the second and third time. So I think, the great thing is we've been a great operating team together. I'm extremely proud of our balance sheet. It positions us well to do the things we want to do and to be very opportunistic. And certainly I had a front row seat to the capital markets crisis. I know how to manage balance sheets. And in concert with a very strong Board very effectively. We've got great people. I'm extremely proud of our field leadership teams in particular. And our associates, 26,000 associates that sell and service cars everyday. And I think a lot of it is just broad strategy. Look automotive retail continues to change. I started my career, at Circuit City's corporate headquarters when CarMax was in its infancy. And if you think about the model it evolved. And so, I think you need to be out there with a broad lens thinking through that, but understanding that every hour that we're open, people are waiting there with vehicle needs. And we need to be meeting that today while investing for the future. And I think that balance is critical. Mike and I over the years have had great dialogue. And think we've struck the right balance there. But that's a continued evolution. And I love the fact that we have some see into the future. And continue to learn in that area.

Okay. That's helpful. And is there any change you guys are seeing perhaps in terms of waning enthusiasm amongst your customers for light trucks, especially in Texas California and Florida?

No. They love them. They love the command sitting position.

Okay, great. Thank you.

Thank you.

Our final question today comes from the line of Colin Langan from UBS. Your line is open.

Great, thanks for taking my question. Most of my questions are answered but just to clarify. I mean, when we look at the rest of the year same-store unit sales were down. That was part of your strategy to focus on more profitable units. So we should expect that to kind of continue through the rest of the year. And then stabilize in the next year is that the right trend we should be thinking about?

We'll continue to strike the right balance. But I do expect to continue to deliver solid new TDRs.

Got it and then, just lastly, CapEx is down in the first half by $75 million, a little surprising with the growth strategy. Should that pick up through the rest of the year? How should we think about it? Or is that just a high comp last year?

It was a little bit of a higher comp last year, as we talked about. From a dealership acquisition standpoint, we have not been as active in that space. And if you think about some of our collision center build outs, they don't have the same costs necessarily as a dealership acquisition. So there'll be some blending of that over time. We're still committed to making sure we have fantastic facilities, we will make sure we commit the right amount of capital as we go forward. But, given our strong balance sheet we feel very good about the relative CapEx position. But we are making sure that we spend that money wisely.

Okay, all right and like everyone else congratulations and well-deserved.

Great, thanks Colin, great. And with that we officially end the call today. And I thank everyone so much for their questions.

And this concludes today's conference call. And you may now disconnect.