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Hello, and welcome to AutoNation, Inc. Third Quarter 2026 Earnings Call. My name is Kenneth and I'll be your operator today. [Operator Instructions]

I will now hand the conference over to Derek Fiebig, VP of Investor Relations. Please go ahead.

Thank you, Kenneth, and good morning, everyone. Welcome to AutoNation's Third Quarter 2026 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open up the call to questions.

Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures, as defined in our SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website at investor.autonation.com.

With that, I'll turn the call over to Mike.

Yes. Thanks, Derek. Good morning, everybody, and thank you for joining us today. So as usual, we'll begin with an overview of the quarter followed by Tom's review of the financial and operating results, and then we will take your questions. So I'm going to begin on Slide 3.

The central message this quarter is straightforward, I think. It's the strength of our business model, which includes durable earnings streams and cash flows and disciplined capital allocation, enabled us to deliver our seventh consecutive quarter of year-over-year adjusted EPS growth. Now that result reflects our focus on our customers' mobility needs and the value creation drivers per share shown, which contributed strongly to the Q3 results. Specifically, After-Sales delivered another record quarter.

Customer Pay and warranty gross profit each increased 5% and, supported by higher traffic and After-Sales again, contributed half of our total company gross profit.

Second, our customer financial services platform gives us control over the placement of products and financial services. This enables us to direct the business to our own captive finance company or to one of our preferred partners. We will discuss the hub in a few minutes, but it gives us upfront income as well as long-term earnings stream. Under this model, AutoNation Finance continued to scale rapidly and profitably. The portfolio reached approximately $2.9 billion, quarterly profit increased to $15 million from $2 million a year ago and return on equity based on Q3 results is approximately 24%.

Now beyond the financial figures, the business is providing a meaningful platform to drive deeper and ongoing relationships with our customers.

Third, cash generation remained, I think, exceptional. Year-to-date adjusted free cash flow was $739 million, representing 141% conversion of adjusted net income.

And fourth, we continue to deploy capital with discipline. Through September, we invested in the business, completed attractive acquisitions and deployed $620 million to share repurchases, reducing our share count by approximately 12% year-over-year.

Now rest assured that we continually evaluate share repurchase and M&A opportunities through the lens of maximizing value per share. And since 2022, that has favored share repurchases. And over that time, we've allocated 88% of our adjusted free cash flow to repurchases, which includes 84% year-to-date. And in current market conditions, our share price is attractive. And given that our capital allocation model focuses on long-term earnings per share growth, we anticipate continuing with share repurchase as a preferred use of incremental capital.

Now moving to Slide 4, which provides a visual on EPS and free cash flow performance. Adjusted EPS was $5.11, up 2% from $5.01 a year ago, again, our seventh consecutive quarter of year-over-year adjusted EPS growth. After-Sales and Automation Finance were the principal operational drivers of EPS growth. We also realized a significant EPS benefit from our share repurchase activities.

Year-to-date adjusted free cash flow was $739 million, in line with 2025 and conversion improved from 141% -- to 141% from 128%. Now as I stated earlier, through the end of September, we have deployed 85% of our free cash flow to share repurchases. And Tom will talk more about capital allocation in a separate side. But our model, as always, will continue to focus on the best use of cash to drive EPS in the long term.

And with that, I'm going to hand over to Tom.

Thanks, Mike. I'm on Slide 5, which gives a little more detail on the EPS growth that Mike mentioned. If I start with Q3 2025, $5.01 and walk it to the $5.11 Q3 '26. First, you'll notice the effect from vehicle sales as anticipated. Vehicle volumes were lower year-over-year, primarily reflecting the comparison with demand ahead of the September 2025 EV incentive expiration and last year's tariff announcements. This is behind us as we move forward, but it did create a $0.52 per share unfavorable impact in the quarter.

On vehicle profitability, we were pleased that we're able to grow year-over-year in used unit profitability and keep new unit profitability normalization within a reasonable range compared to what we have been experiencing in 2024 and 2025. The net effects of these factors were $0.28 per share, unfavorable.

Moving on, the results benefited from the strength of the recurring earnings streams we've been discussing. After-Sales contributed $0.38 of earnings per share growth and AutoNation Finance contributed $0.27 of earnings per share growth. We have more details on each of those coming up.

Additionally, share repurchases contributed another $0.64 of earnings per share growth through the reduction in weighted average shares outstanding. All other items were a net unfavorable $0.39 per share, which includes the effects of less operating leverage for our SG&A resulting from lower vehicle sales. That was about $0.13, reductions in Wholesale vehicle profitability, which was about $0.14 and higher interest expense, which was about $0.08. We have clear actions underway in each of those 3 areas, for example, in SG&A, although we screen near the top of our peer group in terms of cost management proficiency, our cost performance in Q3, particularly in July and August, could have been better. We initiated several initiatives in September, which we are confident will deliver meaningful cost productivity for the rest of the year and into 2027.

Focus areas include field labor productivity, discretionary local spending for categories like marketing and IT, corporate advertising spending and corporate commercial sales.

Second example is on Wholesale vehicle profitability. We didn't have the right mix of used vehicles and held on to some stocks for too long and ended up incurring incremental Wholesale losses in the quarter. Used inventory turns over very quickly, which gives us the opportunity to self-correct rapidly. And we have, in fact, made inventory corrections as well as organizational changes in this used area.

We also had hired general purpose interest expense and floor plan interest expense relating to higher share repurchases and inventory levels. We are comfortable with our used inventory levels. We're a bit higher on new unit inventory levels, and we'll be moderating those over the course of the coming months. The result was adjusted EPS of $5.11, up 2% year-over-year.

Slide 6 highlights the earnings streams, which anchored our quarter. Starting with After-Sales gross profit reached a record $617 million. This marks the ninth consecutive quarter that we've achieved year-over-year record gross profit in After-sales. And After-Sales represents about half of the total company gross profit. Customer Pay and Warranty gross profit each increased 5%, supported by traffic growth of 5% in Customer Pay and 13% in Warranty.

AutoNation Finance also continue to scale. The portfolio increased to approximately $2.9 billion from $2 billion a year ago. And 91% of the portfolio was funded with nonrecourse debt. Year-to-date, profit increased to $36 million from $4 million in the prior year with a 24% return on equity. Customer Financial Services generated $349 million of gross profit and approximately $2,700 unit profitability. Total retail units declined 4% and the continued growth of AutoNation Finance shifted a portion of economics from upfront commissions towards recurring finance income. That shift is strategically important as it enables us to convert transaction-based earnings into a recurring earnings stream, while generating superior earnings and attractive returns on equity.

Turning to Slide 7. We've historically made and we'll continue to make capital allocation decisions based upon the relative contributions to earnings per share of every investment alternative over the long term. And as you can imagine, the current environment, that strongly favors share repurchases. Along those lines, you will see that this morning, we announced that our Board approved an additional $1 billion share repurchase authorization, bringing the total authorization available to approximately $1.4 billion. So far, in 2026, share repurchases represented our largest use of capital. We have deployed $620 million year-to-date and repurchased approximately 9% of the shares outstanding during 2026, thereby decreasing the year-over-year share count by 12%. We're on our way to exceeding the 2025 share repurchases total of $785 million.

Our acquisitions made during the second quarter added approximately $600 million in annual revenue and increased our scale and density in markets where we have a meaningful presence. These included 3 premium luxury stores and 1 Toyota store, all of which were modeled to generate greater value per share than the share repurchase alternative.

Leverage remained stable from the second quarter and within our targeted 2 to 3x EBITDA range. We're committed to maintaining our investment-grade rating, and we're well positioned with our latter debt profile and our covenant-light borrowing arrangements.

Moving to Slide 8. I want to add to the points that Mike made on After-Sales. After sales once again delivered record gross profit and remained our largest gross profit contributor. Revenue increased 5% to $1.29 billion from $1.23 billion a year ago. Growth was led by Customer Pay revenue, up 6% and Wholesale Parts revenue up 16%. Gross profit increased 3% to a record $617 million. Customer Pay and Warranty gross profit each increased 5%, supported by increased traffic. Sales and gross profit were lower for internal reconditioning, which was impacted by lower vehicle volumes and for collision.

Gross margin was 47.8% compared with 48.7% in the prior year quarter. The year-over-year change entirely reflected mix. And that is a mix of Wholesale Parts, which carries a lower margin rate than Customer Pay and Warranty, but is accretive to AutoNation ROI.

The key takeaway is that customer-facing demand remains healthy. We continue to focus on customer retention, repair order content and productivity enabled by technology to support durable mid-single-digit growth in this high-margin and recurring part of the business.

Slide 9. With the success of our financing platform, we wanted to provide an end-to-end view of our Customer Financial Services platform and how it's delivering meaningful profit in the current period and creating an earnings annuity that results in long-term value per share. Over the last few quarters, we've been rolling out an origination hub across the group that allows us to allocate contracts to product providers and financing providers, including our OEM financing partners, mostly for new vehicles, our non-OEM financing partners and AutoNation Finance based on customer needs, economics, risks and available capacity. During the quarter, AutoNation originated approximately $3.9 billion of customer financing across 93,000 units with finance penetration of approximately 73%.

Approximately $500 million of current period originations were retained by AutoNation Finance. And after amortization and liquidation, the finance portfolio expanded by approximately $200 million during the quarter and ended at approximately $2.9 billion. The platform generated $349 million of CFS gross profit and $15 million of AutoNation Finance operating profit during the quarter. The current CFS economics remain significant, while the loans originated by AutoNation Finance builds an earning annuity over the life of the portfolio. That combination of current value and future value is a strategic advantage of this platform.

Turning to Slide 10. AutoNation Finance itself delivered another record quarter. Operating profit increased to $15 million from $2 million a year ago. Year-to-date profit was $36 million compared with $4 million a year ago. Net interest margins remain healthy and they're aligned with our credit risk profile. Delinquencies continue to be modest. Origination terms have been consistent and expansions have been minimal. The team is also achieving attractive portfolio growth without having to inject much in terms of incremental SG&A spending.

The portfolio increased to approximately $2.9 billion from $2 billion a year ago and was 91% funded with nonrecourse debt compared with 86% a year ago. The cash generation from the portfolio is also becoming meaningful. AutoNation Finance generated approximately [indiscernible] operating cash flow in the third quarter and $93 million year-to-date. We remain on track for approximately $120 million for full year 2026 and currently see a path to at least $150 million of cash flow in 2027.

Funding execution also remains very strong for the portfolio. Market demand for AutoNation's ABS paper continues to be healthy. We've completed 4 ABS transactions in the last 18 months, totaling $2.4 billion and we'll be launching a new ABS transaction next week.

Additionally, in October, we closed on a new pre-ABS warehouse facility that provides additional capacity and flexibility. This single syndicated warehouse facility replaces our existing multiple bilateral warehouses funding lines, providing better funding rates and a more efficient administrative structure, and we appreciate the support of our lending partners in getting this completed.

The third quarter return on equity for the portfolio was approximately 24% as the portfolio of seasons and funding efficiency continues to improve. AutoNation Finance is scaling into a meaningful, high returns annuity while enhancing long-term customer relationships.

I'm on Slide 11, customer Financial Services. CFS gross profit was $349 million in the quarter compared with $375 million in the prior year, primarily reflecting lower retail unit volume. Gross profit for vehicle retail was $2,698 compared with $2,775 a year ago, a 2.7% reduction. And that included 3.6% for product terminations and 1% the effect of loan originations retained by AutoNation Finance. Offsetting these were incremental platform access fees and commissions earned during the quarter, the effect of which was a 1.8% increase in our CIS unit profitability.

As AutoNation Finance grows a portion of the economics moves from upfront CFS commissions towards an annuity of recurring finance income. While that shift modestly reduces current period CFS profitability, it does increase the lifetime economics of the customer relationship and supports long-term shareholder value. CFS product attachments remain robust, averaging 2.2 products on new sales -- our new vehicle sales and 1.6 products on used vehicles and pricing remained relatively stable. The CSS team continues to execute a value-driven, customer focused process and product penetration remains an important contributor to future After-Sales activity and customer retention.

Slide 12 covers new and used vehicle sales, the origination events of our business model. New and used constituted 11% and 9%, respectively, of our total gross profit in the quarter. New vehicle retail unit sales were $63,929, down 3% from 66,189 a year ago, reflecting a 60% decline in battery electric vehicle sales following the September 2025 expiration of the U.S. EV incentive program. Excluding battery electric vehicles combined internal combustion and hybrid unit sales increased 2%, by segment, new unit volumes increased for Import and Premium Luxury brands as we benefited from acquisitions, while Domestic units decreased.

Market share remained stable with the first half of the year. New vehicle gross profit per unit was $2,176 compared with $2,281 a year ago and continues to remain within the stable range we've seen over the past several quarters. Unit profitability increased slightly from last year for our Import brands, while Domestic and Premium Luxury decreased.

Used vehicle retail unit sales were 65,410, down 5% from 68,896 a year ago. Volume remained stronger in the higher-priced units. For example, sales of vehicles greater than the $40,000 price point, which is our highest profitability tier, increased 8% year-over-year. Lower price supply continue to be constrained, while off-lease supply is improving, which should create additional sourcing opportunities over time. Used gross profit per unit was $1,524 compared with $1,489 a year ago, demonstrating relative stability. And as we mentioned earlier, used wholesale gross profit was lower for the quarter, reflecting corrections to inventory aging and mix. With an improved inventory mix of properly priced reconditioned, located in merchandise used inventory, we're confident in restoring volume growth this business.

Across both new and used, we remain focused on balancing volume, profitability, inventory and the customer experience. We expect the typical fourth quarter seasonal benefit from our Premium Luxury mix and a lower used to new ratio.

Turning to Slide 13 on free cash flow. Year-to-date, adjusted free cash flow was $739 million, roughly flat with the prior year when you exclude the $40 million of cyber insurance proceeds we received in 2025. Adjusted free cash flow conversion improved 141% from 128%, continuing our history of converting more than 100% of adjusted net income to cash. This reflects continued focus on working capital, inventory, discipline and cycle times.

As I indicated earlier, AutoNation Finance is becoming a more meaningful part of our cash flow generation. So for the full year, we now expect approximately $280 million to $290 million in capital expenditures, roughly a $40 million reduction from our original target of $325 million as we sharpen the pencil on investment return requirements. For the full year 2026, we're on a path to meet the prior year level of $965 million in adjusted free cash flow, again, excluding the 2025 cyber insurance proceeds. Our consistent cash conversion provides the capacity to fund the business, support growth initiatives, maintain balance sheet strength and return capital to shareowners.

I'm going to now turn the call back to Mike.

Yes. Thank you, Tom. Let me close by returning to the central message of the quarter. And that is that we continue to perform in a sluggish environment. Vehicle demand was softer but After-Sales, automation finance, cash generation and discipline in capital allocation enabled us to deliver our seventh consecutive quarter of year-over-year adjusted EPS growth. After-Sales, as we mentioned, contributes over half of our gross profit. Customer Pay and Warranty traffic remain healthy, and we continue to see a durable path of growth through customer retention, repair order, content, productivity-enabled technology and Wholesale Parts expansion.

Automation Finance is emerging as a meaningful earnings engine. The portfolio is approaching $3 billion. Profitability continues to scale and the business generated a 24% return on equity. Over time, Automation Finance converts transaction-based earnings into recurring income, while deepening our customer relationships.

Now in Customer Financial Services, our product attachment and pricing remained solid. The growth of Automation Finance is changing the timing and mixing of -- mix and earnings, but it is increasing the long-term value created from each finance transaction.

Cash generation continues to exceed earnings and our investment-grade balance sheet provides funding efficiency as well as strategic flexibility. Our capital allocation priorities remain clear, we will invest in the business where shareholder value can be meaningfully created. Now at this point, as I mentioned, share repurchases remain our preferred use of incremental capital.

Lastly, I wanted to acknowledge a clear opportunity that lies before us to make every customer experience simpler, more connected and more trusted while giving our associates better tools and support to do their best work. [indiscernible] will also lead to better standard adherence, less friction and leakage, lower costs and ultimately, more sales. Technology and AIR and will continue to play a key role in this transformation. And I'm excited to have Ravi Simhambhatla join us as Chief Technology and AI Officer. He started on October 1. Ravi is leading our technology and digital agenda, helping us modernize the capabilities that strengthen the customer experience, support our associates and accelerate our long-term growth. Ravi brings more than 30 years of experience spanning technology, digital transformation, product innovation, customer experience, obviously, cybersecurity, but also will significantly enhance our data, artificial intelligence and how we use technology and data together to drive our business forward. It's a critical leadership position in our transformation. So welcome, Ravi.

Just want to move on to Slide 14, and I'm going to return to the shareholder value slide because I want to look beyond the strong third quarter results and explain why AutoNation is a compelling investment. And I think the thesis is relatively simple. We view new and new sales as the origination event that creates long-lived relationships that drive strong annuity streams, captured by our customer financial service platforms and our After-Sales business. And we have a fantastic business that creates a lot of these origination events, 2 core capabilities then drive the earnings annuity and deepen our customer relationships.

The first is Customer Financial Services platform. Our origination hub coordinates financing across our product partners, financing partners and our captive finance business. It generates upfront access fees, product commissions along with long-term captive portfolio earnings. Our captive portfolio already delivers high returns on equity, but it also strengthens customer relationships, making them deeper, obviously, more personal and creates long expected reasons to stay connected. It also provides products and services that support and feed directly into our After-Sales business.

Now that's the second thing after sales. Not only is it durable consistent high-margin business, but that, again, also strengthens customer relationships and helps generate future new and used vehicle sales. You may see short-term consumer pressures that could delay or temporarily reduce miles driven. But ultimately, that profit opportunity is generally deferred, not lost. Our focus is to grow a large active customer base, increase lifetime value, retain customers longer and build family and household loyalty. And our unmatched physical footprint supports that effort, enhanced by technology, infrastructure and processes.

An efficient balance sheet and working capital structure, low capital expenditure and streamlined operations support this model. Together, they generate significant free cash flow. We invest that cash with a relentless focus on shareholder value and EPS growth, as we have discussed many times. That is what makes AutoNation a compelling investment opportunity in my view.

Now with that, Derek, I think we'll be happy to take questions from everybody on the call.

Great. Thanks. Kenneth, if you could please remind people how to get in queue for the Q&A?

[Operator Instructions] Your first question comes from the line of Rajat Gupta with JPMorgan.

Just wanted to start off with like a 2-part question on parts and service. Could you confirm or give us some color if you're seeing any sort of pricing pressure in that segment either on labor rates or parts or just like warranty rates? Just curious if you could give us the latest there. And then if I look at just the overall gross profit growth of 1%, I understand Customer Pay is tracking higher than that. But curious if you have any visibility on just the overall gross profit dollar growth reaccelerating in parts and services.

Rajat, it's Mike. I'll start, and Tom, you can comment. I think pricing pressure manifests itself in different ways, doesn't it. What I would tell you is that the traffic in terms of repair orders to our businesses from Customer Play are up. And that, frankly, was the engine of the overall growth that we posted. And I was very, very pleased to see that. But where you do see pricing pressure, I think, in the marketplace is the level of deferred work and the actual hours per RO, which is a direct reflection quite often of the upsell potential that you have on cars in your workshop. And we are seeing higher levels of deferred work, and we are seeing less total hours per RO, which I think is where you may be seeing price pressure in the marketplace.

It isn't necessarily competitive price pressure on our labor rates. I think that we are positioned fairly and well in that area. I think it is just general economic pressure on the consumers. And I think that we will continue to price in line with our markets that we operate in. But also, I think that will reflect inflation as we go forward.

Our deferred work is not lost work. Most of it reaches a critical point, and then I would expect the majority of it to come back into our service departments because, obviously, we are tracking that deferred workers staying very closely in touch with our customers because some of these issues may well be safety issues as well. So I think the story we have is that the content per RO was down, both on, obviously, hours per RO. There was some very slight pressure on retail pricing, but it was very minor in the context, but that was compensated for by increased traffic through the workshops.

In terms of the outlook, I think we can continue to grow. And frankly, I think in the current environment, I think our service and parts teams did a good job. I think growing our Customer Pay business in that environment with the pressures that are clearly out there really reflected their focus on customer. Where we didn't see growth then really, I think if you look at the total number was on our internal pay, that frankly just reflects our performance on new and used vehicle sales. And I expect, particularly around use for that to improve as we get into Q4. So hopefully, that will be back. But my outlook is and something you and I have discussed, and I think it's very well known is that the vehicle part, particularly the part that yields the most labor and parts content for us, is suffering some headwind because of COVID. Now the peak of that is in 2027 and then it starts to recover from there.

So we've obviously got a series of initiatives that have recognized that's coming towards us and are in play at the moment that we think can actually provide us some clear offsets to that headwind. And it is a headwind because the park, as you know, materially shrinks. And as I said, 2027 is the low point. And I think in those offsets, some of it really is around the fact that we still penetrate the vehicle market somewhere in the area of 40% to 50% in those areas. And we can put together packages that we can provide as franchise dealerships that offer our customers that may be effected to a different service provider or doing the maintenance themselves, some compelling reasons to come back into our workshops. And I think we've got a great program that will progressively get rolled out in the coming months in 2027 as a direct reflection of our understanding of that offset that will stay in place for when we see the park begin to recover. So I think it will continue to be under pressure, but I think we can continue to grow.

That's very helpful detail or you have another question. Yes. Just a quick follow-up. I think just a quick follow-up, just on the new vehicle side. I think you mentioned like maybe inventory levels were a little higher than you would like and you're working on moderating that. Would that mean you see some continued pressure here on the front-end gross before it normalizes? Just curious to get a thought when we get to a more normalized new front-end level.

I think Tom talked about his view in terms of margin. And I -- my perspective on this is that our inventory levels have grown. We -- I have a strong view of where we should kind of end the year in terms of our inventory levels. And we know that because of the mix of our brands, we're going into a period of time when looking at our absolute days supply right now is probably not the best metric. And when we reflect back on Q4 with the seasonal high that we expect to see in December, I think you'll see our actual days supply will be normalized, but some of that will need and will require us just to moderate the amount of production that we take from our manufacturers. I think that is something that is manageable within normal course. And I don't think that it will require excessive discounting to move volume.

But I will return to something what I said before, and that is we view new and used vehicle sales largely as the initiation event for us that will create another customer and an ongoing stream of profit through the lifetime of that relationship. So we want to be competitive in the marketplace. And the marketplace itself, we know will probably continue to be very competitive in Q4. And I think some of the things we're seeing around agentic search will keep that pressure on there. But from an inventory point of view, that won't be a reason, I think, for us to have to discount.

Your next question comes from the line of Joseph Spak with UBS.

This is Rob Saltzman on for Joe today. Just a follow-up on parts and service side. How do you think you can work to take share from independents and bring some of these customers back to the dealership for service? You mentioned working on some new products, but is it primarily pricing more competitively? And if so, how do you think about balancing volume versus margins within parts and service?

You're absolutely right. None of this business is going to be easy to get, and it's all largely going to be Conquest business. And the way [indiscernible] business is on the value that we provide and the value, of course, a big element of its price, but it is it's also the warranties that we give. It is also the convenience that we can offer because of the large amount of loaner fleet that we have. And remember that we can also now increasingly provide other solutions for where they want their vehicle service.

So the packages that we are looking at do include some price elements. We're balancing that because we understand, I think, with a large -- we understand enough about the value per repair order of aging vehicles to make sure that whatever we put in place, that it still has a very, very significant return for us. We also clearly want to make sure that we manage it as a reflection of the age of the vehicle so that it is really targeted and contained in increasing the relationship time with customers, so we don't see them using other services as they drop off in the cars reach between 4 and 7 years old as well as attract new vehicles to us. But it will be a package. There will be some price elements in there, but there will certainly be some convenience and warranty to add value to those customers. And we've started on that work. It will accelerate as we close the year out. But I think most of it will be well communicated as we get into Q1 next year.

And just one follow-up for me, just on the AutoNation Finance side. So with rates moving higher and funding costs for AutoNation Finance, likely moving higher with it, how do you think about balancing pushing some of these higher funding costs through to customers and perhaps going to be eating some more of those higher costs to help the affordability side of the equation and maybe drive volumes?

Good question, Rob. When you look at the AutoNation results, net interest margin has been pretty strong when you consider both the funding costs as well as the borrowing rates. We're pretty careful in monitoring that. Yes, there were occasional exceptions. But I think, generally speaking, the team has a really good process for pricing that gives consideration to the changes in the funding costs. I think we've kept up with that pretty well.

Could that change? Perhaps. But I think overall, consumer has been very strong in that business. I mean our delinquencies are very low, lower than what we had modeled when we first purchased the company. the average tenor on loans originated is very stable. We're seeing very little in terms of incremental extensions and the FICO scores continue to improve. So I'd say overall, despite the external noise, the portfolio is being well managed and it's showing up in the results, $15 million of income in the quarter, and we're really encouraged about the trajectory of the business. So I think that can be managed.

And I also think you have to be realistic about the level of subsidy a retail group can provide. There are certain things that we can add value and make sure that our customers are getting competitive finance rate. But when you think about a 60-month term or a longer term, the amount of subsidy we can provide over that period is important, but maybe not materially enough to move the needle. OEMs are the only people that can really subsidize that on a long-term basis to that extent. But I think the question of affordability is something that we get tracked. We track through our contact conversion rates. And we look very, very closely at a number of things that are very, very important to us, not just the finance penetration that we have. But obviously, the underlying curve that we think someone will return into equity and the additional products and services that we sell.

What we want to is to start that relationship with the customer so that we can as I said, maximize that over their lifetime. And if that means that we have to use price very flexibly on the front end to do that, we will do that because we know that the lifetime value will significantly exceed maybe an incremental subsidy to get that transaction done. But we want to do it in a way that really is around the value proposition for our customers. So that's kind of how I would also answer that question.

Your next question comes from the line of John Babcock with Barclays.

Just on new GPUs. Earlier -- I guess in the last couple of quarters, you've talked about seeing stability there. In this quarter, there was a bit of a drop off. I just want to get your latest view on that. I mean do you still expect new vehicle GPUs to be relatively stable? Or is there something that's changed? And if so, what has changed?

Yes. I think we -- great question, John. When we look at the performance in Q3, certainly, you go back 2 years, 2024, 2025, we're seeing measurable, meaningful declines across all of the segments. And I think for the last year or so, that has narrowed down. Maybe picked up a little bit in Q3 for Domestic brands. I think that has all to do with inventory levels. And I think we have some opportunity there. I think we're pleased with how Import and Premium Luxury came out. And I do expect us to get a reasonable uplift in the fourth quarter from that -- from Premium Luxury.

And then you did briefly talk about Ravi's role as the Chief Technology Officer. I was wondering if you could just talk a bit more about what he's going to be doing on, whether the focus is going to be on internal efforts, customer-facing efforts? Or if there's anything else you can share in terms of what the goal is there?

Yes. I mean -- so firstly, obviously, you hear a huge amount about productivity driven through technology, particularly around AI. And like everybody else, and the technology team prior to Ravi joining, I think we've made some really good progress in that area, reducing a number of costs on a per sale basis. But the way that I think about the work that we've been doing, it started before Ravi was with us, but will accelerate now that he's here is really around how you combine a fantastic dense physical infrastructure that has all of the things you need to develop a lifetime service relationship with your customers. That is incredibly difficult for anybody to replicate today and would take decades today. How do you make sure that you put a digital layer on top of that? That really does present a very transparent firm price, trade, finance and also can make sure that the fulfillment of that is done seamlessly, is the massive opportunity for our organization. And we've done a lot of work in that area to really combine those huge often overlooked.

Benefits of the network that AutoNation has been able to build. Now using technology, which, of course, has significantly compressed the development time on that digital layer that can sit on top of it. And I think you'll see a lot of work in the coming months from him and his team in that area. And that will be supported by a number of things we're doing on that physical interface as well. That will also enable us to really lean into some of the changes that we see will advantage us and what we have to offer to customers going forward. But a combination of, I think, a much, much more the future equipped, if you like, digital infrastructure allied to that physical network that I talked about. So short answer to your question.

Your next question comes from the line of Alex Perry with Bank of America.

This is Jack Joyce on for Alex. Perry. First one, how has the recent FTC enforcement impacted your business for that appears to be pretty high dock fee state, which you have some decent exposure to. Has that enforcement had any impact on new GPUs?

Well, firstly, I think the guidance on the FTC actually has just formalized a shift that was inevitable anyway and was well underway before the guidance. Technology has already made real price, the only price. And we've been very, very aware of that in the marketplace. So whether you're in a state where dock fees are prevalent or you're in a state where Dove's not prevalent I think we've always tried to make sure that our all-in pricing has been transparent and has been competitive in the marketplace. So I don't see any impact on our business from the FTC's guidance at all. In fact, as I said, I just think it was a formalization of a shift that was well underway, driven by technology. I view it being beneficial to us because it means that from a consumer perspective, those that are not using agentic tools to search don't need them anymore because it's now very, very apparent on third-party sites. I like that because we're incredibly competitive and we offer a lot more value than some of our competitors in the used vehicle field.

And it also enables us, of course, to make sure that we can constantly use that information to provide the best value to our customers.

That is super helpful. And as a quick follow-up, used GPUs held up well and were up sequentially in 3Q, even with same-store units down. How are you balancing volume versus GPUs from here, especially with off-lease supply improving and higher new vehicle prices potentially pushing more buyers into use?

Yes, Joe, that's a great question because I've said in the past, we're going to get to $2,000 a unit. And I can tell you something that when you look at the brake -- when you break down the drivers of used vehicle margin, whether it's acquisition cost reconditioning, how long you add in inventory, your pricing, there is an absolute clear path to around $2,000 per unit in today's market. The challenge in used vehicle margin is definitely not the math. It's executing consistently across a large dispersed network of stores like we have.

So what we're doing at the moment is really -- we've looked at this for some time, by the way. And now you'll find that we are doing more centralization and putting tighter guidelines into the field. We need to do that for a couple of reasons, frankly. Firstly, we want to do that because we think we can grow our volume. And secondly, by doing that, we can absolutely make the experience that the customer has from a pricing perspective and other things that we're working on much, much more consistent. So we're working on that instead. But I would tell you that my view on this really is more a dynamic return on capital model that, frankly, with the tools that are available and the things that we're developing is going to enable us to balance a number of things to get the best result based on the capital we've invested in that used car inventory.

And I don't think that I'm going to be that -- I don't want to be constrained by a fixed used car margin because I think that, frankly, is that lived in the past and should live in the past. What I really want us to do and we're moving very rapidly to it is to move much more towards a return on capital model, which has to take into account not just the marketplace and how we're selling vehicles, but it has to take the velocity of supplier vehicles as well, which for me really completes the circle and something that we're now able to do by using technology and some of the other things that we have done in our processes.

So you'll probably hear me talk less about GPU. Obviously, I'll respond to the questions about GPU. I know it's important, and we'll talk more about how we're turning our inventory, how we're thinking about that from a return on investment, velocity of money perspective, but increasingly more about customer lifetime value going forward and the fact that it's a great initiation event to generate long-term service loyalty and hopefully, a repeat customer.

Your next question comes from the line of Jeff Lick with Stephens.

Mike, your interest of the last question about no real reason economically why used margins can't get to $2,000 and that it's process-driven or execution driven. Just curious the lower-performing stores, what is it that they aren't doing with the higher-performing stores you're doing? And then just to build on that, also curious, you guys are very focused on units in operation and the lifetime value. Could you give us a little bit of just relative to new how you guys think about a used unit? And do you see -- does that influence your decision in terms of GPU because you're going to get some used customers back into the service lines?

Right. So remember, the $2,000 is an average. So there's always been dealers that we have in our group that perform above that and there's always been dealers that perform below that. But typically, what you see is, once we remove the mix element because, for example, our Domestic stores will have a very different mix to our Premium Luxury stores. and mix does have an impact, even though quite often not as much as people think. But once you remove the mix element, there are a couple of things that, for me, we now know with certainty that we're working on very hard. If we know that stores that price the vehicle right the first time and are very, very focused on doing the right level of reconditioning and they do at that pace in a very disciplined manner on a factory-like basis, yield a higher margin, higher stock turn. And you're quite right, what the math to get you to do 1,000 really just works on those other elements that will get you to that position.

Frankly, it's not always about discipline. It's not always about sloppy execution because most of these vehicles are processed within a workshop that is also looking for Customer Pay and to expand its work there. So what we're now doing is much more dynamically thinking about where we can process these vehicles to remove some of the processing times that the blockage. We're making sure that our certification process and quality of reconditioning is very, very well-known, documented and very clear, not just to the people doing the work, which obviously is vital, but it also enables us to be incredibly transparent with our customers and that becomes increasingly important going forward because that is what customers want to know, particularly in the world of agentic search that we're going into.

So there's a number of elements, and it's never always the same thing, dealership to dealership, but we can and are now doing some things that will improve some of that consistency. But I would tell you, as I said before, it isn't -- I'm not that focused on GPU -- important, yes, I would never say that it's not important, but it is an initiation event for me to get a customer into our workshops. And there is a difference between the lifetime value of a used car buyer and a new car buyer. Some of that is driven by the age of the vehicle. And what is the normal migration time of that service work out of our workshops. So we want to address that, which was part of the earlier answer I gave to a question about how do you penetrate the park.

And secondly, a new car sale yielded a different ratio of a used car to retail than a used car sales. So when you take all of those things into account, new cars typically have a longer activation period, a higher lifetime value than used cars. But that doesn't mean to say that's always the case. It is just the average answer to your question. Every customer is different, and every customer is the relationship that we want. And now with technology, we're moving much, much more closely to be able to make that relationship super personal to them. And that will, I think, extend their relationship with us, and we'll change those dynamics.

So even though I'm talking about average, we actually work on a customer-by-customer basis.

And just a real quick follow-up. On Slide 12, you have a bullet that says gross per unit up sequentially in both August and September. Does that imply that the 8.6% sequential gross degradation in Q3 was all observed in July and it was up in August and September? Or am I misreading that?

No, we just said. We had declines from June to July and then you had sequential improvement from July to August and August to September.

Your next question comes from John Saager with Evercore ISI.

I wanted to ask a little bit more about the used market. We've seen pretty significant share gains from Carvana over the last year. And I wanted to get your feelings on that. Obviously, you're both still a very small fraction of the overall market, but it's clear they are taking like fairly significant share. Just published more than 200,000 units this last quarter. So are you seeing any impact from them head to head? And are you concerned going forward that they're going to sort of continue to grow and that may impact your ability to bring those customers into that flywheel, which does drive all of the profit from the parts and service or AN Finance? So could you talk a little bit about their impact? And then maybe any of the initiatives that you have in place to try to drive same-store outperformance going forward and kind of when you might see that start to happen?

Yes. I think the answer to your question is no determinable impact on us and part of that is because tiny market shares, right, and still remain tiny market shares. And the opportunity to grow is also our opportunity as well as it is their opportunity, and congrats to them the growth that they have posted.

I think for us, we have a very clear path in terms of how we think we can grow our business. And it is that unique and beautiful combination of both the digital infrastructure we can put in place. That will provide to our customers a much, much improved, lower friction interface with us, but can actually combine it with a dense physical network that provides a lot of the service that customers still want -- still value still appreciate. That will also ultimately maintain our ability to keep loyalty and grow loyalty with those customers.

Going forward, and I think it is the combination of those things that will progressively unlock volume for us. And we see used car growth as being a big driver of our performance going forward. And as I said, we've got initiatives in place to do that.

I appreciate the answer. When do you think we might start to see that outperformance? Is that -- is this like -- are these initiatives 2-quarter thing, 3-quarter thing? Or could it be more media than that?

Well, the good news, I don't think it is a switch. And the things we are doing will progressively improve our performance, and I think you're going to see some of that in Q4. But for sure, as we begin to get into Q7 and we get into some traction, and we begin to roll out some of the other things that we are working on. As I said, I alluded to, for example, on used vehicles that the model that we have built that will be progressively deployed in '27.

We'll really dynamically look at used vehicle velocity and return on capital in a very, very different way because for the first time, it will take another element that are vital such as your supply chain and how you're able to replenish inventory as well as lifetime value of the customer. And what that will do is help us determine how hard we should push. So it won't be just a maniacal chase for volume, but it will, I think, balance all of the different elements that hopefully will focus on how effectively and efficiently we are using capital across the entire life time we have that customer relationship with us. And that's progressively going to get rolled out in '27, but I don't think you'll see a switch or a step change.

What I anticipate is that you will see progressive improvements in terms of the things that we are deploying. Some of the things will work well and some of the things will not work as well as we want. Some of those things will require some culture change, and therefore, they may be bumpy at the beginning. I'm sure no one will understand that. It's never managed culture change in a business, but those people who have will recognize that sometimes it will be really good news and sometimes, we will be learning. But I think that all of these things ultimately are going to create a really powerful balance between that physical dense network that we have as well as the ability to have a very powerful digital environment for our customers, whether they want to shop digitally or physically in our businesses.

Appreciate that. I do look forward to learning more about how you look at the customer holistically going forward.

Your next question comes from the line of Daniela Haigian with Morgan Stanley.

I wanted to double-click on the theme of the paradigm shift into lifetime value rather than optimizing for a vehicle GPU as it relates to SG&A. As you know, SG&A as a percentage of gross profit is a key metric that investors do track. And as AutoNation Finance continues to scale and more of those economics shift from upfront CFS gross profit into this recurring finance income, is that metric just less representative of underlying operating leverage? And how should investors start to think about the kind of holistic profitability of the business?

Yes. Thanks, Daniela. I would say that our thinking on SG&A hasn't really changed. I think we're -- when you look at operating margin performance, which does reflect AutoNation Finance. You do see that we are at or near the top of the peer group. So you can pick a part where SG&A is and isn't. In fact, our SG&A numbers do not include AutoNation Finance [indiscernible] I did, you would have a more favorable number. So with that said, we'll continue both short term and long term on managing our costs.

For Q3, the total dollars were essentially flat when you exclude the impact of M&A. We have some categories short term that we're working on. I mentioned several of them in the prepared remarks. So we're focused on delivering good short-term outcomes when it comes to our cost structure. So I think Mike was commenting on the areas where Ravi will have -- and his team will have an impact.

I mean as we change the way we're transacting with customers and improve the digital experience and remove friction and tighten up processes, you will see a residual effect will be a better structural SG&A outcome. So we look forward to that. So it's on our screen, both short term and long term, and we'll continue to manage that. But I think when you look at the operating income, holistically, you can appreciate the focus that we have on it.

Yes. I also want to comment as well because this is an -- the framing of the question suggests that you have an SG&A model that's going to suffer because what's going to happen is your margins are going to compressed. That may not happen at all. Our margins may not compress our margins may actually expand because there are a number of dynamics that will be put -- really into focus that for us are going to determine how we want to be priced in the marketplace and the velocity of sales that we want to make. So it doesn't necessarily result in and, frankly, I don't expect it to result in a collapse in margin at all.

You have to remember that for the first time, we will be able to predict much more accurately our ability to replenish inventory. That in and of itself is a constraint because replenishing used car inventory is a difficult thing to do. We are fortunate that we have a massive new car machine that absolutely helps with replenishment of inventory. But you have to have that inventory to sell it. And you will find that our balance will be a highly predictive inventory replenishment cycle, enabling us to truly understand what is the dynamic of the sale period, the cycle and the margin so that we're trying to balance both the upstream and downstream supply chain because that, I think, is the important thing to note. It isn't just get a customer into our relationship with an AutoNation to any cost at all. That's far from what I'm talking about. But I'm talking about may well expand margins in some periods, it may well compress them.

It may well be reflective of what the competition is definitely reflective of what the competition is doing. And we add a lot of value beyond price, and we will be making sure that, that is part of the customer consideration going forward. So you shouldn't interpret it as a used car margins are going to be under massive pressure. That would be the wrong interpretation. I think you should take a much more balanced view of what I'm saying.

Thanks, Mike. No, I don't want that question to be misconstrued. I more so meant. The SG&A leverage might not be the -- shouldn't necessarily be that myopic focus from The Street. But anyway, I'll leave it there.

Yes. But I'm going to come back on 1 thing because I do think that's a really important question on SG&A leverage. I mean we're seeing the benefit of that [indiscernible] that's going to continue, and that's a big driver of profitability. It's already at 24% ROE. But what I would tell you is one of the things that we have got and Christian and his team are phenomenally focused on this, is if you think about the costs in a dealership, given the powerhouse of After-Sales, we always measure After-Sales absorption of fixed cost because everybody looks at the installed base that we've had or has historically looked at the installed base that we've had and say, "Hey, this is a big anchor around their neck. Look at all that capital that they've got invested there." We can remove all of this capital and hey, everything is going to be rosy.

The reality is the back-end engine of what we operate and dealers operate actually absorbs the vast majority, if not all of that cost. And that enables you to think more different -- enables you to have more options than people who don't understand the power of the After-Sales dynamic on the business in terms of how you can price, how you can be competitive. Our installed base with the brands that we have and the density we have in the marketplace are a key strength of us and that's not easily recoated.

Our final question comes from Bret Jordan with Jefferies.

Could you talk about what you're seeing in the wholesale parts business, obviously, plus 16% is much larger than the total demand for auto parts in the aftermarket. And I guess sort of what's the margin profile of that business?

Yes. Happy to all, Jeff. And it's been a great business for us. With very minimal incremental investment inventory or CapEx, we've been able to drive consistent double-digit growth. And it's really capitalizing on the presence that we have already in our dealerships. It has been double-digit growth last several quarters. And I would say that the margins themselves as a -- if you look at a distribution business or not, obviously, don't have labor. We don't have parts margins like we do on the franchise side, but it is levering existing investment without any incremental. And the returns on it are very attractive for us. So we'll continue to do that. Gives us incremental profitability on existing base. And I think the prospects continue to be good for us.

Yes. I was just going to add in there. The margins are nowhere near the margins you get in your service shops, obviously, the margins are more under pressure now because obviously, we're picking up significant fuel costs. and we're going to bear those in the short term to make sure that we protect our customer base. But what actually helps to drive this really is the group approach, the density approach that we've been talking about. In markets where we have a substantial presence with multiple brands. We're now able to set up a multi-brand wholesale approach to that market where we can not only increase the frequency of servicing of our customers. We can offer the complete portfolio of very, very large number of brands. And what that gives us is a powerhouse in terms of our ability to service customers as a one-stop shop.

It enables us to put in common milk runs, the typical name, as you know, for past deliveries. They really leverage the cost of those milk brands, that means we can increase the frequency for the same cost prior to it. We can coordinate now much more effectively across all of our dealerships in a given market. And we put one central point of contact for all of those Wholesale customers. So they're not talking to 5 different dealerships, as they're buying forward parts, GM parts, [indiscernible], these parts. And that's been a good body of work that has been done by Jan Luke and his team in our business that is beginning to bear fruit for us. And it is low margin, but we see that other benefits, as Tom suggested, because what it also helps for us to do is to make sure that we can be incredible partners for our OEMs because they're benefiting from it, and we're often displacing nonfranchise parts with those people we're selling parts to because of the convenience. So low margin, it's good growth. We're still working on various elements, but it's facilitated by the way we thought about density in markets.

Okay. Great. And then a question on new units domestics. I guess, GM on a percentage basis was down the most in volume. But is it still fair to think that Belantis is where the bigger GPU problem is? Or is it someplace else in the Q3?

I think we've seen pressure across the segment. I wouldn't see allow any individual brand. And I think it's for the factors that Mike and I have talked about.

There are no further questions at this time. I will now turn the call back to Mike Manley for closing remarks.

Okay. Again, thank you, everyone, for joining us, and thank you for your questions. I think Tom and I enjoy the discussions with you. And we actually learn a lot because your questions are invariably thoughtful and make us really think through some of the things that we're working on. And as always, some of the things we've talked about today will work well and some of the things will need to constantly be worked on so that they impact the market. But I'm super excited about the coming years for the industry and how technology will really reshape that for us. And I think automation is really well positioned, as I mentioned, with regard to a great investment. So thank you for your time. I know there are lots of things that are also reporting today, but I'm glad you are with us for the call. Thanks.

This concludes today's call. Thank you for attending. You may now disconnect.

All right. Tom, Derek, thank you for joining us. My name is Daniela Haigian. I'm the auto retail analyst at Morgan Stanley. I have to read some quick disclosures here, and then we can kick it off. So for important disclosures, please see the Morgan Stanley research website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative.

With us today, we have Tom Szlosek, Chief Financial Officer; and Derek Fiebig, VP, IR. So thank you for joining us, and I'll kick it over to Derek for some other disclosures.

Yes. Thanks, Daniela. Great to be here. This is being webcast, and I'd like to remind people that certain statements made during this presentation, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially as contained in our filings with the SEC. So, thank you.

All right. Thank you. Tom, why don't we kick it off with you? What's some key messages you want to share with investors here today, key strategic priorities? What's the AutoNation story?

Thanks, Daniela, and thanks for having us here. I have no disclosures to read. But yes, we're excited to be at the conference. It's always great to come out and enjoy the atmosphere here and see colleagues.

I think AutoNation is, as everybody appreciates, one of the leading retailers. And when you ask about what's important to us, I know we'll get into a little bit more description of the business. But for us, meeting customers where they are is probably the most important part of our business. And what that means is there's an ongoing shift in the way people buy cars. And it's not always they're going to walk into a dealership. I mean it starts all the way back in the research that they're doing and the online activity that they go through. And for us, it's to understand that, influence that. And -- but just to meet them where they are and then transact the way they want to transact. And it's not always just a physical transaction. There's a lot that is done online these days. There's more that can be done online. We are investing in that. But I think that's a big part of the strategy that we have in place.

I think secondly, I would say that we have a very attractive and growing installed base. And when I say installed base, these are vehicles that we've sold over the years. I mean, over the last 2 or 3 decades, and we track every single vehicle we've sold. And we want to know where customers are in their vehicle usage cycle and where they are in their buying cycle. We want to look for opportunities to be the first one they think of when they're trading out a car, trading up, when they need servicing, when they need financial products. So that's -- I think that's probably our second most important part.

I'd say thirdly, it's running the business well. We have important constituents, the most important of which is our customers. And we want them thinking highly of us. We want them to have a good experience. Our OEMs are very critical to us as well. We represent roughly 30 OEMs and being in good stead with them is critical. I think if we're doing the first thing I mentioned, treating our customers well, I think the OEMs will be happy. But for us, that means being able to get allocations of vehicles. That means being able to participate in M&A activity because at the end of the day, they have a say in who gets to buy which franchise. So doing that well.

And then our people, our associates, when you look at across AutoNation, we have 25,000 associates. Many of them are customer-facing, whether you're a customer service technician or adviser and our sales teams. And treating them all well, compensating the way they need to be compensated and keeping them motivated is critical. So those are, I think, the 3 things that we're working on to continue the growth path that we have.

That's really helpful. And we're going to unpack all of that throughout this discussion. But I think first point you brought up was really interesting in that I think the AutoNation story today is very different from the one in 2019, where it's not just selling a car to a customer, and that's the end of your relationship. So can you walk us through maybe to some of us who are a bit newer to the story, what does that customer life cycle look like? You sell a car, but then what goes on top of that?

Yes, I think it's a great question. I mean if you take a step back and look at -- I always look at it from a financial perspective and you look at an auto retailer like us, our profitability might not surprise you, but only 20% of our profit really comes from the actual margin on selling a vehicle, whether it's a new or used vehicle. 80% of the profit comes from service and it comes from the financial service products that we have, including AutoNation Finance. So that's a fundamental tenet. But it's the focus of everybody on the upfront, the movement of the vehicle into the installed base where you then can get the service activity, get -- sell financial services products and have a relationship with the customer over their lifetime. So that's the way we think of it and the way we approach it.

And I think the other important aspect to appreciate if you're not familiar with retail auto is the way the balance sheet is like a CFO's dream. When you sell a car, I mean, our vehicle sales are probably close to, how I'd say, $20 billion out of our $27 billion in revenue, roughly, order of magnitude. We get paid in 2 or 3 days. So there's not a lot of credit exposure on our balance sheet.

Services, as I said, a large part of our profitability. We get paid that day. So I don't have a significant amount of credit exposure receivables on my balance sheet. And on top of that, when you look at inventory, we have a lot of vehicles. We have -- we carry 25,000 used vehicles. We have more than that on new vehicles, but they're financed. I mean there's floor plan financing. And so the toll on your balance sheet is quite limited. It's like a net working capital of 0 or sometimes negative.

So the business model that I described with having a customer purchase a vehicle, having -- giving us the opportunity to sell them products and services for that vehicle and then having the opportunity to service them over the life of that vehicle is the name of the game for us. And all places are important, but the end result is a P&L and a balance sheet that is, I think, quite attractive.

And we'll get into the balance sheet later, but you brought up an interesting point on the vehicles in operation or vehicles in service. And I think that's a little bit of a different way you think about the business now versus before. Can you talk to us a little bit about how you're proactive in assessing who might need to be coming in for service or how you do predictive maintenance in some of your stores today?

Yes, it's a great question. I think of it as -- it's like a doctor relationship with your doctor, right? They do a number of preventative things to prevent bad things from happening. And they're also doing scanning and checking blood tests and whatnot to see if there's actually anything that you should be worried about. Similar with your vehicle, you'll have a maintenance program that you sign up for on a new vehicle. And even on a used vehicle, we make sure that our customers have a strong awareness programmatically of how to service their cars. And so that's the preventative part of it.

And then there's been such a great development in the actual scanning of vehicles and the technology that every service -- every vehicle that comes in, we have the opportunity to scan that vehicle and check right away. Within 30 seconds of a customer dropping off his vehicle, they can go over -- walk over to the service associate. They have on their iPad, just like you, a report. And it checks for things like tire wear, brake wear, alignments and the like. And it's an opportunity right away for that customer to point out some of the things that the scanning is telling us that they need.

And for the most part, we're successful. Our customer associates, our service associates have a strong experience in using that technology, and it gives them more confidence to sell. You have clear evidence from a scan, hey, you really need to think about that. And I'm really excited about our service business. As I said, it's half of our profitability. When you look at it from a -- if it were just a stand-alone business, this will be a 50% gross margin business. And it probably is a 20%, 25%, 30% operating income type business embedded in the P&L that you see for us.

The trends, it's a mid-single-digit grower for us. Historically, it's grown between 4% and 6%. And we've been able to drive the margin rate in a nice way and attractive way. There's really 3 or 4 elements to the service business. Customer pay is the most important one when it comes to -- from a size perspective, 40% of the business. Another 20% is warranty, where if there's a recall or other warranty issues, it's typically done at the dealership, and that's part of the business. And then thirdly, they're preparing vehicles, whether new or used for display and for sale.

When you look at the trends in each of the 3 lines of business, overall, it's going to continue to track mid-single digits. Right now, I think, as I said, the customer pay piece of it, the traffic has been great. I think customers are being a little more selective in this environment. I think you saw the interest rate action yesterday. I'd say consumers are spending very nicely when you look at the day-to-day things that they buy. But when it comes to big capital purchases and maintenance of their capital items, I think there's a little bit of more discretion going on. We've seen these patterns of deferral, and it is deferral because it always comes back.

That's the question. Does it come back? Is that T plus 1 or...

Yes. Our history has been -- we've been through cycles where there has been elective activities that have been pushed out, but then you'll end up seeing a nice surge the other way that tends to offset it. So where we're historically 5%, 6% growth on the customer pay side, we're more modest. It's still positive, but it definitely is in this environment, contributing to a little more moderation in that growth. I think warranty is always going to be cyclical for us. And last year, we were doing significant heavy mechanical type of warranty actions around engines and powertrain. That's heavy technician use, you get a lot of hours out of those. I think there's been a moderation in that type of activity. We're seeing more over-the-air type of warranty activity where you can do things sometimes even remotely. But again, that -- we've been through cycles like this before, but I think that's an aspect.

And then thirdly, our internal business, it always thrives on the volume of new and used vehicles that we're selling. And we'll get into it probably, but the industry is down roughly 4% on retail new vehicle sales. And we're keeping in mind with that. But year-over-year, you have fewer vehicles that you're -- that need to be prepped for sale or for delivery to the customer or reconditioned used vehicles.

I think that's an important point there because I think throughout this conference, right, all year, everyone has been saying how SAAR has been so resilient. And it has been, right, the headline number, mid-16 million. The point you bring up on there is the split between retail and wholesale, that does make a difference for your end customers. So I guess thinking about parts and service being the profit engine for your company, it is less cyclical than the new car business. But if you do have a weaker base on which you can provide service to, does that then impact that mid-single-digit growth rate for 2027?

I think we're seeing a little bit of moderation. Let's see how the rest of this year plays out. I'd say that in the third quarter will be a little bit more modest growth, as I sort of alluded to. But I think that the installed base is there. And like I said, the volume of traffic is still there for us. So the opportunities are very resilient, and I think we'll come through this quite nicely.

Great. Derek, anything to add on the quarter for parts and service or...

No, I think just when you look at it, in the second quarter, we talked about how we had higher tickets for the -- for warranty as well as customer pay that continues. The warranty comps are tough. And then that's going to continue here. But it is going to be a mid-single-digit grower, but a little bit pressured here in the near term. But if you look back, Daniela, historically, there's been 2 years since 2008 that it's been negative. 2020, which makes sense for everyone. And then right during the global financial crisis where it was down. So it's a growth business. It's just not going to be growing the way it has over the last couple of years.

And then I want to switch gears a little bit into used. What are you seeing there? I think some of your peers continually talk about how supply is tight. It's tough to get enough inventory. Demand is there. We have this dynamic of off-lease supply coming back this year. So what are you seeing out there in the market? And yes.

Yes. I mean it's a critical business for us. And when you look at used, first of all, we're uniquely positioned when it comes to selling used vehicles. We have a source of supply, which is trade-ins that not a lot of used-only players can take advantage of. And that's generally 50% or more of the volume comes from trade. So we're excited to continue to be able to drive that. Of course, with the new volumes the way they are, you have marginally less in terms of the volume of trades coming through.

We also have an active We'll Buy Your Car program, which also is probably 30%, 40% of the volume. And then for the remainder, it comes off lease and we'll go to the auction to the extent we need to. So I think if you talk about being able to get inventory, I think we have a unique positioning. We continue to leverage that.

I think you're right regarding the different price points. I think the -- if you look at it from a more expensive vehicle, anything over $40,000 we considered on the used side to be on the higher price side. The volumes have been great for us. I mean second quarter, I think we were mid-single digits, like 4%, 5% unit growth, and it's our most profitable segment from a used perspective. So that has been playing out well.

If you go to the other end of the scale vehicles that are $20,000 and less, that is our highest turn segment. We turn those probably 12, 13x a year. So you kind of always get a reset of your inventory position, your pricing, your cost position and so forth. And I'd say the -- there is a challenge in acquiring those vehicles. And as a consequence, we've been down more pronounced than certainly isn't growth, but it's the declines year-over-year really are a reflection of the ability to acquire those vehicles. We have a concerted effort and made some inventory corrections to enable us to be in a position to acquire more of those lower-priced vehicles. And with the turn activity that they have, I think it's going to put us in a pretty strong position.

The other thing to appreciate on used is that we have vehicles that we acquire either through trade or We'll Buy Your Car that end up in retail and for sale. And sometimes we -- they retail out and sometimes they age out, and we'll need to auction those. We've seen a growth in our inventory levels. We probably had more of the higher-priced vehicles than we needed to support that growth and less of the lower price. And so we've been a little bit more active on the wholesale side, particularly this quarter. And so we've seen more of our vehicles go -- come out of the system from a wholesale basis. That's not necessarily a profitable exit for us because of the -- you don't get the CFS and finance insurance products on it, and it's typically a negative margin.

As we -- as our inventory levels have now corrected into September, we feel pretty good about where we are heading into the fourth quarter. But there were some modifications on used, again, to reflect the conditions. And I think the affordability conditions were a contributor to where you see the volume growth and so forth.

So anyway, that's the way we're looking at the used. Again, the investment in technology that I referred to earlier is helping us to be a better operator on the used side, whether it's the customer experience itself or the way we manage where the inventory is placed, how much we pay for it, how much conditioning -- reconditioning we put into it. The technology is a huge differentiator there. The unit profitability on used has been nice. It's been steady...

Because [indiscernible] into the newer vehicle?

I think mix has helped us, but I think we're also smarter about the way we're acquiring and what we're -- how we're pricing trade-ins, how we're pricing, We'll Buy Your Car activity. We're smarter and have more information on how much reconditioning to put into a vehicle. How much of it is really going to create more value, how much of it is not going to create value. And you really stick to where you have value creation on reconditioning. And then being smart about pricing, what's going on in the market and moving the vehicles with speed. I think time is a killer when you have a big investment in inventory. So we need to be smart about pricing. The beauty of the business, though, as I said, is it's a high-turning business. It turns 10, 11x in totality.

And you have a lot of unique data that you can price on.

The data is -- I mean, between our own systems and what we know in the marketplace, and there's tons of sources, you have daily, hourly, even up-to-the-minute activity on any vehicle you want in terms of mileage and brand and model and pricing levels that are there.

And before we get into the CFS and AutoNation Finance, is there anything that you're doing or implementing with AI new today that you couldn't do a year ago?

Yes, for sure. Everybody talks about how it's making their business more productive. For us, we look for tangible impacts of AI. And where we've seen it the most is on the customer service side, whether it's call handling in our business development centers where we have either inbound or outbound calls for on the service side as an example, whether it's appointment making or parts availability, other things like that. In AN Finance, which I know we'll talk about, the collections -- outbound collections activity, we've got a lot of AI-based technology there, and it's helping us.

And the third area I'd point out is in our back office. We have centralized a significant amount of activity that had once been in the dealerships, whether it's billing or payable -- paying your vendors, keeping your books. And we've always used robotic technology in that space. But the advent of AI has enabled us to take that a step further and drive further automation. So I'm excited about the impacts that it can have in all 3 of those areas, and there's probably a lot more that we're scratching the surface on.

Absolutely. So going into the finance side, can you talk a little bit about CFS versus AN Finance? How do you think about -- are there trade-offs there?

Yes. So just to touch on CFS for a second. I said it's a component of that 80% of our profitability. It's probably 30% of our overall profitability comes from CFS, which is financial services products. It's 2/3 of the offerings are actually product protection type things. Think of extended warranties, think of appearance protection, tire protection and so forth. And 1/3 of it is financing products. So think of the loan itself. The margin on the business is 100% because we're basically -- it's a commission-based model. So we have third-party providers that stand behind the products that we sell. We have third-party financing. I'll talk about AutoNation Finance in a second and how they play into that. But it's another example of hidden inside this business that we have is 100% gross margin business on top of a 50% service gross margin business. It's really attractive. And again, the cash flow aspects are really good.

When you look at AutoNation Finance, we realized a couple of years ago, and Mike really has led the charge for us on this is that we have an opportunity to maintain that and even leverage better the relationship with our customers. We have 11 million, 12 million customers in our customer database. But we have now been able to develop another 70,000 within 2 years of customers that we have the direct lending relationship with. And for us, you probably -- if you've not seen our financials, the growth in AutoNation Finance has been really strong. They finance now roughly 18% of all vehicles that are financed in AutoNation. So we're up to roughly 18%.

We think that, that number continues to go north. The portfolio now is approaching $3 billion. I think it will double in 2 years if we continue to drive up that penetration rate. The profitability speaks for itself. We disclose it every single quarter. But I think in the second quarter, we were probably $10 million, $11 million of operating income where the year before, we were probably $1 million or less. So it's -- that profit trajectory is going to continue for us. Over the life of a loan, an AutoNation Finance loan will be 2 to 3x more profitable than if we had just stuck with the traditional model of third-party lender. But we need -- we value our relationships with our third-party lenders. It's an important part of reaching the customer base that we want to reach.

And I think your question on the interplay between CFS and AutoNation Finance is an interesting one because if you're moving from -- as I said, 1/3 of your CFS volume is financing. And if that -- if you're moving from 100% third parties on that and AutoNation Finance is coming into play a little bit, you get less of that upfront commission and you're trading it off for having an asset in a portfolio that gives you that value over time. I said it's 2 to 3x. It does have an upfront drag on CFS. We've talked about that extensively. And I think it's something that is a long-term economic decision. It's superior for our shareowners. So we're -- we'll continue on that trajectory. We'll continue the growth path.

In terms of current performance, I think AutoNation Finance is doing wonderful, and it's managed its interest margin very nicely in a not easy environment. We've got pretty good match funding between a fixed loan portfolio of receivables and type the way we finance it. We've gotten really good support from the markets in terms of the ABS activity when we've gone out to finance the portfolio. We've done 3 ABS transactions now, and it has been -- it has a meaningful impact on our cost of funds and supporting the growth in that portfolio. So all that is working well.

CFS also on its own, we judge it by both the volume growth, and that's totally dependent upon the number of vehicles we sell and its unit profitability, which is dependent upon the number of products that we sell -- attach the products.

Now our attachment rates, I think, in July and August seasonally come down, and then they'll typically spike in September. We've seen a little bit more of that moderation in July and August. But I think we've come back to really strong attachment rates so far here in September. But I do expect that if you look sequentially, you'll probably see a $50 to $100 impact on unit profitability on CFS before kind of -- if you look at the run rate for September, I think we're back to normal levels.

I want to switch gears a little bit and talk about capital allocation, stock repurchases, M&A, how do you balance the 2? And how do you think about the types of dealerships you might want to acquire?

Yes, great question. And the beauty of capital allocation is that we generate a lot of cash. And for the reasons I talked about earlier, the speed at which we get paid, the limited investment we have to make in our working capital. And so you have a significant amount of cash. There is a compulsory amount of CapEx that we have to spend to maintain our dealerships, call it, $300 million a year, $250 million, $300 million. And that's really driven by the OEM relationship. They'll always want to keep their storefronts up to date. They want to have the latest gen model. And so every 4 or 5 years, you end up refacing a number of your dealerships, which is healthy and it makes the experience for the customers strong. And so we'll continue to do that.

But that leaves a significant amount of cash to either deploy in M&A or return to our shareholders. And for us, M&A is very much an opportunistic -- opportunity or opportunistic endeavor, I would say. The -- our focus is on acquiring dealerships in spaces that we have a good footprint. So if you think of where we are geographically, I think of the Sunbelt, and I use the West and East Coast a bit. And then if you look at our footprint, 65%, 70% of it is in California, Texas and Florida. And so if we can acquire in those areas, we have a lot better chance of generating synergies. And we can go through all the types of synergies that you get. But basically, when you have a footprint, you can drive more operating synergies.

And examples would be in reconditioning. Instead of having -- investing in the capital and the operating cost of reconditioning for a dealership, you can do it for the dealerships that are in the area, your used vehicle inventory. Instead of buying for dealership, you can buy for an area, and you can move vehicles around depending upon where they belong.

So it's our decisions on M&A, and there are plenty of opportunities. We are in every single transaction you hear of. We get a chance and we look at it from a return. Can we get the return that we require? And if we can't, we'll pass. And I think we've been disciplined -- this year, we've deployed a fair amount of capital. We're excited about the acquisitions that we've done in California and on the East Coast, great attractive brands. And so far, they're performing exactly how we had modeled them.

But the other attractive part is that we've continued to deploy capital in the share repurchase. We're not going to be a dividend company for reasons we can get into. But really the returning share -- returning the capital to shareholders has been a hallmark of our capital allocation. So being judicious with how we spend on M&A and turning the residual to our shareholders. I think of it as every penny of operating cash flow I generate, I'm either going to put in CapEx or I'm going to do acquisitions or I'm going to return it to shareholders. I'm not trying to build cash stockpile. Happy with our leverage levels, although we continue to monitor that, we are the only investment-grade rated public dealership. That's important to us. So we'll continue to manage that as part of the equation.

That's great. Derek, any thoughts on nuance for the quarter or for models we should be thinking about?

No, I think just a lot of continuation of what we've seen. And from a performance standpoint, Tom mentioned a little bit of softness on the product side of things for CFS. And on the new side, it's affordability. We're seeing sales are tracking well on the retail side of things, but we're down versus some tough comps last year. Fourth quarter should see more of a seasonal swing that we would get because you had some pull ahead last year that impacted the premium luxury side of things.

And margins are coming down a little bit. You'd expect that they would be coming down in the third quarter just because you have model year changeover. But we're having to meet the customer where they are and give a little bit more on price. So we could be down about 10% or so sequentially on GPUs, but we should have that typical pickup as we roll into the fourth quarter here for new.

And last, lightning round EVs, hybrids, extended range EVs. Is that something consumers want? Are we at the trough? What do people think about for next year?

I think the incentives were really important. And we saw last year when -- with the expiry, it just drove a plethora of activity. And I think without those incentives, we're seeing significant moderation on EVs. It was probably 1% to 8%, 9% of our volume, and it's come down to low single digits. I think the used EVs are still attractive. And I think that tells me that consumers are interested in the experience. But I think without -- I'm not a technical expert, but the limitations that have been there need to be addressed. And I think we're well positioned. I mean the OEMs that we're dealing with, each have a different weighting of products that they're developing, but we'll be positioned to support that if the trends do improve and becomes a higher weighting.

Great. Thank you both for joining us.

All right, Daniela. Thank you very much.

Hello, everyone. Thank you for joining us, and welcome to AutoNation Inc.'s Second Quarter 2026 Earnings Call.

[Operator Instructions]

I will now hand the conference over to Derek Fiebig, VP of Investor Relations. Derek, please go ahead.

Thanks, Kenneth, and good morning, everyone. Welcome to AutoNation's Second Quarter 2026 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we'll open the call to questions. Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website located at investor.autonation.com.

With that, I'll turn the call over to Mike.

Yes. Thank you, Derek, and good morning, everybody. Thank you for joining us today. So as usual, we're going to provide a detailed discussion of our second quarter results, after which we'll take your calls on Q&A. Now once we finish the Q&A session, I'm going to share with you some thoughts on our performance over time and our expectations going forward. So please don't disconnect after the Q&A.

Now Slide 3 is a quick summary of our main messages. We think the industry and consumers are in good shape. The June SAAR is the highest June in 4 years. Consumer sentiment is improving every month. Our banking partners are reporting a 20% increase in applications and originations, and their delinquencies continue to improve. After sales was once again solid, in our workshops internal pay was moderately down, broadly in line with our unit volumes. However, customer pay, which for us is a more relevant indication of after sales performance in our market was up, delivering -- I think that was a coffee you got me. In our workshops, internal pay was moderately down, but broadly in line with our unit volume. However, customer pay, which for us is a more relevant indication of after sales performance in our market was up delivering a gross profit that increased by 7% in total and 4% on a same-store basis.

Now our strategy to grow and develop our parts wholesale is also gaining traction and starting to pay off. Our wholesale businesses saw revenues increase by 16% during the quarter.

Now moving to vehicle sales, you will see that unit profitability in both new and used has remained within a tight band over the last 4 quarters, and our customer financial services team, once again, had an industry-leading quarter. Now we're looking forward to the second half when the volume comparison headwinds from 2025 relating to tariff and EV credits lapse.

As always, SG&A management is front and center, and you will see meaningful progress in Q2 and a path to our 66% to 67% expectation range by year-end. AutoNation Finance continues its growth, generating $11 million profit for the quarter. Free cash flow, frankly, has been excellent. We're up 11% year-to-date and continue to deploy our cash in a consistent shareholder-focused way investing $317 million on attractive M&A and $457 million on share repurchases.

Now with that opening, let me get into the details by business. Moving to Slide 4. For the quarter, we reported adjusted EPS of $5.56, and which was up from $5.46 a year ago, marking our sixth consecutive quarter of year-over-year growth. Results were again led by aftersales, which drives half of our profits and delivered record gross profit of $607 million, increasing both sequentially from the first quarter and year-over-year from a very tough comparison.

This revenue and income stream is durable, has a recurring nature and is high margin. It's also an important driver of customer engagement and retention. Our repair order volume was strong and customer pay fueled our revenue growth increasing 7% from a year ago. And as I previously mentioned, we had 16% growth in wholesale parts. Overall, aftersales performance reflects disciplined execution as we continue to grow this portion of the business while offsetting lower internal reconditioning activity tied to our used vehicle stocking mix and volume.

In Customer Financial Services, the team delivered strong second quarter results with CFS per vehicle profitability of $2,800. This represents a 3% increase from a year ago, even after accounting for increased loan originations from AN Finance, which, as we've discussed before, bring a headwind to CFS profit in the quarter but a significantly improved profit per unit over the term of the loan to AN Finance. And Tom, I know you'll give everyone on the call more details on that of course.

Our CFS team continues to run a value-driven customer-focused process that provides our customers with critical products and services. Now once again, customers purchased on average 2 products per vehicle with extended service contracts, again, leading the mix clearly supporting future aftersales revenue and customer retention. Finance penetration also continues to grow from a year ago with roughly 3/4 of units sold with a finance contract. And we continue to see sequential stability in our profit per unit for both new and used vehicles.

New vehicle per unit profitability of nearly $2,400 represents the fourth consecutive quarter of stability. As expected, new unit sales were lower versus a year ago, which benefited from tariff-related pull-forward activity and higher BEV sales. BEV sales were down by more than 30% year-over-year. Importantly, our market share remained relatively consistent with the first quarter in the markets we serve. In used vehicle sales, we continue to see strength in unit sales for vehicles priced about $40,000. Our volume was slightly impacted by lower mix of vehicles priced below $20,000 than we would like, and we continue to work to improve our accessibility to vehicles priced in this range. Used vehicle profitability remained stable at approximately $1,600 per unit. Total gross margin was just under 18% of revenue for the quarter, which represents consistent top-tier performance for the sector.

Now turning to Slide 5. Adjusted free cash flow continues to stand out, including more than $180 million generated in the quarter and $439 million for the first half of the year. The year-to-date conversion rate was 125%. We continue to deploy capital in a disciplined manner. During the first half, we reinvested $443 million in the business through CapEx and acquisitions, and we returned $457 million to shareholders through share repurchases. The acquisitions we made were Toyota of Newnan, Georgia, in the Atlanta area and 3 premium luxury stores in the San Francisco Bay area. These will add additional scale to markets where we already have meaningful presence.

These acquisitions bring approximately $600 million in annual revenue and around 9,700 in new and used unit sales. AutoNation Finance continued to scale with the portfolio growing to $2.67 billion from $1.76 billion a year ago. Funding also continued to improve, with debt funded status increasing to 91% from 83% a year ago. Overall, it was a solid quarter. And as I mentioned, it was the consecutive quarter where we have delivered year-over-year increases in adjusted EPS.

Now with that introduction, I'm going to turn you over to Tom for a closer look at the quarter's financial results.

Thanks, Mike. Turning to Slide 6, I'll walk through our quarterly P&L. Total revenue was $6.93 billion, essentially in line with the $6.97 billion in the second quarter last year as after sales growth helped offset tariff and BEV related headwinds. Revenue was also up 6% sequentially from $6.55 billion in the second quarter. Gross profit was $1.23 billion compared with $1.28 billion a year ago and $1.21 billion in the first quarter, representing 17.8% of revenue and continued top-tier performance. Adjusted SG&A expense was 68.2% of gross profit compared with 66.2% a year ago and 69.8% in the first quarter, reflecting a 160 basis point sequential improvement.

We expect SG&A as a percentage of profit -- of gross profit to reach our 66% to 67% target range on a run rate basis by the end of the year. AutoNation Finance continued to scale with profitability increasing to $11 million in the quarter compared with $9 million in the first quarter and $2 million a year ago. Adjusted operating income was $343 million compared with $369 million in the prior year quarter and $312 million in the first quarter, delivering a consistent operating margin of approximately 5%.

Weighted average shares outstanding of 33.8 million were down 4.5 million shares or approximately 12% year-over-year, reflecting our share repurchase activity. Diluted EPS was $5.56 per share compared with $5.46 in the prior year quarter and $4.69 in the first quarter. The year-over-year adjusted EPS growth reflects our continued operating execution and disciplined capital allocation.

Moving to Slide 7. After sales remains our largest gross profit contributor and delivered record gross profit in the quarter. After sales revenue increased to $1.26 billion from $1.22 billion a year ago, reflecting continued growth in a durable recurring and high-margin part of the business.

Gross margin was 48.1% compared with 49% in the prior quarter with the decline primarily related to the higher mix of wholesale parts, which, as Mike indicated, were up 16% in the quarter. Margin was stable sequentially versus the first quarter. Revenue growth reflected continued strength in customer pay, which increased 7% year-over-year. And as I said, wholesale parts increased 16%, driven by recent commercial wins.

Repair order growth was strong in the key customer-facing categories with customer pay repair orders up 5% and warranty up 8%. This more than offsets cyclically lower internal repair orders. Total after-sales gross profit increased $9 million from the second quarter of 2025, including the benefit of acquisitions. This was led by customer pay, which increased 7% year-over-year and wholesale parts, which increased 9%. Warranty increased slightly and internal gross profit was down, reflecting cyclical softness.

We remain focused on deploying technology to drive additional volume and productivity and on hiring, developing and retaining technicians. These efforts increase same-store franchise technician head count by more than 2% year-over-year, reflecting improved retention. Growing our technician workforce is key to consistently delivering mid-single-digit growth in after sales gross profit.

I'm now on Slide 8, Customer Financial Services. The momentum in CFS continued with Q2 per unit profitability of $2,799, up approximately 3% from $2,712 a year ago, while absorbing an approximately 2% drag from increased AutoNation finance loan originations.

Total CFS gross profit was $358 million compared with $368 million in the prior year quarter with lower retail unit volume more than offsetting the stronger per unit profitability I mentioned. Results were supported by continued robust product and finance penetration along with improved service contract and commission profitability. This performance reflects continued execution by the team and the strength of our value-driven customer focused process.

Slide 9 provides an update on AutoNation Finance, our captive finance company and its continued solid performance. AutoNation Finance delivered another record quarter, generating $11 million of profit in the second quarter and $20 million for the first half of 2026 compared with $2 million in 2025 as we continue to profitably scale this business. Total interest margin increased $11 million or 35% year-over-year driven primarily by continued portfolio growth.

Delinquencies and reserve rates remain stable, reflecting disciplined underwriting and continued portfolio performance. Originations were $485 million for the quarter and AutoNation finance penetration was 11% of our total vehicle sales and 18% of our vehicle sales financed during the quarter. The AutoNation finance portfolio grew to $2.67 billion, up from $1.76 billion a year ago, an increase of approximately 52%. We also closed our third ABS transaction in June 2026 for approximately $550 million, increasing the portfolio to 91% debt funded compared with 83% in the second quarter of 2025. To close on AutoNation Finance, our compelling offerings are driving healthy customer takeup, and we continue to expect attractive returns on equity as profitability grows and equity investment requirements moderate.

Slide 10 provides some color on new vehicle performance. New vehicle unit sales were 63,240 units, down 4% from a year ago, principally driven by a decline in sales of battery electric vehicles. As Mike mentioned, our market share performance remained consistent with the first quarter in the markets we serve. By segment, import unit sales increased 1%, partially offset by declines of 12% in domestic and 4% in premium luxury. And premium luxury was down 1%, excluding the battery electric vehicle impact.

New vehicle gross profit per unit was $2,381, compared with $2,785 in the prior year quarter. reflecting higher vehicle costs. Importantly, new unit profitability has been relatively stable sequentially over the last 4 quarters. Inventory day supply is healthy with domestic at 73 days and luxury at 66 days while import remained at 34 days.

Turning to Slide 11. As Mike mentioned, used vehicle supply remains tight for lower-priced units, and the team executed well, balancing sourcing, unit volumes and overall profitability, used retail unit sales were lower year-over-year, but mix remained favorable with units priced above $40,000, up 10%, driving an 8% increase in revenue per unit, the unit profitability in this category is more than double that for the rest of our used business. Used vehicle gross profit was $1,582 and in the second quarter compared with $1,622 in the prior year with unit profitability remaining stable over the last year. Our vehicle supply remains healthy with approximately 90% of used vehicles internally sourced. And we expect the off-lease supply to accelerate meaningfully in the second half.

Turning to Slide 12 on free cash flow. Adjusted free cash flow was $439 million for the first half of 2026 and compared with $394 million a year ago, so an 11% increase. Conversion improved to 125% from 100%, reflecting our focus on working capital and cycle times to support robust free cash flow generation. For the full year, we remain on track for approximately $325 million of CapEx.

Slide 13. Our consistent cash conversion gives us flexibility to invest in growth and drive shareholder value. Through June 2026, we deployed $900 million of capital compared with $478 million a year ago, including $457 million of share repurchases, $317 million for M&A and $126 million of capital expenditures. The store in -- the Toyota store in Georgia and 3 premium luxury stores we acquired in the San Francisco Bay Area represent attractive brands have $600 million of combined annual revenue and add to our scale and density in these markets.

Adjusted cash from operations was $565 million through June 2026 compared with $548 million in the prior year period, and total capital deployed represented 159% of adjusted cash from operations compared with 87% a year ago, reflecting significant reinvestment in the business and continued returns to shareholders.

Our capital allocation approach remains the same. Fund CapEx, which is mostly compulsory maintenance-related spend, pursue selected M&A opportunities that add scale and density, return residual cash flow to investors and maintain our investment-grade rating. Our balance sheet remains strong. covenant leverage remains comfortably within our targeted 2x to 3x EBITDA range. The strength of our balance sheet and robust cash flow generation give us significant flexibility to continue deploying capital, driving shareholder returns and growing earnings per share.

At this point, we'll open the lines for your questions.

Kenneth, if you could please remind the participants how to get in queue for the question-and-answer period. .

[Operator Instructions]

Your first question today comes from the line of Rajat Gupta from JPMorgan.

Operator, can you check his lines open, please?

Sorry, can you hear me now?

Yes, we can hear you.

Sorry about that. I just wanted to start with parts and services. 3% revenue growth, but flat to close profit growth. It looks like there was a margin mix impact. It sounds like from your remarks that the consumer is fine in general. But curious like what's driving the overall gross profit like deceleration? And is this just a temporary phenomena based on some tough comps? When can we expect growth there to recover back to like the mid-single-digit cadence over the next few quarters? And I have a quick followup.

Yes, Rajat, this is Mike. As I said, the I am very, very pleased with the way the after sales team continue to grow customer pay businesses regardless of whether the comps are tough or not comes, I actually look at the penetration in the marketplace and how we're retaining our customers. So within the overall number, obviously, you're picking up a mix issue on internal pay as our mix shifted more towards $20,000, $40,000 cars and less towards under $20,000 cars, which obviously has a different mix of preparation and reconditioning and we saw shifts in warranty mix.

We moved much more towards higher volume, lower content per RO in warranty. I think all of those things are just point in time, very temporary. And I look at the underlying performance in what really matters to me which is the penetration in the park and customer pay. And notwithstanding the fact that if you look at the addressable market in the aftersales park, is still working through the COVID hole in the 3- to 10-year park, which for us is obviously prime. So the market our after sales teams have made that up with improved penetration. And I think that's very positive, and that's going to continue.

So I would view any temporary drop in terms of internal pay and warranty as a point in time, nothing structural in there, and you should look at the underlying performance with the penetration in the park. We did take time to call out our wholesale performance. Obviously, that's at a lower margin, and therefore, you're going to get an effect of that. But that's all incremental business for us. We're up very, very significantly, and that is share gain in that marketplace. And again, I think that is a result of the work that the team has done.

So all in all, encouraged by the performance in aftersales and believe that we can continue that in customer pay, not just in the next half, but also continue it forward.

Got it. That's helpful color. And I just want to follow up also on the SG&A comments. If I heard correctly, I think you mentioned 66% to 67%, excluding the year. That's a pretty meaningful improvement versus the levels today. I know like you've talked about the investments you were making on customer experience. Is it just that some onetime expenses that are more weighted towards the first half and go away that's driving the improvement. Curious on the drivers there.

Yes. I think what you'll see is the drivers, Rajat, is improved gross profit, a number of productivity initiatives that we have, including those involving the application of we've got some programs around discipline around advertising that we've invested more heavily in, in the first half. I think that begins to moderate. You also saw that we took some portfolio actions, and that will also help the SG&A rate. So a number of orders in the water that are moving in the right direction.

Your next question comes from the line of Mike Ward with Citigroup.

I wonder if you could talk a little bit about variable growth. It looks like it's stabilized in the $4,500 per unit range and it goes up and down whatever, $50 or $100 depending on the quarter and mix, et cetera, is that the new normal? And when I look at it, using new and used are down, but F&I is strong? And what could disrupt that trend? What are the things that are really driving that stability, as we look at it.

Yes. Thanks, Mike. Great question. And your question kind of reflects the focus that we have on total unit profitability. So you can pick at whatever you want on individual PVRs and so forth. But for us, it's a total economic equation, including the products and services that we offer from a CFS perspective, and we think our trajectory is very strong. In fact, the last 4 quarters, as we've mentioned, you can look at the new unit profitability, used unit profitability and see it's in a very narrow bandwidth, and we expect that to continue. And you couple that with gross growth in CFS, it was essentially 5% in unit profitability, you end up with a pretty attractive performance and expectation going forward. So we're looking at it comprehensively like you do. And think that's the way it should be done.

Yes. Let me also add to that, Mike, if I can. And Tom, I think it was a great answer. But I talked in my opening comments about the importance of CFS to us and the fact that we are really attaching very valuable products for our customers as well as for us. And the main attach rate is in extended service contracts and warranties. And that's very important for us. So as we think about the overall economic balance that you mentioned, Mike and Tom reinforced.

Within there, we know we're seeding future customers for our after sales and our service departments, and that's very, very important to us, and the team continues to perform incredibly well. And one thing that I don't think is discussed enough is that is a result, which I think is not just in credit industry leading, but it's also a result that reflects temporary headwinds from our AN Finance performance. Because as Tom has discussed on many occasions, as AN Finance scales, that profit from that business is released over time and not point in time.

So notwithstanding the fact that it is a great result in the e itself, if you also add to the fact that AN Finance continues to grow and take that in context as well. Overall, I think it is a very, very strong performance.

Very helpful. Secondly, what percentage do CPO sales represent your used? And I think you mentioned that you're going to start to see lease returns pick up a little bit in late '26, '27. And I assume it seems to me that on the used vehicle side, there is more financing going on. Is that another potential boost for the CFS.

Well, yes. I mean our overall finance rate is something we track very, very carefully, and it's actually been very solid and stable. Our penetration, particularly on used vehicles, Mike, has continued to increase. And we see incremental opportunity there as we go forward with that finance penetration through AN Finance. But we have a process in place that really looks to work in partnership with other finance providers for that credit type that frankly is not in our target grouping that we're looking for. And that is holding up very well, and we think that there's incremental opportunity for us to drive that, not just in the second half, but all the way through 2027 as well. Tom, do you have the answer?

Yes. I remember. So Mike, glad you asked that question. CPS or sorry, CPO continues to be moving in the right direction for us, we were roughly 15% last year in the first half. This year, we're closer to 20%. So we're happy with the progress that we're making there. And you had asked about lease returns as well. The progress on -- or sorry, the trends on lease returns will significantly increase in the second half from the first half, probably upwards of 30% to 40%. And now these are overall relative to the unit sales that we have for a month, it's not like 10% or -- 10% or anything like that. It's a fairly modest number. But the lease volumes definitely at least return volumes definitely are going to start to trend really strongly in the second half.

Yes. I mean you begin in just we've now passed through the trough of lease returns, we're beginning to see some recovery. It's not back to pre-COVID levels, but it is going to grow nicely in the second half, Tom, you're quite right.

Your next question comes from the line of John Babcock with Barclays.

I guess just quickly while we're on the off-fleet side of things. Any thoughts in terms of what percentage of off-lease vehicles are going to be kept by the grounding dealer this time around, just given everything that's going on with residual values and just broadly demand for off lease?

Yes. Well, it's certainly increasing, John, because as you know, when we were going through that period where not just supply was restricted. You also saw significant increase in residual values and a lot of equity in returning leases, which customers quite rightly took advantage of. That's obviously beginning to normalize as well. So the number of returns that come back to us that are either returned or bought out, which is our preference as we supply a new vehicle, has increased. It's still not back to the levels that it was before, but it's something that we have seen pretty steady progress on -- over the last few quarters.

Okay. And also, you're not the only deal to report better GPUs on the used side of things. I'm just kind of curious, how sustainable do you think the increase in GPUs was this quarter, recognizing for you, it maybe was a little bit less than some of your peers. But Also, like how sustainable is this at this level? Do you think there are any market factors? Is there anything else that might lead to some pullback in the rest of the year?

Well, so frankly, GPU improvement comes from multiple places. It isn't just average transaction price. But there is a lot of opportunity for us to not just sustain what we're seeing, but also improve it. Clearly, mix is going to have an impact on that. But we're finding that our ability to drive our vehicles to market quicker -- to turn them quicker. And if you look at our relative turn rate compared to others in the marketplace, you'll see we see a very healthy turn rate, but it is also around the mix because as we're acquiring our vehicles through those channels that we have more control over, trade, for example, off lease that we've just talked about, it impacts our average purchase price of those vehicles.

We turn them in what we consider to be a reasonable pace thinking about our ability to replenish those vehicles. So we very much look at return on invested capital in used cars, which is why I think sometimes this maniacal focus purely on used volume actually misses the point. The point is how will we invest in that capital and what return are we getting? And we know that if we're able to replenish vehicles and turn for example, plus $40,000 used cars at a reasonable rate, the actual return on invested capital for that segment is better than sub-$20,000 cars. But often that gets missed in everybody's, as I said, maniacal focus on you use volumes of 2%. And I think people should focus on return on invested capital and cash flow is a better proxy.

So it's coming from multiple areas. Faster to market, good control over reconditioning, reasonable turn rates, so depreciation is not impacting it, some mix. And therefore, I think as a result of that, it's sustainable you're going to get some cyclical times when it's up, somewhat is down, but the key drivers are under control and well managed.

Your next question comes from the line of Bret Jordan with Jefferies.

On the wholesale business, it obviously got some ink in the prepared remarks. How much of parts and service is wholesale. And I guess when you think about the margin of that mix, if we get a little bit more clarity on how big could it be? And where are you taking the share from? And as you think about 2 or 3 years out, is this going to be a material piece of the business.

Yes. Thanks, Bret. Great question. As you know, our franchise stores have exclusive distribution rights on wholesale for parts. And generally, in our business is, historically, we've been each store has been managing its own parts customer base, including the whole supply chain delivery for its single brand with this distributed approach, we were missing out on opportunities for growth and synergies, cost synergy opportunities. We're now orchestrating the business such that all products in all brands are managed through 1 supply chain.

Our customers appreciate the simplicity of dealing with a single vendor. And for us, this is that resulted in some meaningful commercial wins, some large commercial wins that have contributed to the 16% growth we mentioned in the quarter as well as in the scaling of we're able to scale a relatively stable cost base and inventory base. So it should begin to help us improve margins as well. So we have a central acumen as well that helps us to manage our supplier incentive programs, doing that in one place with strong acumen will also help us to improve our yields there. So we're going to continue to invest in the business and invest in technology and drive further efficiencies here.

Yes. I also going to talk about that because we talk -- we talk about the fact that we're very focused in terms of our M&A and that what we want to do is to build density in our clusters. This is a perfect example of why and I think the teams are now beginning to deploy this at scale. And if you look at our growth, and remember that this is business being sold into collision shops around a non-franchise, largely non-franchise aftermarket suppliers, which are operating in the same vehicle park as we are.

We know -- you all know that collision volumes are down because of various factors. So the growth that we're seeing, you can clearly see the majority of that is coming from share gains. And I think that's really positive and healthy. And I think the approach to have a virtual parts warehouse and distributed system that Tom described very well, by the way, Tom -- is beginning to show the benefits, and I think there is more for us to go and get.

Is this strictly OE parts as you sell into the aftermarket? I mean, 7 or 8 years ago, you were doing a private label import parts business as well. Are you selling the OE product or a mix of both?

The vast majority of our growth is OE, absolutely OE parts, yes. It's not after sales -- after sales parts and margins in that business compared to stocking costs are for us, not as attractive as leverage in the assets that we naturally have, which is all of the fantastic brands we represent.

Your next question comes from the line of Jeff Lick with Stephens Inc.

Mike, I was wondering if you could get your point of view on the new business from a couple of different angles. First, your same-store was down 4.7%. But when you look at that versus what you were up again seeing on a 2-year basis, it was up 2.7%, which is a better outcome than all of your peers, except for one, but actually a decent margin. First, just curious your thoughts on the new market as we go into the second half.

And also I was wondering, somewhat look at your new GPU came in maybe a little bit more than others. But what you were talking about earlier in terms of maintaining a customer. When you look at your service and parts same-store sales, it's still pretty strong given what you're up against. Internally, do you guys think about that marginal transaction we don't want to lose because that's a customers. And so maybe you're willing to sacrifice a penny bit of GPU to gain new volume?

Jeff, I think your analysis is spot on. And I think it's, again, often getting lost in the headlines that we see, which I think when people sit down and actually look at the they're going to recognize that when you look at where AutoNation has come that the results are very, very credible in the marketplace. But let me specifically answer your questions, and I'm going to return to that at the end in terms of the how do we think about balance I hear a lot about affordability in the marketplace and how is it impacting things.

I think, as Tom mentioned, SAAR actually is at a healthy place and consumers are incredibly resilient given everything that is going on. And from an affordability perspective, we saw in Q1 the best affordability levels that you have seen over the last few years. If you take any of the external metrics and look at the difference in average transaction price incentives, but also wage growth. You will see the best balance that has been there since pre-COVID times, which really indicates that affordability is not back to pre-COVID times, but it is significantly improved over the last 24 to 48 months.

And that was largely stable Q1 to Q2. And I think it's going to be stable as we get into Q3 and Q4, which means from my point of view, the underlying SAAR, absent a shock that none of us can see, I think, is going to be in a good place as we get into the second half, and I think we're well positioned to do that. We -- our share performance Q2 to Q1 was in good shape. And I think that we're doing a number of things. That means we'll be able to not just maintain that, but we can also see opportunity for growth. It doesn't mean to say that the consumer isn't challenged. I think the consumer is challenged, but the results that we are seeing when you step back and look at all of the drivers in the industry, we had, as Tom said, very strong growing SAAR, I think that, that will continue and give us a tailwind as we get into the second half of the year. And I think we're positioned well as a result of that. And as I said, that's absent any shock.

I just go back to your balance. This is something, I think, that we should talk about a lot more as we go forward. One of the things that we are very focused on is customer lifetime value. We look at customer lifetime value active customers and period of activity in the business, and that's something that we internally focus on we have a view that what we're trying to do with our businesses is acquire customers and then as they come into AutoNation world that we build that relationship and retain them. But we also grow -- we also grow the richness of that relationship for us and for our customers because we are able provide now a significant range of products and services with significantly good geography for our customers.

And as we continue to add to those products and services, whether it is through our FinCo or, for example, our insurance pilots that we are running, we're able to grow that customer lifetime value. So the acquisition costs to put customers into that ecosystem is something that we want to balance very, very much.

And you may see short-term pressure on margin, for example, because we want to and we recognize that through other areas and through other means, we can maintain a strong customer lifetime value even if the initial acquisition cost looks high, whether that's in marketing or whether that's in GPU that we retain. That is our entire approach. And it goes back to something that Tom alluded to. As I said, people are going to get well, don't you know your volume is this and your volume is that.

But ultimately, it is how we are using the shareholder capital that they have given us, how we are thinking about the return on the capital that we have and how we give that back to our shareholders. And I'll talk at the end of this call, and I'll give you our scorecard and you make up your mind, but that's how we're focused on running the business. So lifetime value, absolutely. How much does it cost to acquire those customers compared to how we can through great products and services and execution, deliver value for them and value for us. So often missed, but that's the important thing.

Your next question comes from the line of Rob Saltzman with UBS.

Just a quick question. Strong customer pay performance on the part side, plus 7% in the quarter. Can you just talk a little bit about your strategy of driving that segment within parts and how you compete with independent repair shops in customer pay, you may be offering lower prices? And how do you keep customers coming back to your shops just in that customer base segment?

Yes. I think that's a very, very relevant question because we know the overall aftersales park, the overall vehicles in operation are going to grow over the coming years, particularly if the [ SAAR ] hangs in where it is, which I expect it to be from a franchise dealer point of view, the addressable part for us or the historical addressable part for us will actually dip in the next 24 months -- 12 months to 24 months. So how you penetrate that park and how you add product and service to it is important, and that's what drives our team.

So what we look at is how do we create the right balance to improve penetration and we've been able to do that, and that's why we can see customer pay grow we focus very, very much, obviously, on that initial impression in 0 to 3 years, is hugely important to us because it establishes the relationship through 10 and that's where we're seeing some improvement in our penetration despite the fact that the addressable park is dipping and we'll dip for a little bit of time. And then if we can unlock increasingly that year plus park. That's very important to us and where we compete with the non-franchise players. It's also, as you can imagine, on average, the bigger ticket price. So how we do that is to focus on how we package and bundle value and how we communicate it.

All that business is conquest. It's all conquest because it's gone somewhere else by the time you get to 10 years if we haven't been able to retain it. So your growth in and the work you do in that area pays off over time. And Christian and the aftersales team are heavily focused on how we can communicate the value that we offer or we can package for value and make sure that we are a very, very credible alternative to the loads and non-franchise businesses that are out there. And I think they did a reasonable job in Q2, which drove our customer pay which I was pleased with, as I said, plus 4%. That's not just a one-off quarter thing. You look back over the quarters and how often they've done that. So their comps are not easy, plus 7% in total and the expectation of Christian and team, from themselves, not just from me, but from themselves as they can continue to do it. So very much focused on how we can package the services that we provide, demonstrate that it adds competitive value, particularly for those older vehicles. Not easy, but that's a big focus for the team.

And just one follow-up. So technician growth head count 2% in the quarter. Maybe you can just talk a little bit about how you continue to compete with other dealerships to recruit technicians when you think about that mid-single-digit park and service algorithm, how much of that is continuing to add technicians in that tight labor market?

Yes. I mean without great people, you can't continue to maintain what you've got, let alone grow it. And it is an incredibly competitive marketplace, as you know. So what we focus on is we focus on the proposition that AutoNation can offer to the people in our organization, which is total rewards. It isn't just around the level of pay that they can achieve. It is also how we think about other benefits that we provide to our technicians is how we recognize them. We've just come off of after sales, technician recognition month. where we spend a lot of time thanking our technicians and our parts team, by the way, including our service advisers for what they've done in the business. We try and find ways to recognize them because often, it is not top of mind, even though it is absolutely the generator of our consistent profitability.

We do a lot of work making sure that we're competitive in the marketplace in terms of the total rewards that we provide for our team. And we also like to provide them a good career journey for those that maybe want to become master techs in the business, but they also want to become general managers and regional directors. And we try and find talent in all areas of the business. And when we find talent, we like to put it in -- we like to put that talent into situations that stretch them and grow them, and they can continue their career journey with us. So as always, not one single thing can help, but 2% growth in terms of our technicians is good. We need to continue that, and we obviously need to continue to retain them.

I'd also add, Mike, the amount that we're investing in our physical layouts and properties. It will be -- grow to a meaningful portion of our CapEx spend, and that's improving tools, improving working conditions and so forth. And I think that's going to be contributor as well.

Your next question comes from the line of John Saager with Evercore ISI.

I got cut off earlier, so I apologize if someone already asked this. But everyone all of the publicly traded dealers discuss and think a lot about being disciplined in our capital allocation, balancing acquisitions with buybacks. But it feels like people are using different valuation or strategic metrics within that same type of framework. So can you frame out your thinking around your approach.

There are certainly some private dealerships that are operating at higher margins than your overall book but how willing are you to pay a premium for those assets relative to your own valuation? And then how do you think about balancing a desire for growth and the network benefits from that overall customer flywheel versus just buying back your own stock, especially when it's trading at these valuations.

Yes. Thanks for the question, John. for us, I mean, it is important that you pay a competitive rate you compete for properties that are attractive to you. And for us, that means they're generally in brands that we're strong in and in locations and areas where we have density. We feel like we can create the most value with those types of conditions. But with that said, it's not just what you pay, but it's the returns.

And we have very clear measures in terms of our expectations on ROIC, and that really dictates what we're going to compete for. And over time, perhaps our M&A spend has not been -- kept pace with our return to shareowners, but it really just is a reflection of where we think we can create value for the shareowners. And we'll end up passing on deals that we think we can't meet the mark on ROIC and return the residual cash to our shareholders is the way we think about it.

Yes, I'm going to add to that, Tom. I think I may have mentioned on a couple of times the sixth consecutive quarter of EPS growth. I don't think anybody else has done that. Earnings per share is important because shareholders are individuals. I know we think about them as one particular group, but they're individuals. So we think about the individual return that we can give our shareholders. And 6 consecutive quarters of EPS with our capital strategy, I think, speak very, very loudly. And therefore, we look at the biggest benefit we can give our shareholders for each dollar that we are going to invest.

We are very clear on the maintenance CapEx that we have to invest because it maintains obviously, a cash stream for us. But everything else, we look at the best use of those dollars and how competitively we can invest it. As we have grown the synergistic benefits of coming into a group like AutoNation, it means that we can make acquisitions that in the past were marginal. They now actually yield a great result for us because we have proven that, for example, through the discussion we've had on wholesale, that is a synergistic play that we're able to do through the density we've been able to develop in the marketplace.

So you may see that some people get headline revenue growth, for example, and we may not grow our revenue in the same way, but 6 consecutive quarters of EPS growth for our shareholders, as I said, should speak loudly and we have shareholders that really push us on how we think about capital and how we deploy our capital. And I appreciate that from them. And we are very much thinking of it from their perspective. So yes, that means that sometimes our revenue may not grow as somebody who has been out and bought a load of other businesses and just bolted them in. That's inevitable, but we have optionality but it really is grounded in what's the best use of that dollar that we can deploy on behalf of our shareholders with their lens.

Very helpful, actually. And then just adding on to that, how do you think about sizing and leverage? And are there deals out there that are so large that you may decide to pursue them and pause share buybacks?

Yes. Yes. Thanks, John. Great question. Again, I would emphasize the return on equity, return on invested capital that is the basic focus of our M&A program. With that said, we're also managing our investment-grade rating, and we have a very healthy balance sheet, good relationship with the rating agencies. No doubt, if we did a larger acquisition, it would come with a lot more EBITDA and a lot more synergy opportunity. So it would depend on the return and it would depend on the upfront leverage as well as the ability to delever. And in general, with large acquisitions like that. Our expectation is that we could delever very, very quickly. And that's a conversation we're always willing to have.

So size is important. You see a lot more flow in traffic on the small- and medium-sized deals. But yes, it's with our return focus with our shareholders, we're we have an open mind to considering all the opportunities that might be there.

Yes, but it goes back to the same thing that we just discussed. We have a great balance sheet with phenomenal liquidity. If the investment gives the returns that we expect and is best use of our dollars we will find a way to be able to deal with very, very large scale acquisitions if it's the best use of our dollars. You've created with your team and the work that our people have done a great balance sheet, that gives us immense flexibility in the marketplace. And we will use exactly the same lens as we do across other investments that we make.

The final question today comes from David Whiston with Morningstar.

Sticking on capital allocation, buybacks were up 80% year-over-year in the first half. I'm just curious, can you comment directionally for the second half? Is it going to be around that range or a lot less? Or does that just all depend on the M&A environment?

Yes. Thanks. Good question, David. The -- ofcourse, our priorities are is what we've stated. I mean we'll continue to fund CapEx, and that's pretty much within a contained range, pretty confident in those numbers. We do consider an ongoing pipeline of M&A opportunities. As I said, we've been very thoughtful. As Mike points out. But our residual will continue to go to -- our residual cash flow will continue to go to share buyback. So is it going to be exactly what it was in the first half? I mean I don't really comment on that, but it is an important priority for us, and you can think of us as spending all of the free cash flow that we have.

Okay. And on a different topic, just curious on the trend this year versus the past couple of years on new and used vehicle. AutoNation customers buying a vehicle online. Has that leveled off? Is it increasing or trended down a bit.

Well, like everybody else, we are continuing to see our customers in prepurchase and purchase, leveraging online resources increasingly, particularly as we get into as you will all know, the generational change of buyers from my generation, which is basically towards the end to a much younger generation that thinks about buying and buying habits in a very, very different way. Some of the things that we are investing in is to make sure that we can provide different options for our customers, depending upon their preference to do research, to purchase and to get fulfillment of their vehicles. That means that we have to constantly invest in some of those channels, digital channels to provide the functionality that they want. We continue to do that.

And the trends we are seeing in terms of that preference for buying, I think, will continue. And because we're aware of that, we're obviously investing to make sure that we can provide those levels of access to the business that we have.

There are no further questions at this time. I will now turn the call back to Mike Manley for closing remarks.

Yes Thank you, I thought -- great questions, and thank you for that. We appreciate you being on the call, and we appreciate your questions. But and I'm going to talk about some things that I'll actually speak to some of the answers that we've already given you. And I'm going to take a few minutes just to share some reflections on our sustained performance. And then as always, I do want to give you some of you on our forward expectations.

So let's turn to Slide 16. Now this is about how AutoNation has set the pace in the auto retail world. I think we have an outstanding set of brand offerings. We're attractively positioned from a geographic perspective. We have scale and very, very importantly, and should never be missed, we have a team of associates who work in our playbook every day who are great who are committed and help drive our business forward. But if you have a look, these have enabled significantly strong overall financial results in the space.

I emphasize overall because our focus is on operating profits and cash flows, not necessarily being #1 in each of the individual metrics referenced. We have a clear focus that Tom and I have talked about on many occasions. And you can see that come through in the results that I'm showing you here. Now approximately 80% of our profits come from CFS and after sales. Both a high-margin, highly recurring earnings streams and our growth and position in gross margins reflects this attractive business mix, I think. And further, we consistently deliver amongst the highest operating margins of the group, meaning that not only do we have strong positions in attractive segments, but we also have a strong track record of operating them effectively.

Now our scale helps, of course, but it's really our strong measurement rigor. We bring operating standardization to our business, and we have excellent field leadership. And I know all of our field and our leadership teams are on this call, and I thank you for the things that you do, and I thank you for your focus on measurement and rigor. Because really that enables our results to stand out over the course of time. And I think that's important, and that's what our shareholders look for over the course of time.

Now if you look at Page 17, it's clear from our ROIC that these operating results are being delivered in a capital-efficient manner. In 6 years, we've gone from approximately 9% return on invested capital to around 14%. And in this time frame, we've generated over $6.3 billion in free cash flow, and we've returned $6.5 billion to our shareholders in the form of share repurchases. We think this is a strong track record, and we think we're well positioned to continue it.

But let me close on Slide 18. We talked about this we do have a diversified business model. We added AN Finance. And you can see from our results, not only is it scaling, but it is producing great returns on equity. And we're very pleased with the way the team are performing there which is important. But as I mentioned at the opening, consumer demand and industry sales do remain resilient and as such, we expect our unit sales to continue to track largely in line with the markets and brands we serve in both new and used vehicles.

But as we talked about on the call, we really remain focused on trying to balance volume, margin, inventory and customer experience around that lens of customer lifetime value, what's our acquisition cost and then how can we provide value and services to our customers. So it is a blend. Sometimes you will see margins from a temporary lens move up. Sometimes you'll see them move down, but it really is with that more longer-term focus on what we're trying to do.

And frankly, our aftersales business, which was a lot of topic of conversation today remains well positioned for continued mid-single-digit growth in customer pay because there is a durable demand out there, and it is a recurring revenue profile. And that focus that we talked about on customer retention, technician capacity, for example, we talked about that as well and their productivity is going to serve us well.

Customer Financial Services continues to deliver sustained performance and that does reflect the disciplined execution it is around product penetration, and we touched on that point as well during the call. And it is around that value that we provide to our customers and the processes we use to explain the value inside it.

We do continue to scale with AutoNation Finance the ongoing portfolio growth and improving year-over-year profitability contribute to the strength and diversification of our earnings profile. And with more stable and unit profitability, growth in CFS and after sales, lower shares outstanding, we do expect adjusted EPS growth in the second half. So as I said, 6 consecutive quarters of EPS growth, with the capital allocation strategy that we deploy on behalf of our shareholders, and we expect that to continue certainly in the next half.

And capital allocation, obviously remains shareholder focus. And it is around an emphasis on disciplined investment, obviously, optimize our portfolio and continue with that lens on returns to our investors. And taken together, I think, our business model, the cash generation the disciplined deployment of that cash and focus on our operational execution position are going to continue to deliver attractive returns.

So listen, on behalf of our team, I want to thank you for being part of the call. Thank you for your questions, and we'll see you in a quarter's time.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, and welcome to the AutoNation Inc. First Quarter 2026 Earnings Call. My name is Rob, and I'll be your operator today. [Operator Instructions].

I will now hand the conference over to Derek Fiebig, VP of Investor Relations. Please go ahead.

Thanks, Rob, and good morning, everyone. Welcome to AutoNation's First Quarter 2026 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Solosec, our Chief Financial Officer. Following their remarks, we'll open up the call to questions.

Before beginning, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private Security Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements.

Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and our website located at investors.autonation.com.

With that, I'll turn the call over to Mike.

Thanks, Derek. Good morning, everyone. Thank you for joining us today. Now as usual, we're going to provide a fulsome discussion of our results. And in our materials, I think you're going to notice some updates that we hope you will find useful.

Obviously, we're very pleased to report that despite a challenging Q1 for the industry, particularly with year-over-year comps, AutoNation delivered its fifth consecutive quarter of year-over-year growth in adjusted earnings per share. This represents a solid first quarter for AutoNation.

Now we continue to deliver strong operating performance coupled with excellent consistent cash conversion which enables us to maintain our strategy of deploying capital in a disciplined way to deliver results to our shareholders on a consistent basis. For the quarter, we reported adjusted EPS of $4.69, up from a year ago and as I mentioned, our fifth consecutive quarter of year-over-year adjusted EPS growth.

Operating cash flow was also strong. We generated $256 million of adjusted free cash flow, which represents substantial cash flow conversion of adjusted earnings. Now starting on Page 3, where we cover gross profit for each of our businesses. Results were led by after sales, which once again delivered solid mid-single-digit growth despite some year-over-year impact from adverse weather. Same-store gross profit increased 3%, and total store gross profit increased 5% to $593 million, which was a first quarter record for the company.

The story underneath this solid total growth in growth gets even more interesting as you tease out the dynamics of the different sources of growth. Underneath that total growth of 5%, internal pay actually declined by 6%. And somewhat expected, I think, due to lower industry volumes. This contraction in internal pay was more than offset from 2 important segments. Customer pay, which grew 8% and warranty-related gross profit, which grew at 7%.

Now as always, there is still more for us to do in aftersales, where we believe there is more growth to come, but clearly, this revenue and net income stream is durable, as a recurring nature and is high margin. It's also an important driver of customer engagement and retention.

Now moving on, I want to turn to Customer Financial Services. The team delivered another outstanding quarter, posting a first quarter record per unit profit up 6% from a year ago. The team continues to run a value-driven customer-focused process that provides our customers with valuable products and services.

Customers purchased on average more than 2 products per vehicle with extended service contracts, again, leading the mix clearly supporting future aftersales revenue and customer retention. Finance penetration also continues to grow with roughly 3/4 of units sold with a finance contract. Now this performance should be read with the added context of the growth in our own finance company originations, which, as you know, deliver a superior return over time, but in the short term, represent a headwind to the record per unit value we just delivered. And Tom, I know you're going to give everyone on the call more details of this dynamic literature.

So let's look at new vehicle industry in our results. New vehicle unit sales were down in line with the market. As you'll remember, last year, there was a significant acceleration in demand following tariff-related announcements, which clearly set up a very challenging year-over-year comp.

As in the fourth quarter, following the elimination of the BEV incentives, sales declined -- BEV sales declined more than 50% year-over-year and the largest reduction of that was in our premium luxury segment. Now as a partial offset to industry volumes, we just discussed, new vehicle unit profitability improved sequentially, up 5% from the fourth quarter driven by higher per unit profit in both our import and premium luxury segments.

Now moving on to used vehicles. I feel we delivered a solid performance in the quarter. We actually achieved our highest used to new ratio in 2 years. Our margins were much more stable, delivering a per unit profitability sequentially higher. Our wholesale performance was also strong. I would say that coming into the quarter, we had a couple of challenges that were hangovers from 2025. Inventory levels that were lower than I would prefer and aging that was slightly elevated.

I think the team has made good progress with these challenges, and we now enter Q2 with improved inventory position at a younger average age.

Now turning to Slide 4. I briefly touched on our customer financial services performance earlier, but let's turn to our own finance company. AutoNation Finance performed well, generating $9 million of profit in the quarter, which, by the way, nearly equaled the entire profit for 2025. AN Finance generated over $20 million of cash for the quarter, and the portfolio continues to scale and ended the quarter at $2.4 billion, up $1 billion year-over-year. Our funding profile also improved following our second ABS transaction, which closed in January.

The operating momentum of AutoNation finance is obviously delivering attractive returns and we are also benefiting from the ongoing customer engagement and valuable consumer insights that come from the business.

Now moving on to cash. Adjusted free cash flow was strong again at $256 million. This reflects excellent cash conversion, which Tom will talk through in more detail.

Now during the quarter, we deployed approximately $350 million of capital, including $300 million in share repurchases. While we did not acquire any franchises in the first quarter, we do remain active in evaluating opportunities that can add scale and density in our existing markets.

Our balance sheet remains strong. Our leverage ratio was in line with the first quarter of last year and remains comfortably within our targeted 2 to 3x range as we maintain our investment-grade rating. The strength of our balance sheet and robust cash flow generation give us significant flexibility to deploy capital, drive shareholder returns and grow earnings per share.

Overall, it was a good quarter. strong results. And as I mentioned, the fifth consecutive quarter where we have delivered year-over-year increases in EPS.

And now with that Tom, I'm going to hand it over to you.

Okay. Thanks, Mike. Turning to Slide 5, I'll walk through our quarterly P&L. Total revenue for the quarter was $6.6 billion compared with $6.7 billion in the first quarter last year, which benefited from the tariff-related volumes, particularly in premium luxury to talk later. First quarter gross profit of $1.2 billion was essentially flat year-over-year, and gross margin improved 30 basis points to 18.5% of revenue. That was driven by continued mid-single-digit growth in our aftersales business and strong performance in customer financial services.

Adjusted SG&A as a percentage of gross profit was 69.8% for the quarter, a bit higher than our targeted range of 66% to 67%. The increase reflects investments in marketing, including upper funnel spending to generate higher quality growth opportunities and build AutoNation brand awareness. We are also making structural investments targeting our customer experience.

Lastly, we had unfavorable self-insurance experience in the quarter, including damage related to weather events. We expect SG&A to moderate in subsequent quarters as a percentage of gross profit, but remain above our targeted range, reflecting continued investment, as I mentioned earlier, of the aforementioned strategic initiatives.

Adjusted operating income was $312 million for the quarter and was down 7% from a year ago. At 4.8% of revenue, it remains nearly 100 basis points above prepandemic levels. Below the operating line, floor plan interest expense decreased $5 million or 10% year-over-year as borrowing rates moderated and we remain disciplined in our inventory management.

Non-vehicle interest expense increased $6 million year-over-year, reflecting higher average balances and a slightly higher blended borrowing rate, reflecting maturities of lower-cost debt. Excluded from our adjusted results, our net after-tax gain of approximately $40 million related to our valuable strategic equity investments in Waymo and TrueCar.

Weighted average shares outstanding decreased 2% year-over-year, reflecting $1.1 billion of share repurchases since the end of 2024. Adjusted earnings per share was $4.69 for the quarter. Through strong operating execution and disciplined capital allocation, we've now delivered 5 consecutive quarters of year-over-year growth in adjusted earnings per share, as Mike mentioned.

Moving to Slide 6, after sales, representing nearly half of our gross profit, continued its impressive momentum. Gross profit was $593 million, and AutoNation first quarter record. And as Mike mentioned, we saw a modest impact from adverse weather, but still delivered mid-single-digit growth. Our results reflect higher repair order count, higher value per repair order and improved labor productivity.

Same-store revenue increased 4% and same-store gross profit increased 3%, while total store revenue and gross profit both increased 5%. Growth was led by customer pay gross profit up 8% and warranty gross profit, up 7%. Internal reconditioning gross profit declined 6% due to lower used vehicle volume. Wholesale and retail parts increased 10%. After sales gross margin was 48.6% for the quarter, roughly in line with the first quarter of 2025.

We remain focused on deploying technology to drive additional volume and productivity and on hiring, developing and retaining technicians. These efforts increased same-store franchise technician headcount by more than 3% year-over-year, reflecting improved retention. Growing our technician workforce is key to consistently delivering mid-single-digit growth in after sales gross profit.

I'm now on Slide 7, Customer Financial Services. The momentum in CFS continues. After growing 6% for the full year last year, per unit profitability increased another 6% in the first quarter, driven by improved vehicle service contract margins, consistent product attachment and higher finance product penetration. This per unit growth offset the year-over-year decline in unit volume. This performance is even more impressive considering the growth of AutoNation Finance.

While AutoNation France is attractive in long-term profitability, it diluted CFS per unit results in the first quarter by approximately $160 million -- $160 per unit, which is a little over 5%.

Slide 8 provides an update on AutoNation Finance, our captive finance company and its continued strong performance. As expected, profitability is gaining meaningful traction as the portfolio matures and as we leverage our fixed cost structure across a much larger book.

First quarter profit improved to $9 million, up from $0.1 million in the first quarter of 2025 and up sequentially from $6 million in the fourth quarter 2025. During the quarter, we originated approximately $460 million in loans and received approximately $213 million in customer repayments. Our penetration continues to improve AutoNation finance originations were approximately 17% of all deals financed in the first quarter, up from 14% in the fourth quarter.

The AutoNation portfolio ended the quarter at $2.45 billion, up about $1 billion year-over-year. The portfolio quality continues to improve. Credit performance metrics strengthened and average FICO scores on originations were 700 in the first quarter. Delinquency rates, 30-day delinquency rates were 2.1% at quarter end, stable as a percentage of the portfolio and in line with our expectations.

As we've discussed, we do expect delinquencies to continue to normalize as the portfolio matures, migrating towards the 3% range over time, and our loss reserving methodology incorporates this expectation. Nonrecourse debt funding also improved, reflecting better advanced rates in our warehouse facilities and the benefits of our second ABS issuance for approximately $750 million completed in January.

Debt funding as a percentage of the total portfolio at quarter end was 90%, now that's up from 74% a year ago, reflecting lender and market confidence in our portfolio. To close on AutoNation Finance, our compelling offerings are driving strong customer takeup, and we continue to expect attractive returns on equity, as profitability grows and equity investment requirements moderating.

Slide 9 provides some color for new vehicle performance. Our unit sales declines were in line with the industry down 9% on a same-store basis and down 8% on a total store basis. Battery electric vehicle unit sales declined more than 50% year-over-year and when combined with tariff-related pull-ins in the first quarter last year, created a disproportionate impact on our premium luxury unit sales, which decreased 16% from a year ago. Domestic and import sales were down mid-single digits.

New vehicle profitability again increased sequentially in the first quarter, averaging more than $2,500 per unit, up more than $100 or about 5% versus the fourth quarter. The improvement was driven by higher per-unit profits in our import and premium luxury segment. New vehicle inventory amounted to 46 days of supply, up 8 days from the first quarter of last year and 1 day from the end of December.

Turning to Slide 10. As Mike mentioned, used vehicle supply remains constrained, and the team did a great job balancing sourcing, unit volumes and overall profitability. Our used to new ratio increased to 1 in the first quarter, the highest in 2 years. Used retail unit sales decreased 5% on a same-store basis and 3% on a total store basis. Now unit sales in the sub-$20,000 category declined 9%, while vehicles priced above 40,000 increased 7%. This mix shift contributed to a 5% increase in average selling prices year-over-year.

Our used vehicle unit profitability increased by more than $150 sequentially to just under 1,600 per unit, reflecting a more optimal vehicle acquisition and reconditioning inventory velocity and usage of enhanced technologies. We had over 25,000 units ready for sale and 32,600 total units in our used inventory at month end, and the aging is in terrific shape.

To Slide 11. Adjusted free cash flow for the quarter was $256 million or 155% of adjusted net income. Both of those metrics were improved from the first quarter last year as we continue to demonstrate stronger operational performance, a relentless focus on working capital and cycle times and CapEx discipline and prioritization.

Our capital expenditures to depreciation ratio was 0.9x compared to 1.2x a year ago. CapEx was a little light in the quarter, mostly due to timing, and we expect full year spending to be $300 million to $325 million. We continue to focus on driving free cash flow to improve maximum capital deployment capacity.

On Slide 12, our strong cash conversion gives us flexibility to invest in growth and drive shareholder value. In the quarter, we deployed more than $350 million of capital, including $300 million of share repurchases. The remaining was spent on CapEx, which is largely maintenance and compulsory spending. Since the end of March, we have made additional share repurchases, bringing our year-to-date deployment to approximately $400 million or around $100 million per month.

We have repurchased nearly 2 million shares or 6% of the shares outstanding at the beginning of the year. In our capital allocation decisioning, we also consider our investment-grade balance sheet and the associated leverage level. At quarter end, our leverage was 2.57x EBITDA, almost identical with a 2.56x EBITDA at the end of the first quarter last year and well within our 2 to 3x EBITDA long-term target, giving us additional dry powder for capital allocation going forward.

Now I'll turn the call back to Mike before we open the line for questions.

Yes. Thank you, Tom. Just a quick closing from me, reflecting on a strong quarter and what I expect moving forward. I am very pleased about our EPS growth. I think that's something that the team and I were very, very focused on, and I was pleased we were able to deliver it, notwithstanding some of the dynamics in the industry that we've just discussed.

Our aftersales business is well positioned. And I think that the market will facilitate growth in that, and we're obviously going to stay focused on our technician recruitment, retention and development. Customer Financial Services continues to deliver strongly for us, very consistent performance. Its profitability is also very consistent. And we know that particularly with AN Finance, it builds strong relationships with our customers for us. And that portfolio continues to scale, improving productivity and profitability and funding.

I do expect improvements in our used business over the course of the year as lease returns increase, and the execution continues to improve. New vehicle sales continue to track in line with the broader retail market and as you've seen, unit profitability continues to show signs of stabilization. And during the Q&A, we may get into discussions about forecast for margin. That's fine. We can take questions on that.

But I think all of the factors that we've talked about position us from -- particularly from a cash flow perspective, to continue to generate strong cash flow, which will enable us to deploy meaningful levels of capital always with our shareholders in mind.

So with that, Tom, if you're ready, let's open up for questions.

Rob, if you could please remind participants how to get in queue for the question-and-answer period.

[Operator Instructions]. Your first question comes from the line of Rajat Gupta from JPMorgan.

Great. The first one was just that you removed your previous 2026 outlook slide. I'm curious, is that something to do with just what's going on geopolitically and just creating more uncertainty, just trying to understand the reason behind it. And maybe as you offered any guardrails around new vehicle GPU, used vehicle GPU trajectory from here on? I have a quick follow-up.

Rajat, it's Mike. I'll start the answer and then Tom, you jump in. So when we came into 2026, I think we all would agree that we knew that the structural demand, particularly in new and used was certainly there all of the inputs to demand, I think, continued scrappage rates, household formation have continued. But I think we knew that there would be some affordability headwinds coming into the year based upon the developments of last year.

And we were forecasting at that time, maybe up to a 5% impact on new vehicle industry. And obviously, that has been compounded from a headwind perspective with the ongoing inflation that we've seen as well as the fuel price movements that we've seen of late. And I think that is going to continue for the foreseeable future. So the way I'm thinking about the industry now is notwithstanding the fact that we're going to see quarter-over-quarter comparisons that are may be uneven this year because of the industry shocks we saw last year.

I think the industry will be below that 5% forecast that we originally had coming in until some of those impacts get dissipated. Now whether that is the Iran war is over, fuel prices begin to return, whether that is transaction price movements that may happen or change over the years, interest rate movements. Regardless of what causes it, I think we need to see some movements in those areas for that unmet demand now in the marketplace to start to get released. But sitting underneath that, I think the industry is still large as we saw the volumes that we delivered in Q1, albeit down year-over-year, we're still very, very credible.

And any deferred demand usually ends up relatively quickly in the vehicle Parker, and we managed to capture that with our aftersales business as well. And that's why aftersales is typically anticyclical because I expect our aftersales business to benefit now because there's certainly some deferred purchases in new.

There's certainly some segments shifting from new to used and the deferred purchases and used as well, and that will find its way into aftersales.

And then finally, because your question was quite detailed along and you have to tell me if I've actually answered it. When I think about margins for the year, you may see some margin compression. From our point of view, what's important is that, that drives an improvement in volume because some margin compressions as long as it feeds its way through into average transaction price should stimulate volume.

And I'll be very comfortable with that balance, by the way, because I think driving new car volume is important for us over the long term.

Tom, do you want to add something?

Yes, quickly. Rajat, just relative to that -- the original thought process, I think Mike said it well in terms of we're facing a different macro environment for very obvious reasons, won't get into us. But if you look at the main tenants in our outlook. I mean, apart from the market, I think all of them are intact in terms of what we're committing to deliver, whether it's customer financial services, sustained performance, the AutoNation portfolio growth after sales, continued mid-single-digit growth, good conversion on cash and just shareholder focused capital allocation, I mean, all those things are still intact and we're committed to.

Got it. That's helpful color. And just on the investments, the strategic investments, could you double click on that a little bit? what areas are you looking to go into? How should we think about as a return on that for the business? Any specific areas those are targeted would be helpful.

I'll start and then Tom can finish up. I think there's probably 2 main areas that I would call out as part of this call. When I look back at -- I think one of the benefits that automation has is that we have a national brand. And I think the benefit of that is not truly unlocked yet. And what that means is that we continue to invest with high-quality, but good third-party partners to generate opportunities for us.

We're very focused on changing that dynamic. And to change that dynamic, we need to make some more upper funnel investments to be able to grow our brand recognition higher in certain areas than it is today because we will reap the benefits of that over time. Now they will not be immediate. So what you get is you get a dislocation between our investment and our return, and that's what you're seeing to some extent in our financial performance. Obviously, the investments being made.

Our expectation is, over time, you will progressively see that return. Now what you won't immediately see is a reversal of that because upper funnel investment is obviously going to continue, but it is measured, it is well thought through, and I think it has a very, very clear end in mind.

The second area that we're investing in is obviously in technology. It is an ongoing daily topic of conversation across every business. I think we've made some good investments in technology. Some of it is in an exploratory way at this moment in time. So what we're trying to do is understand do we truly get a long-term sustainable return on investment from those investments. That means you have to make some speculative investments and some of which will pay off hands on million, some of which were not. So you're seeing some elevated costs from that.

And again, that will continue throughout the year, but we're very cognizant of the fact that we want to maintain our forecast in terms of our underlying SG&A. And I think the finance teams and our operators really do have that in mind. And in fact, there's an increased emphasis on that because it frees up some headroom for us to make some of these exploratory investments that we're making. But overall, I think, and you can see it in our Q1, we're creating still a very, very credible balance of SG&A to gross.

Tom, do you want to add anything?

No, you did well.

Your next question comes from the line of Mike Ward from Citigroup.

It seems like there's a I don't know if it's concerned effort or just a shift towards the more profitable parts of the businesses, F&I after sales financing, and it's almost like the new and used retail is just a feeder to enhance those businesses? Is that the way you're strategically thinking about it? How do you view that trend?

I think you answered your own question there. I like that answer very much. I've got nothing to add to it.

Okay. So that is a concern of effort. And Mike, when you look at the industry, it seems to me when we came out of Covet everybody was set that inventory going forward to be about 20% lower than it had been in the past. It seems to me the industry has gotten even more efficient. How much does that contribute? We've kind of seen a stabilization of the new and used variable grosses. And how much does inventory discipline contribute to that? And do you expect that to continue?

Well, it's a bit of a -- I'm going to give you a bit of a broader answer. So apologies upfront for this because if I want to lean into this kind of discussion on affordability a little bit more because I think that it is what is going to shape the overall industry volume for the foreseeable quarters that are coming at us.

We know that if I just take new, for example, average transaction prices are up roughly 40% on us since 2019. But the dynamics in that are quite interesting when you tease it apart. The vast majority of that was covered off by real wage inflation. And in fact, the pass-on effects of average transaction prices have been speculated between 8% and 10%. And I think that, that was what was well, it's creating some of that affordability headwind when we came into this year.

Obviously, it was compounded by tariffs, some of that pricing in some form or another being passed on. but we no longer had supply constraint on new vehicles driving up ATPs. That is largely with the exception maybe of 1 or 2 manufacturers completely dissipated now. But you're left with that affordability headwind, which initially was driven by transaction prices and then more recently, a combination of rate and transaction prices. And that's what stays in the market today, and it really has been compounded by what I'm hoping is a relatively short-term shock to the economic environment that we're in at the moment.

But notwithstanding that, the industry level, as I mentioned, I think, is still relatively large. So as we go forward, I think for us to release as an industry that pent-up demand, some of those dynamics have got to change. And I think part of that will be this affordability question, whether it's content, or whether it is supply chain changes or whether it is some margin mitigation with the OEMs or us.

I'm comfortable with margin mitigation because I think it will translate into volume because I do think that there is a large amount of pent-up demand now in new. It's also translated into us to some extent. I think used will supplier will still be constrained for a period to come as that hole that was created in COVID works its way through the system.

But I do think that when some of those input dynamics begin to get released, which some of them hopefully will be happening sooner rather than later, you'll progressively see a release of volume and may see some accompanying margin compression as a result. But as I said, that's a trade we'd be comfortable to make so long as it's done in a disciplined way, and we actually see the volume growth. Does that answer your question?

Yes, it does. And it just seems like the industry becomes more profitable if we stay in this million, $16.5 million range instead of like getting these big peaks and valleys, so lower highs and higher loads. And it seems like it feeds into the more profitable part of the business for AutoNation.

Yes, absolutely. I mean we like very, very much our aftersales capacity because as you said, it is -- it is anticyclical to some extent, but it's stable, it's durable, and it's much, much more predictable. Because the other thing that's happening, of course, is the vehicle park is still continuing to age and an aging vehicle park particularly when new and used vehicle volumes deferred an aging vehicle park just represents an opportunity for us that we are constantly looking to try and try and unlock. So that dynamic is 1 of the great things about a balanced business that we run.

Your next question comes from the line of Alex Perry from Bank of America

Congrats on all the progress. I wanted to drill in a bit more on the used vehicle side. How should we be thinking about sort of used vehicle comps and GPUs as we move forward? Inventory seems pretty lean -- how should we think about your ability to sort of drive an improvement in GPUs and same-store sales on the used side?

I think we've got upside on our volume side. I was pleased with our GPUs for Q1. I talked in the past that I think -- and our internal view is that we should be moving towards $2,000 a unit. That to me is something that we've set as a goal for our teams and to understand the different drivers of achieving that. The very first driver is obviously how you source your vehicles. So we're very focused on trying to make sure we source, obviously, from lower cost channels first, but to build up an inventory volume that is sufficient to drive incremental sales for us.

As Tom mentioned, we made some progress in Q1, the real forecast for us. The real initiative for us is to keep our progress moving -- and we think that will translate into higher volumes. I do not want that to come with a compression necessarily on the margin because I still think there's some inefficiencies in the used car business that will enable us, even if we reduce ATPs to maintain the margin, whether that is through cycle times, whether that is through a much, much more focused reconditioning or whether that is through hold times. So even if you do see some mitigation in ATPs, I think some of that can be offset and mitigated by improved productivity as part of that value chain.

Really helpful. And then just my second one, I wanted to go back to sort of the state of the union right now and how you're sort of thinking about things with all the uncertainty. Are you seeing any sort of change in trend line, any impact through April on consumer confidence related to the war? Just talk to us about how you're sort of seeing the demand trend as we move forward here?

Yes. Well, there's no doubt that we are seeing an impact on it. I mentioned before that the affordability was a a key industry issue for us right now. But I said that wage growth, to a large extent, increased has offset most of the -- well, a large portion really of the increases that we've seen. But there are other effects that sit underneath that.

The first one is total cost of ownership is also being impacted by increased insurance costs, which were up roughly 50%. After sales maintenance costs are up as well. But that the issue that I think we're going to face in the short term, that really is driving my outlook of the industry over the, say, coming 1 or 2 quarters is the fact that, that wage inflation that partially offset increases in transaction prices wasn't distributed evenly. I mean, if you were at the top and at the bottom, you got real wage increases. If you were set in the middle, you were largely stagnant treading water. And that middle cohort of of the population really is the engine for us.

So the impact that we're seeing in the short term in terms of their household income and the dynamics there in terms of the needs, the must-haves, the staples actually taking a higher level of their disposable income. It will impact our industry and give us some headwind. We've seen that in Q1. It will continue, in my view, into Q2. But those deferred purchases will feed into our aftersales. But that's the dynamic really that we're seeing and where the impact is, in my view, is going to be felt.

I do think that some of this. I'm hoping that some of this obviously is short term and can get relieved quickly. But I'm still optimistic that when we look back on this year, the industry is still going to be a healthy one.

Incredibly helpful. Best of luck going forward.

Your next question comes from the line of Jeff Lick from Stephens Inc.

I was wondering if you maybe drill down a little deeper on the used and Alex earlier question, Mike. Just in terms of your guys' strategy maybe looking at late model versus 6- to 8-year-old plus your cluster strategy, use of internal auctions. Obviously, one of the largest competitors is going through a little bit of a change and Carvana continues to ramp up. Just curious how you see the used car -- or used car business playing out, especially as it relates to sourcing and whatnot.

Yes. Well, obviously, you saw in our results that are above $40,000 used car business improved, I think it was up over 7%. Tom, correct me if I'm wrong, but it was up over 7% and then our 20% to 40% and below $20 a drop. Some of that was inventory related. There's no doubt about that. But I do think that some of the drivers of that above 40,000 were maybe those marginal new car buyers that from affordability did, in fact, drop into the used car scene.

So sourcing vehicles across all of those price band is important for us. And by the way, even if those marginal new car buyers dropped into the used car industry, you can tell from the total used car industry even more deferred their purchases from used cars anyway. So the way that we think about sourcing is it is -- everyone talks about how competitive it is.

I think it's been competitive really for the last 5 years and will continue to be competitive. But you've got to be focused on every single channel. The very first channel that we're very focused on is clearly, those vehicles that come to us and trade new or used trade that we can with the right and appropriate amount of reconditioning generate a really excellent used car inventory piece. And that's what our focus is.

I mentioned before brand. Brand is super important when you're sourcing vehicles directly from the market it helps cut through all of the noise out there. We have done well in many of our markets with our sourcing through our Web or car activities. I think we can do better, but I do think we need to continue to reposition our brand to more of a top of mind perspective rather than a searched outcome, and that's some of the investment that we're making, but very comfortable also to dip into the auction market. They come at some people think an inflated price.

But the reality is if you price them right, you can still get a good turn. So fundamentally, you've got to have the inventory because you can't sell fresh air. You've got to be able to buy it competitively hopefully with a mix that suits the business that you're trying to achieve. But the industry is so broad, we want a balanced portfolio of vehicles between all of those 3 price bands. But as you've seen in our end with this, which is a repetition of how I started, our plus $40,000 sales benefited in the quarter, probably from some of that migration from new.

Your next question comes from the line of John Saager from Evercore.

On you're annualizing ANS at $36 million a year. The penetration increased from 14% to 7%, [indiscernible] scores are in a good place. Can you just reframe sort of the steady state and where do you think that heads -- if we look out to 2027, do you think that we can continue improving that penetration to higher and higher levels, is something like $50 million an achievable goal?

Yes. Thanks, John. Great question. When you look at where we have been on penetrations -- sorry, when you look at overall originations for AutoNation Finance. Going back to 2024, we're -- we underwrote about $1 billion in sort of our first full year of $1.1 billion, and that went up to $1.8 billion in 2025.

We're on a run rate that we think is going to get us north of $2 billion to $2.1 billion in '26, which would be close to 20% growth. So we keep the key is the originations. And that would -- right now, as you said, penetration is 17%. That's of all units that are financed -- if we get to the numbers I mentioned for 2026, I think we'll be pushing 20%.

And I don't think we're really calling a limit on what the penetration can be. I mean it's been a steady climb following the originations. But at some point, there's some elasticity there. But right now, I think it's slow and steady growth for us in both penetration and originations.

Okay. Great. And then on the SG&A efficiency, can you just quantify the impact of stock-based comp in the quarter?

Over probably less than $1 million of incremental expense.

Our next question comes from the line of John Babcock from Barclays.

Just first of all, did you guys quantify the impact of the weather on the quarter? Apologies if I missed

Well, we both can answer this one. I don't -- I'm not really -- I don't really entertain discussions about the impact of weather on the business, in the business. I think it's something that tends to happen relatively frequently. So from a -- I know that Tom will have a much more well thought-through answer. I tend to believe that much of it may be just deferred for a short period of time. Some of it you lose as people say. But no doubt, Tom will be able to give you a better flavor than that. I'll try and focus on doing as much business as possible regardless of whether it's raining or windy.

I think Mike is saying that he doesn't allow us to make any excuses for our SG&A performance. When you look at the onetime events that we referred to, they were self-insured type claims activity, more than half of which was weather-related. I'd say the total, including those weather-related impact was roughly $5 million year-over-year, John.

Yes. Okay. That's Perfectly fine. And then just on the SG&A side. Obviously, there's been a fair bit of discussion on the call so far about the uncertainty in the market, affordability challenges, the other broader macro headwinds. In light of all that, how are you thinking about your SG&A spending levels? And part of the reason I ask is because over time, the dealers have generally tended to be pretty good about adjusting spending up and down based on how the market is looking.

So I want to get your thoughts on that and whether you're comfortable with current spending levels or if you think there might be a time at which maybe you decide to pull back in certain areas.

Yes. Great question. Thanks, John. I'll start it out and then let Mike jump in. The thing that's hidden inside those SG&A numbers that we talked about is some of the productivity that we are generating either through AI or other technology. And if you look, for example, at our compensation for sales personnel, we're up at close to 10 sales per associate in the first quarter of 2026. That number was probably 9 or so a year earlier.

And we're doing that with better training better technology emphasis on performance-based incentives. So -- and there are a number of other initiatives when it comes to AI and productivity that we think will continue to allow us to drive down our SG&A.

We're deploying AI at scale in our servicing contact centers. and in our back office, we've generated meaningful savings in 2025, close to $5 million, and I expect that to continue into 2026 through digital applications and AI-type applications. So I don't want you to think that we're not focused on it. We do have to make some investments, some incremental investments.

I do think they'll start to generate additional growth over time. I also think those investments, some of them dissipate as we get through 2026, particularly the investments on some of the digital enhancements that Mike referred to. I don't -- at this point, we feel like we're on a good trajectory to bring our SG&A at a run rate it starts to approximate our targeted range. towards the first quarter of next year.

I think in second quarter through the fourth quarter, we should probably expect us to bring it down 150 basis points from what we saw in the first quarter. If we can avoid some of the calamities that we don't necessarily control. So that's the way I would look at it.

John, I just want to add a piece as well. Obviously, we see a much more detailed breakdown of our SG&A performance than others on the outside of the company are. So if we look at the underlying core SG&A performance of our dealerships, our collision centers and our auctions, and we take out or we give an allowance for the investments that we see as being incremental that will benefit us that's that dislocation between the investment and the revenue that you get that I discussed earlier.

I'm comfortable with our SG&A levels. And I see a trajectory that I'm actually pleased with. It's not so apparent for me outside. So the question is, are the investments that we are making that are incremental, truly going to give us a revenue stream in a reasonable time frame to have made them worth the trip. That's something that we are very, very careful to look at that we're really looking to see what benefits we see as a result of those investments. And if we believe they are, we continue to do it. And if we believe that they're not, for whatever reason, we're quick to shut them off.

So I think underneath the headline number that you're looking at, there is a good trend in our SG&A in line with discussions that Tom has had with all of you in recent quarters. And I do think that there is a mechanism for us to make sure that we're looking very closely at any incremental investment that we make that it will yield a benefit for the company at some point in the future.

And your final question comes from the line of David Whiston from Morningstar.

Just curious if you could give any kind of update on the status and mobile repair adoption? And what are the challenges in getting more consumers to use that service.

Yes. Actually, what we've now done is we have been able to integrate our mobile repair service into our big markets. So we've now we moved their bases into our existing AN USA businesses, which gives them a base, which you need a hub. We found out that having a hub actually helps with our productivity quite significantly because it gives us a start and return point that's much, much more consistent. We slimmed down the number of technicians that we had in that area because the levels of productivity were very, very low because you have to build quite a large consistent base.

The integration of those into that business have helped tremendously with that. because there is a residual amount of business that enables us to layer in those more variable trips, those more unexpected trips in a good way, I'd expected to customers outside of the physical locations. We have learned a huge amount about dynamic booking and still learning about dynamic booking and now that I think we have a much more solid base.

Our productivity has increased, I think, well. We're now beginning to build layers of business on top of that, so that we can extend the products and services that are remote in a way that doesn't bring our utilization and productivity down to such a level that we're actually not covering our costs. So it is a much more complex business than we anticipated a few years ago when we acquired the business and began building it.

I think our skill set has improved tremendously. And I think it now begins to add value, not just to customers who want remote work, but also add value to a number of our business partners as well. Still a lot of work to do in that area, but I'm pleased with what I've seen so far.

And we have reached the end of our question-and-answer session. I will now turn the call back over to management for closing remarks.

Yes, thank you, everybody. Thanks very much for your time on this call, and we look forward to talking to you more about the quarter and also next quarter, Q2. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Good morning, everyone. Welcome to AutoNation's Fourth Quarter 2025 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Thomas Szlosek, our Chief Financial Officer. Following the remarks, we will open the call to questions. I'll now hand the call over to Derek Fiebig, Vice President of Investor Relations, to begin.

Thanks, Adam, and good morning, everyone. Welcome to AutoNation's Fourth Quarter Conference Call.

Before we begin, I'd like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on the website located at investors.autonation.com.

With that, I'll turn the call over to Mike.

Yes. Thank you, Derek. Good morning, everybody, and thank you for joining us today. I'm on the third slide. We're pleased to report a solid fourth quarter and full year results for AutoNation. During a turbulent year, we delivered 3% revenue growth and 8% adjusted net income growth and 4 consecutive quarters of year-over-year EPS growth, ultimately leading to an increase in adjusted earnings per share of 16%. Adjusted free cash flow exceeded $1 billion, up approximately 39% from 2025, and we deployed over $1.5 billion in capital, half of which went to share repurchases which resulted in a 10% reduction of the shares in circulation with the remainder invested in the business, including $460 million in M&A to acquire some strong brand assets. Our balance sheet remains extremely healthy with year-end leverage largely unchanged from the prior year.

2025 was the first year that AutoNation delivered earnings and EPS growth since 2022. And as I said, it was a solid year of growth and performance by the group. Relative to the fourth quarter, the industry faced tougher sales comparisons to last year when post-election sales surged driving a Q4 2024 light vehicle SAAR of $16.7 million. Also, sales in this year's fourth quarter were negatively impacted by the strong pull ahead earlier in the year as consumers reacted to the tariff announcements and purchased vehicles prior to the expiration of government incentives for electric related powertrains. We felt these impacts across most brands with the biggest impact on premium luxury.

In the fourth quarter, our same-store unit sales of new vehicles decreased by 10% including declines of 60% in battery electric vehicles and 10% in hybrid powertrain vehicles. For the year, however, our new unit growth was 2%, largely in line with the overall industry. With regard to new unit profitability, we delivered a sequential increase from Q3 to Q4 and ended up approximately $2,400 per unit. In the fourth quarter, we improved our used to new ratio from a year ago as used sales tracked more favorably than new. Although used unit sales decreased 5% from 2024 on a same-store basis, with growth in units higher in the $40,000 price point more than offset by declines in lower price used unit sales increased by 1%. New selling prices held up well in 2025 across all price bands.

For the full year, our used vehicle gross profit increased 5%, reflecting improved gross profit on the retail side and strong results in used vehicle wholesale. Retail profitability per unit for the year was in line with 2024, but modestly lower in the fourth quarter, reflecting a tightening supply market. Notwithstanding this, our team continued to demonstrate strong performance in acquiring vehicles through trade-ins and directly from the consumer through our We Buy Your Car efforts with more than 90% of our sourcing of vehicles through internal channels. And naturally, we're focused on continuing this discipline, but also improving our purchase and sales unit pricing discipline and cycle times.

We ended December with 25,700 used vehicles in inventory and expect this number to increase as we progress towards a stronger March and summer selling periods. Customer Financial Services had an excellent quarter. Growing unit profitability by 8% from the prior year and 4% sequentially. Fourth quarter and full year gross profit per unit for CFS was the highest we have had in the history of AutoNation. Our customers continue to purchase more than 2 products per vehicle with extended service contracts continuing to be the top offering, which is, of course, fantastic for our future aftersales revenue and customer retention. Our finance penetration continues to grow with around 3/4 of units being sold with financing. The momentum in After-Sales maintained, and we delivered record fourth quarter and full year revenue and gross profit.

For the quarter, total gross profit increased by 6% or 4% on a same-store basis. Our growth was led by customer pay, which increased 8% on a same-store basis and warranty, which increased 6% on a same-store basis. Improvements in our aftersales performance were not restricted to just revenue. We also improved our total gross margin for the year by 80 basis points to 48.7%. We continue to focus on our technician workforce by recruiting, retaining and developing our technicians and I think the efforts are certainly paying off. Turnover has decreased. Franchise technician head count increased more than 3% from a year ago on a same-store basis and is up more than 5% on a total store base.

The strong momentum at AN Finance was maintained, including a $19 million year-over-year swing in profitability to $10 million. Originations for the year increased by $700 million from 2024 with the portfolio now exceeding $2.2 billion. The portfolio continues to perform in line with our expectations from a delinquency and a loss perspective and the business' base costs have remained stable, enabling attractive profit scaling from portfolio growth. As I mentioned earlier, this was the fourth consecutive quarter of year-over-year increases in adjusted EPS with our full year adjusted EPS growing by 16% from 2024.

Cash flow for the quarter and the full year was also strong. Fully adjusted free cash flow was up 39% from 2024 our investment-grade credit rating and balance sheet anchored on a low net capital, high free cash flow model enabled us to once again deploy significant capital for CapEx, M&A and share repurchases. During 2025, we expanded our presence in 3 key markets, including acquisition of a Ford and Mazda store in Denver as well as an Audi and Mercedes store in Chicago and a Toyota store in Baltimore. All in all, great results, I think good progress and a solid performance by the AutoNation team.

Now I'm going to hand the call over to you to take everyone through the results in more detail.

Thanks, Mike. I'm turning to Slide 4 to discuss our third quarter P&L. Mike explained the factors that impacted our fourth quarter vehicle unit sales and revenues. Total revenue for the quarter was $6.9 billion compared to $7.2 billion a year ago. Driven by a decline in revenues from new vehicle sales of approximately 9%. New revenue per unit retail was stable year-over-year. As Mike mentioned, our CFS and aftersales businesses delivered strong top line results with a highlight being the 6% growth in After-Sales. Fourth quarter revenues from sales of used vehicles were essentially flat year-over-year.

For the full year, revenue increased 3% to $27.6 billion including our CFS and After-Sales, which were up 8% and 5%, respectively, from 2024. Revenue for new vehicles was up approximately 3% and for used vehicles 1%. Revenue per unit retail increased modestly year-over-year for both new and used. Fourth quarter gross profit of $1.2 billion increased by -- decreased by 2% from a year ago for the quarter. So only half of the rate decline in revenue. The positive outcome reflects declines in new vehicle gross profit being significantly offset by 6% growth in After-Sales. For the year, gross profit was up 3%, led by our CFS and After-Sales, which were up 8% and 7%, respectively, from 2024. Our adjusted SG&A expenses were flat in the quarter and 68% of gross profit.

During the quarter, we increased our advertising expenditures, specifically targeting upper funnel demand creation activities and had higher expenses for our service [ loaner ] fleet to support the growth in our After-Sales business. This also will help bolster used inventory levels. Full year SG&A was 67.3% of gross profit. Absent the fourth quarter investments I just mentioned, our SG&A as a percentage of gross profit would have been in line with our targeted range for both the quarter and the full year. Adjusted operating income, which decreased 7% from the fourth quarter last year, increased 3% for the full year.

Below the operating line, the fourth quarter floor plan interest expense decreased by $6 million or 10% from a year ago as our disciplines around inventory continued and average interest rates moderated, reflecting the movement in short-term interest rates in 2025. For the full year, floor plan interest expense decreased by $30 million or 14%, reflecting the same factors. Fourth quarter non-vehicle interest expense increased $3 million or 7% from a year ago, reflecting higher average balances and slightly higher blended interest rates stemming from our debt refinancings in 2025.

As a reminder, we reflect floor plan assistance received from OEMs in gross margin. This assistance totaled $35 million in line with a year ago. Net of these OEM incentives, the net new vehicle floor plan expense for the fourth quarter totaled $13 million, down from $18 million a year ago. For the full year, new vehicle floor plan expense totaled $46 million, down from $74 million in 2024. In all, this resulted in fourth quarter adjusted net income of $186 million compared to $199 million a year ago. For the full year, adjusted net income increased 8% to $770 million.

I'll get into the details of a bit, but adjusted free cash flow for the year was outstanding, as Mike mentioned, and enable share repurchases that reduced share count by 10% year-over-year. Adjusted EPS was $5.08 for the quarter, an increase of 2% from a year ago and was $20.22 for the full year, an increase of 16% from 2024. Adjusted earnings per share excludes the business interruption and insurance recoveries related to the second quarter 2024 [ CDK ] business incident. This amounted to $40 million on a pretax basis for the quarter and $80 million for the full year. Adjusted earnings per share also excludes charges for severance expenses and asset impairments.

Slide 5 provides some color from vehicle performance. We have covered the market conditions leading to the fourth quarter's new unit sales decline of 9% or 10% on a same-store basis for the quarter. The decline in sales of electric vehicles contributed half of the unit sales decline. Sequentially, internal combustion engines were up 8% from the third quarter, which is in line with historical norms. Our market share also improved from the third quarter. For the year, unit sales were up 2%. As I mentioned, average sales prices were stable for the quarter and the year.

New vehicle unit profitability averaged approximately $2,400 for the quarter, increasing more than $100 or 5% from the third quarter. This sequential increase was consistent with prior years and reflects strong commercial performance in the face of declining OEM dealer incentives. New vehicle inventory amounted to 45 days of supply, up 6 days from the fourth quarter of last year and down from 2 days at the end of September.

Turning to Slide 6. Used Vehicle fourth quarter retail unit sales decreased by 5% on a same-store basis and 3% on a total store basis. Average retail prices were up about 3% for the quarter and 1% for the year. And for the full year, used unit sales increased by 1%. Overall, used vehicle profit was down 6% for the quarter, but up 5% for the year, reflecting increases in used retail, and used wholesale. Q4 used vehicle profit per unit of $1,438 was lower than a year ago, reflecting higher acquisition costs, as Mike mentioned.

For the full year, used profit per unit of $1,555 was flat from a year ago. We remain focused on optimizing vehicle acquisition, reconditioning inventory velocity and acquisition pricing, and we're also investing in creating a better customer experience. Overall, industry supply of used vehicles remains tight. We continue to be competitive in securing used vehicles from our own retail operations, including trade-ins, We'll Buy Your Car, services loaner conversions and lease returns, and we continue to source more than 90% of our vehicles through these internal sources.

Let me move to Slide 7 on Customer Financial Services. The momentum in CFS performance continues. Unit profitability was up 8% in the fourth quarter and 6% for the full year. Reflecting improved margins on vehicle service contracts, consistent product attachment and higher penetration of finance products. The continued strong unit profitability performance at CFS is even more impressive considering the growth of AN Finance which, while superior and long-term profitability, diluted our CFS PBR unit profitability in the fourth quarter by approximately $130 per unit. Absent this impact, our CFS unit profitability of $2,891 that you see on the slide for the fourth quarter would have been greater than $3,000. CFS total profit grew at a rate lower than our historical norms in the fourth quarter even that new and used volumes, but were still up 8% for the full year.

Slide 8 provides an update on AN Finance our captive finance company and its excellent performance. As expected, the profitability of AN Finance is gaining meaningful traction as the portfolio matures and we get leverage of the fixed cost structure from the outstanding growth. For the full year, we improved from $9 million operating loss in 2024 to a $10 million operating profit, including $6 million profit in the fourth quarter. During the quarter, we originated $400 million in loans, bringing the full year originations to $1.76 billion, up from $1.06 billion in 2024. We had approximately $170 million in customer repayments in the quarter.

The AN Finance portfolio ended the year at $2.2 billion and has more than doubled since last year. The quality of the portfolio continues to improve. Our credit and performance metrics are improving with average FICO scores on originations of 696 for the full year of 2025, and compared to 678 a year ago and 623 in 2023. 30-day delinquency at [ year ] end of 2.7% were largely stable as a percentage of the portfolio and in line with our expectations. And as we've discussed in the past, we do expect delinquency rates to continue to normalize as the portfolio continues toward full maturity with delinquency rates migrating to the 3% range. Our loss reserving methodology incorporates this expectation.

The nonrecourse debt funded status of the portfolio also continued to improve as we have improved advance rates for our warehouse facilities and are benefiting from higher nonrecourse debt funding levels from our $700 million ABS issuance completed during the second quarter. Our debt funded status at December was 88% compared to 75% a year ago and 59% in 2023. And this improved funding has freed up over $140 million of equity funding that we have used for other capital allocation opportunities. In January of this year, we completed our second ABS offering for AN Finance for just under $750 million at a blended interest rate of 4.25% with an advance rate of 98.7%, both improvements from our second quarter 2025 ABS offer. On a pro forma basis, this new offer will increase the funded status of the portfolio to more than 90%. Closing off on AN Finance, the business's attractive offerings are driving strong customer takeup, and we continue to expect attractive ROEs in the business driven by profitability growth and moderating equity requirements.

Moving to Slide 9, After-Sales represents nearly 1/2 of our gross profits, continued its impressive revenue and growth profit momentum. Gross profit for the quarter of close to $600 million was an AutoNation record. Our results reflect higher repair order count, higher value repair order and improved labor productivity. For the quarter, same-store revenue increased 5% and gross profit was up 4%. And for the full year, same-store revenue increased 6% and gross profit increased 7%. The improvement in fourth quarter's gross profit was led by customer pay, which increased by 8% and warranty, which increased 6%. Internal reconditioning was modestly lower in the quarter, reflecting lower used vehicle sales as we've discussed.

Our fourth quarter gross margin was stable versus 2024 at 48.3%. Now this reflects higher growth in the wholesale parts business, which has more modest margins than the rest of the After-Sales business, but it was offset by improvements in growth rates in customer pay, which were up 70 basis points. We remain focused on deploying technology to drive additional volume and productivity on -- and on hiring, developing and retaining our technicians. As Mike mentioned, these efforts have helped to increase our franchise technician head count by more than 3% from a year ago on a same-store basis, reflecting better technician retention. The increased technician workforce is key to consistently delivering mid-single-digit growth in After-Sales gross profit.

To Slide 10. Adjusted free cash flow for the year was $1.05 billion or 125% of our adjusted net income. Adjusted free cash flow increased by nearly $300 million a year ago, and free cash flow conversion improved by 20 basis points. The increased cash flow represents stronger operational performance, including our continued focus on working capital and cycle times, CapEx management and prioritization resulting in $20 million less CapEx in 2025 and the recovery from the CDK outage, including $80 million business interruption-related insurance receipts I mentioned earlier. We excluded the CDK recovery from the 125% free cash flow conversion calculation. Our capital expenditures depreciation ratio was [ 1.25 compared to 1.4 ] a year ago. We continue to focus on driving free cash flow to improve -- to provide maximum capital deployment capacity.

Turning to Slide 11. For the full year, we deployed over $1.5 billion in capital, with half of it being reinvested in the business in the form of CapEx and M&A and have returned to our shareholders. We remain prudent in our CapEx methodology, which is mostly maintenance-related compulsory spending and totaled $309 million for 2025. We continue to actively explore M&A opportunities to add scale and density to our existing markets. In 2025, we invested $460 million closing on transactions in Baltimore, Denver and Chicago, as Mike discussed. Share repurchases are an important part of our playbook.

For the full year, we repurchased $785 million or 10% [indiscernible] at the beginning of the year at an average price of $193 per share. In the last 3 years, we've repurchased a total of 2.1 billion, representing 36% share count reduction at an average price of $170 a share. In our capital allocation decisioning, we also consider our investment-grade balance sheet and the associated leverage levels. At quarter end, our leverage was 2.44x EBITDA almost identical with a 2.45x EBITDA at the end of last year and well within our 2 to 3x long-term target, giving us additional dry powder for capital allocation going forward.

Now let me turn the call back to Mike before we go into question and answer.

Yes. Thanks, Tom. So in summary, 2025 was a year of growth for AutoNation. Organic growth was volume up, revenue up and After-Sales margin up. Acquisition growth with the addition of 5 dealerships with great brands. Cash flow growth, as Tom mentioned, with adjusted free cash flow over $1 billion, up 39%. Capital allocation, I think, in the year was very balanced and disciplined. And all of this in combination resulted in the increase in adjusted net income and improvements in adjusted EPS of over 16% that both Tom and I have been talking about and I think capped off a very solid year of growth for AutoNation. And I'd like to thank all of our colleagues and associates in the business for everything that they did.

So just briefly turning and looking ahead to 2026 and just some of the commentary that we have, we obviously expect to move in line with the market, and we think the market will be slightly down in 2026 compared to 2025. But there could be some benefits from known tailwinds around withholding tax rates, refunds and [indiscernible] depreciation but that's our expectation as we sit here today. From a new unit profitability, we think it will remain fairly stable with the second half of 2025 levels. That's our expectation, at least for the coming few months and we believe that the used vehicle market is going to still remain constrained to some extent, but we think it will show improvements year-over-year.

From our CFS business, we spent some time talking about that on the call. What's important for us is to maintain the performance that we have and that's a big, big focus for all of us, but then very aware of customer sensitivity to monthly payments, which clearly is a key topic for the business and for us going forward. We're going to continue to expand AN Finance portfolio and grow its profitability. That will drive more SG&A leverage that Tom mentioned in his commentary.

And then just finally turning to After-Sales. I'd like to thank our After-Sales colleagues across the entire business for the record that they delivered in Q4. We think we're well positioned, frankly, to continue that growth in mid-single-digit growth numbers. And I think we have the levers, and we're certainly putting the resources in place to help facilitate that. I think all of that will enable us to continue to deliver strong cash flow and obviously, be able to deploy significant capital. We've got a strong financial position. Tom mentioned our investment-grade balance sheet. I think our operations are disciplined. I think we can continue to do that and continue to improve productivity ultimately, the aim is to continue the growth that I mentioned before.

So with that, I'm going to open it up for questions if I may.

Yes, Adam, if you could please remind the audience how to get in queue.

[Operator Instructions] Our first question today comes from Rajat Gupta from JPMorgan.

Great. I just had a couple. Just first on the new car business. The unit numbers seem a little weaker than some of the peers, some of the industry metrics, although the profitability was better. I'm curious was there a temporary trade-off decision that you made in the quarter around profitability versus sales? Or was it just a function of comparisons and just your regional and brand mix that might have driven that 10% same-store decline? And I have a quick follow-up.

Yes. Rajat, this is Mike. I think there are a number of things that we were taking into consideration. Firstly, we mentioned that we saw year-over-year ramp, in fact, quarter-over-quarter, a reduction in OEM dealer-facing incentives. We offset some of that with margin because, obviously, it impacts net transaction price. But particularly year-over-year, that reduction in dealer price [ spend ], we had to be very careful in our consideration and balance between volume and margin. In fact, the largest drop, by the way, was OEM dealers support for hybrid and battery electric vehicles, as you can imagine. So that was the one dynamic that we saw in the quarter.

The second one was if you think about where the key reduction came from us, EVs and BEVs represented about 30% of our mix Q4 2024. That dropped to 20% in Q4 2025. That's a 60% reduction in EV volume. So the biggest impact on that 10% that you referenced by far came from electrified powertrains. And I think the combination of those things and the way that we were trying to make sure we had a good balance between our market share performance, but also margin led to what we delivered, which was, I think, a good sequential improvement in new vehicle margin and also reflective of some of the things we were trying to do in the business. And it was those 2 things really that resulted in the position that we ended up with.

Understood. That's helpful. And then just maybe for Tom, on AutoNation Finance, really, really quick and good progress there in terms of the maturity of that portfolio. I'm curious, how should we think about the cadence of profitability here over the next year or maybe the year beyond. I mean, are we at a point in your trade-off between penetration base versus portfolio maturity that it's safe to expect a continued inflection in the profitability here. I'm curious like how you kind of balance that? Any guardrails you can give us maybe even around net interest margin or loss ratios also would be helpful.

Thanks, Rajat. Yes, we're really happy with the growth that we're seeing in the portfolio. I mean the growth rates -- I mean, let's put it this way, the doubling of the portfolio is a real harbinger for the future. And we don't realize all those benefits in the year it doubles as you realize, because of the charges -- the upfront charges for [ CECL ] and so forth. As we mentioned, $6 million we achieved in the fourth quarter. And I think that's probably a decent starting point as you look on a quarterly basis through 2026. So that will give you some a nice starting point for what the P&L will look like for ANF. .

I think we're reasonably confident on net interest margin. The portfolio from a delinquency perspective and risk perspective is well managed by the team. The delinquency, as I said, will grow as it's mostly a brand-new portfolio. So you start to see delinquencies as it matures, but we've got that factored in. So I believe that our performance trajectory and the income improvement will continue, we'll get a good position throughout 2026.

Do you expect to maintain these -- what's the upper end you have in mind on penetration for the portfolio or in medium term...

I think I mean it's really strong on the used side, as you know. I mean on the new side, we're partnering with our OEMs as well from a financing perspective. So as we grow -- continue to grow our used business, we do see opportunity to drive further penetration. We've got great partnerships. It's been great programs with our lending partners outside of ANF that I think are going to help continue the trajectory.

And let me just add just some color to it, Tom. I think Tom is exactly right. There are a few things that are important to us. One is we work in partnership with all of our OEM captives, which means we're very, very clear with our teams about that relationship. And frankly, we cannot compete with an OEM captive because of the way that they subsidize either their leases obviously or their finance rates. And that is not our job to do. We've improved our penetration in what we call the market that is open for us to be competitive in, and that is those new vehicles, those few new vehicles that don't qualify wouldn't benefit.

Our customers wouldn't benefit from subsidized finance. And obviously, all of our used vehicle volume that falls within the buy box that we've established for the company. We're very, very disciplined in that buy box and our penetration has improved over the years, but we still have headroom to improve even further. The constraint really on our growth, even though it was very good, it was well balanced within Jeff Butler, who is our CEO of that business, and Tom to make sure that in terms of the way we're thinking about allocation of resources in the business we had balance, but it could have grown faster than it did, but I was very pleased with the discipline that they said. So I do think that there is opportunity from a penetration point of view. And as we mentioned earlier, our penetration mainly is coming from the used car market. And as I said, we think there will be some stability in volumes in that area.

The next question comes from [ John Babcock ] at Barclays.

I guess just quickly, just on capital spending. Is there any reason to think that '26 would be any different from '25? And then also, if you could just talk about the M&A market, how that looks right now and how you plan to balance? How do share buybacks in the area, that would be great.

Yes. Thanks, John. Thanks for the question. From a CapEx perspective, I think we're -- I think 2025 levels are a reasonable starting point for 2026, I mean it's pretty locked down in terms of the spending that we do, as you know, it's mostly maintaining our properties and then keeping up with OEM requirements on the latest models to the stores. We've got some service growth as well that we're supporting. But I think the levels that we spent at in '25 are sustainable for 2026.

In terms of M&A and Mike is involved in this as I am. So it'd be good to hear his commentary as well. But we had a really strong year. We saw a number of opportunities across all 4 quarters in 2025 in terms of opportunities. I think we were selective. I think you saw where we spend our money in terms of regions and brands. And as Mike said, we've got -- we ended up with some very high-quality brands in territories where we have density, where we think we can create operating synergies. And I'm confident that 2026, there will be continued opportunities for us in the dealership space. And we'll remain disciplined. I mean we'll go for the ones that pencil out for us and then allow us to take advantage of where we're present and where we can drive operating synergies.

Well, I think it's a pretty complete answer but just to add some color on the process that we have. Like all organizations when we think about the capital deployed, we have a number of hurdle rates, but the key one for us is on a per shareholder basis. And what are we able to return, thinking about it from individual shareholder perspective. Which, to a large extent, can be an interesting hurdle to have when you think about M&A. The good news is there are opportunities where not only does the business that we're interested in deliver reasonably that we can bring significant synergies to it. And obviously, that's not something that is usually or very easily apparent when you first think about purchase prices of some of these assets.

But it is clearly a big consideration for us because we have significant invested resources and capabilities that we obviously get leverage in the businesses that we're adding so long as we're adding them into geographies and densities that make sense, and that is a big part of the calculation. We're also thinking about the incremental EBITDA that is delivered from these acquisitions and how we can leverage that in the business for further return to our shareholders, whether it is through revenue or net income growth or whether it is in terms of share repurchases. So I think there are opportunities that are coming to the market. It is reasonably buoyant in my view, we are, like everybody would tell you, very selective and very clear on the hurdles of what makes an attractive target or not. I think that's the best I can add to what Tom said.

And then just one follow-on. I am just kind of curious, how did hybrid GPUs trend in the quarter? And then also, what are your expectations on when electric vehicle GPUs might start to normalize with typical combustion engine vehicles? Any color on that would be helpful.

Yes. Well, as I already mentioned on -- comments. We saw quite a significant pullback in terms of incentive contribution from our OEMs in terms of dealer support incentives. So let me get the exact numbers for you so that I can be completely accurate with you. So from overall GPUs on hybrids reduced on battery electric vehicles in Q4 and were largely flat, Tom check our numbers on [ AGVs ] but we obviously benefited from a very significant mix change in the quarter.

From a stabilization of [ rounds ], I think if the industry stabilizes around 2% to 3% penetration, that will be based upon a proper demand and supply balance, then I think you will begin to see some improvement in margins, both on battery electric vehicles, in particular, but that, in my view, is not going to happen in 2026. I think it will take longer for that. But I do think you will see improvement in hybrid margins throughout 2026 with a better balance because many people find that a much more attractive powertrain combination than just battery electric vehicles.

Tom, just...

On the sequential, we've been very stable in terms of hybrid electrics as -- relative to total revenues or total unit sales on new roughly 20% a quarter, and that has remained very stable. We have seen a decline in BEVs themselves in favor of ICE engines probably to the extent of 5% to 6% from first quarter to fourth quarter.

The next question comes from Jeff Lick at Stephens.

Mike, as you pointed out in your -- several times in the prepared remarks, obviously, there was a lot of extraordinary items this year in terms of pull forwards and obviously, the compare from last year after the election. I was just wondering if you could just break down the year, thinking of 2025 as the base and now you're -- as you go in, is there any particular call-outs in terms of parts of the year or items that you would kind of call it, hey, this is going to be a particularly more challenging compare or how things get a little easier here or there. Just wondering your perspective there just kind of thinking of an extraordinary year of 2025 is not what you're comparing against?

Yes, I think it's a great question. We obviously saw the dynamics of various different announcements impact in March, April. For example, when the tariffs really became very much front of mind. And then as we approached for those electrified powertrains, the end of incentives, the 2 key points where I think when we think about comps, we just need to be mindful of that. I do think that when I review the year, what I feel we did well was really to navigate those events. Obviously, you feel good when you're in a period of pullback. But when that goes away, you try and make sure that you fill that vacuum as effectively as you can to continue the performance and the momentum in the business.

And I think the demonstration from us and our results over the full year showed that even in a turbulent year, we can continue to perform at a reasonable level and deliver the results to our shareholders, and I'm pleased about that because as we came into 2025, I think none of us had the expectations of how it would actually play out. We obviously think 2026 will be more stable, but I'm -- there's no way I can call that. What I can tell you is that we have a business model that I think is robust, a business model that is disciplined. And what gets thrown at us will not only navigate, but we'll try and find those areas where we can maximize the opportunities that come.

I think this year, we're going to be -- as we have always done, focused on affordability, frankly, we all know what's happened with net transaction prices over the last few years and how that's impacted monthly payments. And it's been a topic of discussion both on our calls, but with other people's calls as well. And I think we're going to be everybody will be very mindful of that and seeing how that may move through the year as really an indicator of whatever strength is in the new retail market and used market as well. So that's kind of my top of mind thoughts in response to your question.

And then just a quick follow-up. I was wondering maybe you could put your OEM hat back on. As we get into the second half of this year, there's going to be a sizable year-over-year increase in lease returns. Just thinking about what that -- how that might impact the dealership business, but also some of these lease returns are going to be deeply underwater, specifically the EV ones. Just wondering how you see that dynamic of how the OEMs will handle that and how that will affect the franchise business?

Well, I would imagine every single OEM has already provided for that frankly, because I don't think it's -- we don't need to get there and it suddenly be a surprise. I think it is very well forecasted, and I think it's very evident from some of the early signs that we are seeing and any OEM should have assessed that in their portfolio and should have provided for it. There have been a number of very large provisions that have been announced. And I'm sure it also would cover forward-looking liabilities such as residual values.

I think increased lease returns into the business is a very, very good thing. I think the important part of that is that they return to market at a correct market price and that the OEMs work with the dealers to try and make sure that, that is a stable price in the marketplace and not transfer some of the liabilities that may be there in terms of actual residual values on to the dealers and ultimately, to some extent, on to consumers. So firstly, in summary, it's well known that there are certain models, certain powertrains where the original residual value estimates are incorrect. I think they're well known. They should be provided for. And I think the dealers will benefit from those lease returns and work with their OEMs to try and get a reasonable fair price for those vehicles in the marketplace. We're certainly looking forward to the benefits that come from improved lease returns in our business.

The next question comes from Daniela Haigian from Morgan Stanley.

So you touched on this a little bit in the prior question. But how are you viewing affordability pressures as it relates to consumer credit availability as we enter this new year. You also mentioned consumer sensitivity to monthly payments. Have you seen any change in consumer behavior in the After-Sales business, whether it's willingness to pay for certain repair orders or otherwise?

Yes. As I said earlier, obviously, it depends how far you want to go back, but people still referring back 6 years now it's a pre-pandemic, but we've seen significant compound growth in monthly payments that we basically been driven by a combination of average transaction price, but also some differences in charge APR. I think there will be some relief in Charge APR as we get into this year, further into this year, particularly towards the back end. But there's no doubt that affordability is front of mind. I think the OEMs are going to look at how they can provide more affordable models in the marketplace, either through decontenting because they are also absorbing, as you know, whatever the residual tariff impact will be on their cost of goods sold as well.

So I think that they're going to try and manage that without significantly impacting net transaction price and maybe with some -- maybe with repackaging. I think as a result of that, that's one of the reasons why we think the new car market, in particular, will probably be down somewhere between 2% and 5% for the year. We anticipate that, that's in our view. We think that we will perform a minimum in line with that, maybe slightly better, but we think that there is pent-up demand that will hold the used car market relatively stable, albeit there may well be some shifting down to slightly lower prices in there.

In terms of consumer behavior, we haven't really seen much behavior in the After-Sales business is very competitive. We have seen over the last few years, and [ Christian ] tracks this religiously with his team, we have seen much, much more attention to the cost and pricing of service and parts within the business. And we know we compete with non-franchise providers of service and parts because our growth really is targeted on improving our penetration in the 3-year-old plus After-Sales market. And to do that, you obviously have to provide great convenience, great service, but you've got to be very competitive on price.

So where we can achieve that without an impact on our margin. And the After-Sales team, I think, did a good job. We talked about the improvement in After-Sales margin. We just got to keep doing that. There is no right to that business. We have to conquest it and to do that, it's the combination of price and service. So they're much, much more price sensitive particularly as the vehicle gets a bit older, and you just have to be aware of it and respond accordingly.

That's helpful. And then digging more into the used market. Have you seen any mix shift? Or do you expect to see your strategy evolve in terms of older or newer within that segment especially as off-lease volumes begin to return later this year. And then you also spoke to an opportunity to acquire more competitively in that market. So any commentary or color there would be helpful.

Yes. So firstly, if you just take our results, I think we performed really well in $40,000-plus vehicles. We saw growth in that segment. And it's a segment that I think we're very strong in. Where we did not perform really to market was in that -- particularly that sub-$20,000 price range. And some of that is because when we think about vehicles we want to sell to our customers, many of those vehicles don't [ feed ] the profile that we want to put in the marketplace. And I think chasing volume of a poor used car is not what we want to do for the brand. But notwithstanding that, we are looking very, very carefully at how we can achieve a slightly different balance in terms of price segments if our used vehicles, which would naturally mean stocking vehicles of a lower-priced band, say, sub for the purpose of this discussion, $30,000. But how do we do that and get the right inventory?

That is a very, very competitive at a very, very competitive marketplace, as you can imagine, and this is where we've got to leverage our scale and our reach. And the way we would do that is our ability to respond to customers very quickly when they're looking for values, our ability to be flexible in terms of how we can go and get those vehicles or have those vehicles dropped off the speed of our payment and the fact that when you sell a vehicle to AutoNation, you're selling it to an investment-grade company, and you get certainty with that. So I think we've got to leverage the infrastructure and the teams we have. So in summary, I think there is mix shifting that we should be aware of, and we should also make sure that we are playing in that, which is, say, sub-$30,000 vehicles, and we've got to leverage our strength to be more successful at acquiring inventory in that area. And that's what Christian team is focused on.

The next question comes from John [indiscernible] at Evercore ISI.

I was hoping you could just answer some of the dig deeper into the used market. The GPUs in the second half were down versus the previous 6 quarters, more at the $1,600 level. Do you think this is more of a demand or a supply issue? And how should we think about that heading into 2026?

So Tom, do you want to answer this, and then I'll add some color or would you like me to answer it?

Happy to do it. I'll build off of what you said earlier. I mean, you're right, John. The fourth quarter was the low mark for the year in terms of use GPU, we were disappointed. We know that some actions that we can take, and we'll get us back to the norms that we had in first and second quarters, we -- eventually, we expect to be in target on a longer-term basis, $2,000 per unit. Some of it is the basics Mike mentioned, acquiring at the right price, reconditioning properly, not excessively and getting the day 1 pricing, correct. The market is tighter. So it's important to move with speed when we're doing acquisitions.

But we do have opportunity. I mean, in the short term, getting the right mix, as Mike mentioned, calibrating brands, price points and the like, aging, managing our funnel, our commercial funnel of opportunities all the way through to closure, the second shorter-term opportunity we have. And as we said, doing reconditioning efficiently and quickly and getting the vehicles out to the floor. Longer term, we're really encouraged by the business. We'll be making some investments in it. We do want to improve the customer journey, as you know. It's become much more virtual and digital, and we're putting that capability in place, and we'll continue to work on what we're going to do, that's an investment we want to make. So in summary, we're paying a lot of attention to the business and know that we'll be driving unit profitability and overall profitability higher.

I think that was a really comprehensive answer. There's not much that I can add. But one thing I think that is going to show us the strength of being a new car retailer. And that is, if you look at sourcing channels, there has been increased competition really across all sourcing channels, not just tradings, We Buy Your Car, obvious the auction, and that's going to continue. We've been able to offset some of that cost pressure through mix changes as well in terms of how we source vehicles. And I think that's something that we have the ability to do because we operate a very, very sizable new car sales organization. And that is a great and often undervalued channel because it is still the best channel to source excellent used car vehicles. And I think it will play -- I think there will be more competition, and I think that will be part -- that channel will partially offset that partially, not completely because you also get price pressure in that channel, which is knock on price pressure for more visible channels, but it will partially offset some of that price pressure. And I think Tom answered the rest really well.

Okay. Great. That's really good answer. And then on new GPUs, can you give us a sense of what you're seeing in the marketplace? You mentioned that you're seeing sort of continued stabilization and I think the market is really very encouraged if we see that continue.

Yes. Thanks, John. I mean the third quarter to fourth quarter, Mike talked through the improvement in the overall, the weighted GPU, notwithstanding the pressure we've got on OEM dealer incentives. We're encouraged as we built our plan for 2026 that the reactions that we can take to continue that stabilization so far. So certainly, we haven't closed to January we expect to see stable December to January. So off to a good start, I'd say on that front, it takes discipline.

Apologies, please stand by.

Adam, can you hear us now?

We can hear you loud and clear.

Are we live with all of our guests?

Yes, we're good.

Sorry about that guys. I don't know what happened from a technology point of view, but I will just repeat what I said. I was referencing Rajat question right at the very beginning about the balances of puts and takes in our business. And I think that's an important one to know as we get into this year. I think what we're trying to build is obviously, a growing After-Sales base, a pool of customers that we can continue to serve and drive up our loyalty. And that means that we want to make sure that we don't lose pace with the marketplace. And to do that, we obviously have to be competitive to make sure that we stay at a minimum in line with market and we do try and balance it where we can balance it. So as that market develops and we see what happens, there may well be more or less pressure on margins. But as Tom said, we have seen stability from third quarter to fourth quarter. And our expectation, particularly in H1 is that we think, to a large extent, that will continue in '26.

Next question comes from Colin Langan from Wells Fargo.

Just want to ask on After-Sales growth was 6% on a same-store basis, which I think historically, it's go back many years, it was 3% or 4%. I mean should we think about staying at the higher end of sort of mid-single? Or do you think there's just some maybe good news this year, some catch-up this year from some of the issues last year. And then also on the margin there, margins also have been actually quite strong, much higher than they were 5 years ago. Is that sustainable? Or does that moderate a little bit into '26?

So my view on that. We talked about the competitive nature of After-Sales and the fact that what we want to do is to conquest in particular, vehicle parker 3-year-old vehicles. I think what that means is that hourly rate, obviously needs to be competitive. So the fact that by its very nature says that we -- the margins that we delivered are going to be constrained to some extent, albeit still incredibly healthy, and we're very pleased with them. We do think that there's opportunity for us with different products that we can offer and different ways of communicating with the customer that we can provide more work on a per RO basis. That doesn't necessarily drive up margin per se, but it does help us a lot with regard to the productivity that we have in our business. So there may be some incremental opportunity on the margin side, but that's not what we bake into our plans. What we baked into our plans is more sustainable growth, not margin growth per se, Tom?

Yes. I guess the other thing is we have plenty of capacity to support more repair orders, physical capacity. And as Mike said, our -- we've been able to grow our technician workforce. But if we can continue that with minimal additional investment. We have the plant in place to support more business, which itself will drive higher margin rates as well, better absorption. So I think we're positioned with -- to sustain the trends we've had. And we'll continue to -- Christian and the team to continue to manage this very closely.

Yes. I think the other thing that you mentioned earlier in your commentary that you just remind calling of between Christian and [ Jean Luca ], we have, I think, been successful at growing our wholesale business. And wholesale, as we know, is much, much more competitive and the margin is dilutive. So I think that is, for us, a big area, again, of opportunity of growth, and that will have from a headline perspective, downward pressure on the margin. So when we talk about aftersales margin, I think we need to be clear that you may see a moderation in the margin that we report and that may well be a mix-driven thing. It may not be margin per se through our workshops. So Colin, please just bear that in mind when you're thinking about the future and what Tom and I just said.

Got it. And just secondly, any thoughts on SG&A. I think in the past, you've talked about 66% to 67% being the right target. Is that still sort of a long-term target and any sort of actions that might help reduce costs into next year and that gets you closer to 66%?

Yes. Good question, Colin. Yes, first of all, reaffirm 66% to 67% is our intended target. We were a bit higher in the fourth quarter and probably will be a little bit higher as we go forward here at least in the early part of the year, we've made some upfront investments on advertising. And it's really to -- in the upper funnel, which for us means creating demand as opposed to lower funnel where you're actually trying to capitalize on known demand. And we feel like we've got some opportunity to drive better upper funnel activity. So that's requiring a little bit of a incremental investment here.

And as we also talked about our lower pool, we made some conscious investments in. It helps you on the used vehicle side when they come out of the pool. So and we've talked about a tight market, but that gives us a little bit of a relief valve in terms of supply. But importantly, it's also helping us support the service business in its totality. So apart from those 2 incremental things, I expect us to continue to drive towards the lower end of that range we talked about over the long term. And we've got a number of different initiatives in place.

As you know, the biggest component of SG&A is compensation. And it's important for us to have good productivity when it comes to both sales and service. We feel like we've got excellent training programs and standard procedures that we've got in the cycle thanks to drive productivity and comp and benefits. I talked about advertising and the big category is just other SG&A. We've got a number of good initiatives to manage through some of these inflationary things that we're seeing like energy costs as an example, we're trying to standardize our usage model around the utilities to offset some of that. So it's an effort that we're heavily focused on and just reiterating where we are in terms of the range. Hopefully, that helps, Colin.

We'll now hand back to the management team for any closing comments.

Yes. Thanks, Adam. Again, thank you very much for joining the call today and all of your questions. And just finally, as I mentioned earlier, I just want to thank the AutoNation team for what we delivered. And as usual, then you all know this, that's behind us now. We've got '26 out of us, so let's get to it.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

All right. Moving along -- and another -- excuse me, another pivot from a company perspective, three very different companies to start the day. AutoNation is the second largest dealership group in the U.S. with over 320 new vehicle franchises in over 240 stores. It has been one of the most remarkable capital allocation stories, at least, of that I've seen. The company has just under 37 million shares of around $200 at print last week, but $7.4 billion equity cap, $3.7 billion net debt, $11 billion to enterprise value. So it's 37 million shares. That's down from a peak of 458 million shares in 1999. So over the course of the last 7 -- over the course of the last 27 years, 26 years, just a terrific repurchaser of their own shares.

We're delighted to have Jeff Butler, President of AutoNation Finance; and Derek Fiebig, VP of Investor Relations. Derek has been with us for really since he's been back at AutoNation, but a number of years; and Jeff helped kick off the company's new internal finance organization a couple of years ago. So we're glad to have them. We'll get right into some Q&A.

Jeff, can you just -- at least start with an overview of AutoNation Finance and how AutoNation decided to get into the loan origination business after being more of a third-party -- third-party agency-related business for a while?

Absolutely. Good morning, first of all, and thanks for having me. The transition of the previous CEO and the incoming CEO, present CEO, Mike Manley, who had come from Stellantis for a long period of time. He saw the value in having the ability to provide financing for the customer as part of what we refer to as our customer journey. Creates an attachment point with the customer, average loan stays on the books, call it, 2.5 years, and it's a way for us to be able to market to that customer, continue to inform the customer products and services that the company offers. As you highlighted, the retail space. We also have over 50 collision centers. We have a in U.S.A., which are a stand-alone used car retail location. So to be able to tie all of that together. The FinCo was considered to be a strategic add. And in '22, company out of Southern California called CIP Financial had been identified and negotiated the sale of CIG to AutoNation, and we have since rebranded, AutoNation Finance. CIG had been in existence for over 30 years, singly owned by one individual. I led the company operations on a day-to-day basis and have obviously legacy CIG. Prior to that, I actually worked at AutoNation for 5 years. So I had some understanding of the company and had done business with them throughout my career on the lending side.

So it just seemed a natural synergy was created with that acquisition. CIG, again, over 35 years in business, largely a subprime lender through an independent network of dealerships -- used car dealerships. Since the sale and the rebrand, we've pivoted away from subprime and largely originate prime business. The infrastructure, the leadership team had come back together from previous companies that I had been involved with. So we had a level of sophistication that probably was a little bit different from a company the size of CIG at the time of sale, $300 million book. We since now have crossed over $2 billion in originations in the 3 years. Since we've closed primarily or exclusively with our dealerships, we no longer offer financing for any dealerships outside of the AutoNation network, so it's a closed loop in that respect. And have sold off a good portion of the book, all but a handful of loans have been sold from the subprime third-party originations that CIG brought with it.

And just so you can better educate the audience, the AutoNation Finance business how much of that breaks down versus with used? And how do you ever get in a situation where you're competing with captives?

So that has been a strategic discussion all the way. There's no intention for us to compete against the OEM captive. They bring value and relationships and the ability on a host of different fronts from a financial perspective that absolutely are incentives for our stores to continue to do business with those OEM captives. So to answer the initial question, about 85% of the business that we do are our used cars, and the 15% is largely displacing some of the third-party lenders that have legacy been a part of the AutoNation lender network that you alluded to earlier. So the allies, the [ cap ones ], the lenders like that is where we've captured that 15%.

Understood. So it gives us a nice foundation to discuss really the health of the consumer through your loan book. So maybe talk about on the used side, in particular, what you're seeing both in the prime and near prime areas and then potentially whatever legacy subprime loans you have to understand what's really going on from a consumer stress standpoint?

It's been a unique journey over the last 3 years. Obviously, for 10 years, had worked primarily in subprime with CIG. So you definitely see a split happening over the course of the last couple of years -- for the subprime customer has continued to face more and more pressure as things have gotten more expensive to inflation, whether it's consumer goods, product staples, whatever kind of metric you want to use, they've been stretched. I've always believed that the subprime customer lives in some level of distress regardless of economic cycles. But when basic everyday things are more expensive, that obviously puts additional pressure that hadn't been faced over the last several years prior to that.

The prime customer is still very much healthy. There's still a lot of pent-up demand for sales, and we see that through the performance. When we sold, obviously, we had a subprime book that immediately, the 22 and 23 vintages across the industry from a subprime perspective weren't performing well, so to be able to divest for them. It was a huge relief. My joke internally is that I sleep a lot better at 700 than I did 600 FICO. But we've seen in that immediate time frame after our close, we did originate a small number of loans in the context of the book today that had been aligned with subprime. So we still have some of the AutoNation assets after the initial close, and we do see a difference in performance on those loans. Again, a very small percentage of our book today. Weighted average FICO on the book in our Qs and Ks, you can see is just south of 690, and that number continues to grow with every quarter of originations.

Well, you not participate at all in new subprime financing, just not an area you want to be -- in general?

My view on subprime today is my view on leasing. I want no parts of it.

Okay. Understood. So with your history in subprime, we have seen a couple of bankruptcies in -- really in the last month or two, whether it's Tricolor or [ Prime Alan ], how much of being a subprime lender is having the experience to understand the risk that comes with the book? Or is it just -- are you're looking at land mines no matter which way you cut it?

I think the first thing is obviously specific to Tricolor aside from the alleged out and out fraud, which obviously is not a normal course of business for anyone. I think the key to subprime is remaining diligent to the underwriting, and that was one of the things in the previous iteration on the predecessor of AN Finance that we were very -- always top of mind. We updated our models every year. We looked at performance. We made proactive adjustments based on where we thought the market was potentially going, but we also are very diligent in our underwriting. And it was the reason why we had a $300 million book and not a $2 billion book is because we were very content with taking the offerings that were made available to us that align with ROA returns and a diligent pattern of growth. We were never a huge proponent of just going out and gaining market share. And I think that is where subprime as an industry, typically has the headwinds that are more self-inflicted is that you start to chase a volume number and you sacrifice the credit underwriting. And ultimately, when you're in a good cycle, you can outperform that because the consumer is healthy. But as I alluded to earlier, I made mention of earlier, any time additional pressure is introduced to that consumer, it's going to show up in performance, whether it's used car values moderating back to pre-pandemic levels and the repossession is obviously having larger severity of losses on them now or the consumer, obviously, just being pressed and a little bit more constrained than he and she had been previous to the last couple of years.

So it's a $2 billion book up from $300 million. Talk about funding availability and cost. And any constraints on securitization or warehouse lines?

I smile because being a part of an IG parent, obviously, puts us in a very enviable position compared to some of our peers. So as we've moved away from subprime, as we've continued to demonstrate the ability to originate a consistent quarter-over-quarter growth in credit quality, the warehouse lenders that we have, have continued to improve the execution of our warehouse facility. So we've continued to moderate that attachment point in the warehouse facility is up. And then we've issued our first ABS deal several months ago, that attached that, call it, 98% advance rate. So a combination of the improved execution in the warehouse facilities, the availability in the ABS market, it does not -- it puts us in a position to be able -- without requiring a lot of capital from the parent. And we'll continue to moderate or monitor the ABS market, we think moving into '26 is still a very healthy environment. And what we've seen in the market there are other avenues that we could deploy with strategic partners if we wanted to execute whole loan sale through private partnerships with some of the entities that are out there. We've had those conversations. And obviously, have been reached out to for some of the other partners that execute with some of the other large automotive retailers that also have finance companies that we could obviously leverage and deploy that if we wanted to.

I guess, Derek and Jeff, with your AutoNation U.S.A. stores -- that used-only stores, how much has the availability of AutoNation Finance helped drive unit growth there relative to where you were before?

Yes. I think, Jeff, you can weight in on this, too. The real issue on the used side has been supply vehicles. And I think we've done a really nice job of acquiring vehicles internally. We get about 90% of our vehicles internally sourced between trade-ins. We'll buy your car where that's just us direct to the consumer, where we'll purchase about 100,000 cars or so a year there. It has helped. And the good thing about the AN USA is it does give us an opportunity to play to see what different things we can do on AN Finance side of things and maybe run some different plays there in terms of can we get a little more penetration on the lending side. But we've had a deep relationship with lenders. Jeff mentioned that he'd interacted with us for a number of years when he was at CIG, and we brought those lenders to the AN USA stores as well.

I just got a note -- just for the Zoom, if you can bring the microphone a little closer. Let's talk about the used market now. We had heard availability of off-lease vehicles as being a constraint yesterday. Clearly, the consumer on the use side can be challenged. What are your current thoughts on just the -- and we've certainly seen CarMax having issues relative to Carvana from a growth perspective. What are your thoughts on the current state of the used market?

I think the used market is still relatively healthy. Derek mentioned that we source 90% of our cars internally. We use a metric that Mike talks about in our quarterly calls about holding our stores accountable on a one-to-one ratio for every new car we sell, we sell the used car. The vast majority of the transactions on our new car purchases come with a trade-in. So it gives us the perfect opportunity to acquire used car inventory without having to compete at auction, which obviously has a higher cost associated with it. So with that 90% ratio, we still feel very comfortable about being able to source used cars. We'll buy your car, which is our public-facing marketing does a really great job of allowing us to talk to consumers who are in this market to sell a car without necessarily looking to buy one. And through those avenues, again, we continue to see a healthy environment.

There is a difference, obviously, at different price points. I think sub-$30,000, that's a little bit more of a competitive arena than the above 30,000 used cars. I think that's where a lot of the conversation has largely been centered on that inexpensive used car does create a different environment than the above 30,000.

Go ahead, Brian.

I wanted to just follow up on Brian's question on the used car side. So if you look at the landscape right now, where you're obviously a player, there seems to be this divergence among performance on some of the companies. And -- so I guess the easy question is kind of -- is there any thought of what's going on out there. I mean if I make it more complex. I mean, you look at like a Carvana on the online-only plays, growing rapidly, seemingly taking market share, other more traditional companies seem to be struggling. So I guess what is -- what do you think is going on out there? And is there just this growing awareness on the part of the consumer to buy cars -- buy preowned cars now online?

I think that is an emerging market for sure. And I think companies that have paid attention to what the example using Carvana that you just made reference to, companies that have paid attention obviously had to make a decision how we can incorporate some of that technology and that flexibility to be able to solve for that. There's still the vast majority of the consumer. When we step back and think about it outside of a home, the vehicle is typically going to be the second largest purchase that you make in your lifetime. And there's still the vast majority of the consumer base that wants to be able to touch that car drive it and get comfortable that it is what he or she is looking for. But that -- if we just looked at it from that perspective without an open mind, to the possibility of the consumer is changing. I think that would be naive and probably set us up for failure. So we've continued to look at that. We continue to deploy technology. One of the things that Derek just alluded to, that we get to use our AN USA stores is kind of a testing ground. So we're in the process of doing some of those things now to be able to solve for what I'll refer to as an omnichannel experience where you purchase a car completely online, and solve for it, including the finance company or the financing. So the FinCo obviously gives us a strategic advantage that only one of the other big public groups has and obviously, we'll continue to solve for that. But I do think, especially the younger consumer is much more comfortable buying that car online, and we have to understand that and have -- had those conversations and made decisions to align ourselves to be more competitive against the likes of a Carvana.

Going to, I guess, more -- these are last couple of questions, more for Derek. Just on the new side, we've seen electric vehicle sales go from 8% to a real pull forward of 10% or so in September, now down to a pretty dire situation for some of the OEMs coming out and with the SAAR for the last month. How are you positioning yourself for this new demand reality for EVs?

Yes. I think if you just look at what we did, Brian, in the third quarter, we saw higher sales, and we were able to bring our inventory down. We've been running about 7% or so overall inventory. We got that down below 4% for BEVs. So we sold a lot of them in September and throughout the third quarter. Obviously, sales were a lot lower here in October as the IRA money went away. But it's one of those things. There's going to be an underlying market for BEV vehicles. It's going to be a lot lower than it had been in the last several months.

$50,000 average transaction price broadly in the marketplace. It's maybe a question for Jeff, too. Affordability, even on the new side, it continues to defy my own expectations. Talk about your thoughts on the consumer -- the new vehicle consumer and their ability to pay $750 a month plus or $780 for a new vehicle.

I think the dynamic of the consumer and the inflection with our country is really what drives that. And you think about outside of the New York City Metro area, there really is no other place that you can have public transportation be a real solution. So it just increases the necessity of the car. And I think that ultimately, with respect to the motivation or the impetus for having to have a car ultimately will drive the consumer acceptance of where the pricing goes. The other part of it is consumer-driven as well in that every article you ever -- you read about it is more convenience, more technology, more comfort, more optionality is what the consumer is telling the OEMs, they want in the vehicle. So whether it's started out as years ago, and I'm going to age myself with this with CD players. We've now moved to WiFi. We've now moved to real-time updates, the connectivity to the car and being able to communicate with the OEM and understand how that interacts with service. Those are all things that the consumer has said that he or she wants, and that obviously comes with a price. Specific to the environment we're in, we'll ultimately see how tariffs ultimately play out and drive the additional cost. But I think that's also where we see the divergence to use your word in subprime and prime. I mean the prime consumer, much healthier financially, does a better job of savings, comes to the table with more cash down, so they're more invested in the vehicle and all of those things contribute to good performance.

Jeff, just go back one giant steps to go forward. AutoNation bid on the company in the U.K. As you were looking at the financing in the U.K. Kind of give us a quick one on one just because it applies to other companies at the moment. But outside the U.K., how would you do that -- how would you do the business there? And how would you do it in the EU?

Well, we did obviously look at the deal outside of the U.S. and the U.K. We hadn't gotten far enough along that we folded in the assessment of what the FinCo, if anything would do. Obviously, there's differences in markets. I did work for a company in a previous part of my career that finance cars in Canada. And ultimately, it is a different market. We'd have to learn it, quite honestly, Mr. Gabelli. I don't -- I've never financed cars outside of the country. So it would be something that we would have to really tackle dig into. And the only thing I'll mention there is that very much like the journey that we've been on the last 3 years, it would be something that we would do ingrain ourselves slow, diligently learn the market, just the same way we've done with the creation of AutoNation Finance, and it's the reason why to go back, we haven't pushed AN USA forward even more is that we started it wanted to get performance history and then ultimately understand where we can moderate and fuel those sales, but we would do the same thing in that scenario.

Derek, on the parts and service business, Jeff just brought up a point about evolution of vehicles and connectivity. Talk about your ability as a dealer to stay connected to the customer longer to drive that consumer back to you for parts and service work where they otherwise might have gone to an independent aftermarket service provider for some reason.

I think the most important thing is making it convenient for the consumer and making it a priority. So one of the things Mike Manley did is he brought in Christian Treiber, who run -- he's President of our aftersales business. And you want to make sure it's convenient from a scheduling standpoint that when they come in, they're received well and they see the value in terms of what you're providing them. You mentioned how the average price of the vehicle has gone up. Well, that's a bigger investment. So we're going to try to sell them CFS products or F&I as most people would call it, that will protect their vehicle and lower their overall cost to the vehicle and bring them back to our dealership to service them. If you look at what we've done through 9 months of the year, we've already passed the amount of gross profit that we had pre-pandemic. So it's a growing portion of our business. Obviously, you've seen some inflation there from price on parts as well as labor. But the complexity of vehicles is significantly greater. And there's just -- for some of these things, it really isn't a defined third-party independent aftermarket yet for some of these things, and we want to keep people coming back and just recapture them more frequently.

You bring up a point I wanted to bring back to Jeff. So just talk about the trade-off in F&I and finance and insurance, the long-term trade-off between now originating the loan versus selling the F&I product right off the BEV and how that starts to work itself out over time?

Derek reminds me every quarter the headwind I create.

Yes, the near term.

Yes, the near-term headwinds. Over the life, we talk about it often. I mentioned it earlier, the weighted average life is 2.5 years on the loan that we originate. So when you look at that, first, the upfront fee we get from a third party with respect to the financing piece of the F&I, a loan that we keep internally within our buy box is 2.5x more profitable over the life of that loan than if we were to sell it to a third party at the time of sale, and that is long-term value creation for the company. But as I mentioned earlier, it also creates an opportunity as an additional touch point through the servicing of that loan with the customer to continue to leverage other products and services. So we think it has a twofold benefit, long-term value creation, but also the connectivity through the other parts of our business is to be able to retain that customer.

Derek mentioned CFS or F&I, 46% of the time, our customers are leaving, they're leaving with a service contract that we've sold them. So between servicing the loan on a day-to-day basis on the AN Finance side, nearly half of our customers receiving a service contract that incentivizes them to try and we retain their servicing, we think holistically, it creates a relationship that is a benefit to the customer and to the company in the long term.

Staying with parts and service. We have seen OEMs talk about wanting to increase their touch points with the consumer. And it sounds an awful lot like at the expense of the dealer, whether it's through direct sales or otherwise. Talk about that kind of push and pull and the value that you all clearly provide that the OEMs clearly shouldn't be trying to take away.

Yes, if you look at it at our dealerships, we've got roughly 250 dealerships across the U.S. Our Bay utilization is probably 55% or so. So we've been gated by the number of technicians that we have. And it's great to say you want to do it, but you need to have the infrastructure set up to meet the consumer where they are. There are some more applications where some things can happen over the year. But some of those are pretty complex and would take a lot longer to run so that you end up putting us through at the dealership anyways. But it's one of the things that we're looking at, but it's -- we help them sell a heck of a lot of parts and make a lot of money on that, too. So it's a nice balance there.

And warranty continues to be a source of growth. Maybe talk about that and the types of claims that you're seeing now that aren't just the over-the-air software updates relative to maybe what they were?

Yes. It's -- if you look, there was -- Brian, my background is the parts supply as well as the OEM side before I came here. And the complexity of launch is just tremendous to what you have. And the OEMs had numerous launches with various powertrains. If you're doing a BEV as well as an ICE engine simultaneously, there's just more things that can go wrong. And we've seen that happen where warranty claims have gone up. For us, interestingly enough, in the third quarter, warranty was still up, but not as much. So we actually led with customer pay, which was up 10% for us. So we like to see that. Things need to be fixed. Sometimes it's an engine problem, but there's been a lot of electronic problems and things like that, that have happened, and we work with the consumer -- with the customer, with the OEM and the customer as well to get things fixed quickly. And like Tony mentioned yesterday, you need to know what the parts are and what the solution is, but continue to work through it, and it's -- we'll see where things go from here.

Yes. New gross profit per unit outside of the third quarter, which was a little bit unique with the EV sales. We've been talking here for 4 years about expectation -- street expectations about gross per unit versus reality. Talk about where you see the market trending there and relative to overall expectations?

Yes. If you look, it's come down. It's on a percentage basis of the ASP, it's about where it was pre-pandemic. And obviously, the third quarter was impacted adversely with what happened with BEVs as well as we had a lot more domestic. We break that number out. It's a lot lower GPU for us there. But it seems like we're a lot closer to where bottom is going to be, and we'll see. I should get a pickup here in the fourth quarter with the premium luxury sales being a little bit stronger, which you typically see at the holiday season. Importantly, though, if you look at our CFS number, even though Jeff's taken about $130 a copy at AN Finance on that, that number is up like $800 or $900 from where it was. And everyone's focused on the -- just the new margin, but we're picking up quite a bit there on CFS.

And one in the back there. We have time for one more.

I don't know if the right word is, but what are you seeing in terms of like fill rates with all the Ford with aluminum, -- you got the Nexperia chip crisis? Are you having difficulty getting shipments on time from the OEMs? And is it potentially grinding towards a tighter inventory environment, at least in the short term here, which may set the stage for acceptance of price because we know what happened during COVID when supply got tight and the OEMs have been eating tariffs as it stands right now. They're just kind of like is it an opportunity for them to start pushing price in the mean term?

Yes. So the Ford situation, if you look at the typical situation where you have for pickup trucks, those are you're typically about 100 days supply just because there's so many different product variants for that. We think we'll have enough inventory. They've got multiple sources for suppliers as well for that. So it's going to be bigger for the suppliers and for Ford than it will be for us on the dealer side of things. It looks like the chip thing is probably going to be resolved. And -- but if you look at our overall inventory, industry inventories, I just saw the numbers from yesterday, probably 2.8 million units. That's down from 4 million pre-pandemic. So that sets up well for us. If you've got more limited supply out there, it helps from a margin standpoint.

Great. Jeff, Derek, thank you very much. We're got to move it along. My apologies to you for only book in 30 minutes. We'll get you for 45 next year maybe. But thank you very much, everybody.

Hello, and welcome to the AutoNation, Inc. Q3 Earnings Call. My name is Harry, and I'll be your operator today. [Operator Instructions] I will now hand the conference over to Derek Fiebig, VP of Investor Relations. Please go ahead.

Thanks, Harry, and good morning, everyone. Welcome to AutoNation's Third Quarter 2025 Conference Call. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we will open up the call to questions.

Before beginning, I'd like to remind that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued today and in our filings with the SEC. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our materials and on our website at investors.autonation.com.

With that, I'll turn the call over to Mike.

Yes. Thank you, Derek. Good morning, everybody. Thank you for joining us today. And as usual, I'm going to start on the third slide. Firstly, we were very pleased to report our strong third quarter. We delivered 25% adjusted EPS growth, generated strong cash flow and deployed significant capital for share repurchases and acquisitions while maintaining our leverage at the lower half of our targeted range. Overall market conditions for New and Used Vehicles, we think are reasonable and holding up well, industry inventory of about 2.6 million units remains well below the 4 million units which was the norm ahead of the pandemic and units are down about 6% year-to-date.

I think OEMs have been adding some production, but overall, inventory levels are in good shape. New vehicle sales remained below historical standards with the year-to-date light vehicle [indiscernible] averaging 16.3 million units and the retails are averaging around 13.6. Our industry sales are up 5% year-to-date, with about half of that increase attributable to a strong performance in March and April. But we think comparisons will probably get tougher in the fourth quarter as we [indiscernible] of $16.7 million and $13.9 million, respectively.

The tariff story continues to evolve. Most of the negotiations with major trade partners are nearing completion, and the effects on the auto industry, I think, are becoming clearer. The impact on the OEM profitability is significant and well chronicled but they're clearly not standing still. There will be manufacturing relocations and other actions to drive a more efficient tariff supply chain and the knock on impacts of the dealers and consumers are beginning to play out as well. We expect decontenting and reductions in trim levels, additional fees and moderation in incentives and marketing spend.

Now in the third quarter, we've already started to experience a reduction in certain types of incentive spending, which I will discuss a little bit more shortly. Our same-store sales of New Vehicles increased 4.5%, largely in line with the overall industry and unit growth was led by our domestic segment, which increased 11% from a year ago on a same-store basis. Import brand also increased and Premium Luxury was slightly down. With the expiration of government incentives for EVs on September 30, there was a significant increase in sales of Hybrid Vehicles, which were up 25% from a year ago and [indiscernible], which increased 40%. With the incentive exploration in mind, we reduced our BEV inventory by approximately 55% from year-end to around 1,550 units or less than 20 days of supplier quarter end. New Vehicle profitability moderated in the quarter as one might have expected with the mix of ourselves being more heavily weighted to bad and domestic vehicles. And as I mentioned, our [indiscernible] incentive spending played a part in here as well.

[indiscernible], it is worth noting over the course of the quarter, we did see an improvement in unit profitability with September closing out more strongly than the average. Used Vehicle gross profit increased 3%, which was 2% on a same-store basis year-over-year as we benefited from stronger unit sales and improved performance in wholesale. Our unit sales increased 4% overall and more than 2% on a same-store basis, outpacing the industry. We had strong performances for the over $40,000 price point. In terms of acquisition, the team did a nice job acquiring vehicles through trade-ins and directly from consumers to our We'll Buy Your Car effort and these channels accounted for around 90% of the vehicles acquired in the quarter. We ended September with over 27,000 Used Vehicles and inventory, which has positioned us well for the fourth quarter of this year.

Customer Financial Services gross profit was the highest we had ever reported in a quarter increasing 12% from a year ago. We continue to attach more than 2 products per vehicle with extended service contracts continuing to be the top offering which is, of course, fantastic for our future After-Sales revenue and customer retention. Our finance penetration was higher from a year ago with around 3/4 of units [indiscernible] with financing and we benefited from improved margins on vehicle service contracts. The momentum in After-Sales continued. We delivered record [indiscernible] revenue and gross profit. Total gross profit increased by 7%. The total gross profit margins expanded by 100 basis points from a year ago. Our growth was led by customer pay, which reflects our ongoing customer retention efforts. We continue to focus on our technician workforce by recruiting, retaining and developing our technicians. And I think we're continuing to see positive signs here. Turnover has decreased and franchise technician hand count increased 4% from a year ago on a same-store basis.

Now the strong momentum at AN Finance continued originations have nearly doubled from the year prior, and we continue to scale the business with the portfolio now exceeding more than $2 billion. The portfolio and balance continues to perform in line with our expectations from a delinquency and a loss perspective and the business's base cost to remain reasonably stable, enabling good profit scaling as the portfolio grows.

Our Q3 performance, combined with our share repurchases, helped us to grow our adjusted EPS by 25% from a year ago. This was the third consecutive year-over-year increase in adjusted EPS. Cash flow for the quarter and year-to-date was also strong. On a year-to-date basis, our adjusted free cash flow is 1.7x that for 2024, and Tom will talk a little bit more about that after me. Our investment-grade credit rating and balance sheet, as you know, is really anchored around a low net capital, high free cash flow model, enabled us to once again deploy significant capital in the quarter for both share repurchases and acquisitions to improve our franchise density and portfolio in existing markets. We've expanded our presence in 2 key markets, including the acquisition of a [ Ford and Matastore ] in Denver as well as an [ Audi ] in the Mercedes store in Chicago.

All in all, I think, really good results and good progress from the automation team. And as usual, it is their results that have delivered this. So thank you all, many of you listen. At that time, I'm going to hand it over to you to take everyone through the results in more detail.

All right. Great. Thanks, Mike. I'm turning to Slide 4 to discuss our third quarter P&L. Our total revenue for the quarter was $7 billion an increase of 7% a year ago on both total store and same-store basis. We achieved attractive same-store growth across the entire business, including double-digit growth in Customer Financial Services. 7% increase in same-store new vehicle revenue, which reflects new unit volumes across all 3 segments and After-Sales growth of 6%. Gross.

Profit of $1.2 billion increased by 5% from a year ago, reflecting same-store CFS growth of 11%, After-Sales growth of 7% and Used Vehicle growth of 2%. The growth was offset in part by a decline in New Vehicle gross profit. Adjusted SG&A of 67.4% of gross profit for the quarter was in line with a year ago. For the year-to-date, we are at 67% within our targeted 66% to 67% range. Adjusted operating income increased by 9% and margin of 4.9% increased modestly from a year ago, reflecting excellent growth and performance in CFS and After-Sales, offset by moderation in new vehicle gross profit -- our unit profit. As a reminder, CFS and After-Sales comprise close to 80% of our gross profit together comprised a gross margin rate of more than 60% of revenue.

Below the operating line, floor plan expense decreased by $13 million from a year ago as average rates were down approximately 100 basis points, combined with lower average outstanding borrowings. Non-vehicle interest expense was approximately flat from a year ago. As a reminder, we reflect floor plan assistance received from OEMs in gross margin. This assistance totaled $34 million compared with $38 million a year ago. Net of these OEMs have net new vehicle floor plan expense totaled $12 million, down from $20 million a year ago. In all, this resulted in an adjusted net income of $191 million compared to $162 million a year ago, an increase of 18%.

Total shares repurchased over the 12 months decreased our average shares outstanding year-over-year by 5% to 38.1 million shares, benefiting our adjusted EPS, of course, which was $5.01 for the quarter, an increase of nearly $1 or 25% from a year ago. Adjusted EPS for the quarter excludes the $40 million in business interruption insurance recoveries related to last year's CDK business incident. Also the year-over-year comparison of adjusted EPS benefited from non-reccurence of the residual effects of the CDK business incident that adversely impacted the third quarter last year by approximately $0.21.

Slide 5 provides some more color on New Vehicle. New Vehicle Unit volumes increased 5% from a year ago in total store, on a total store basis and 4% on a same-store basis. Total store unit sales were led by domestic vehicles, which grew approximately 12% in the quarter, followed by import growth at 4%. Premium Luxury was relatively flat year-over-year. By powertrain, Hybrid New Vehicle unit sales representing 20% of our volume, were up nearly 25% from the third quarter of a year ago. BEV New Vehicle sales representing nearly 10% of our volume, we're also up more than 40% year-over-year and on a sequential basis.

Our New Vehicle unit profitability averaged approximately $2,300 for the quarter, down approximately 500 from a year ago for the reasons Mike mentioned. New Vehicle inventory amounted to 47 days of supply, down 5 days from the third quarter of last year and down from 2 days or down from 2 days at the end of June. The strong BEV sales during the quarter reduced battery electric inventory close to 70% from a year ago to less than 1 month of supply. For the fourth quarter, we expect the mix of new unit sales to improve, including less Battery Electric Vehicles and a higher percentage of Premium Luxury, reflecting seasonal strength during the holiday season.

Turning to Slide 6. Used Vehicle retail sales improved on a total store basis by 4%. Average retail prices were up about 4%. Used Vehicle retail unit profitability of [ 14.89 ] was lower than a year ago, reflecting higher acquisition costs, but remains in line with historical levels. Total used gross profit increased 3% from a year ago, reflecting increased units and stronger wholesale performance. We remain focused on optimizing vehicle acquisition, reconditioning, inventory velocity and pricing.

Overall, industry supply of Used Vehicles remains tight. We continue to be competitive in securing our vehicle supply from our retail operations, including trade-ins, We'll Buy Your Car, services loaner conversions and lease returns. We source more than 90% of our vehicles from these channels and are encouraged by the level and quality of our Used Vehicle inventories heading into the fourth quarter of the year.

Turning to Slide 7. Customer Financial Services. Momentum continues to be strong for CFS. Gross profit increased 12% on a total store basis. Approximately 2/3 of the increase was from higher unit profitability. The rest was volume related. The results reflect improved margins on vehicle service contracts, consistent product attachment and higher penetration of finance products. The continued unit profitability performance in CFS is even more impressive considering the growth of AN Finance which, while superior long-term profitability dilutes our CFS PVR unit profitability. In fact, without the AN Finance dilution, our CFS per unit profitability would increase by an additional $30 from a year ago.

Slide 8 provides an update on AN Finance, which is our captive finance company. As expected, the profitability of this portfolio is gaining meaningful traction as the portfolio matures and we get leverage on the fixed cost structure from the outstanding portfolio growth. Year-to-date, you can see that we improved from a $10 million operating loss in 2024 to a $4 million operating profit in 2025. During the third quarter, we again originated more than $400 million in loans bringing the year-to-date originations to more than $1.3 billion, nearly double our originations from last year. We had approximately $160 million in customer repayments in the quarter. Portfolio has more than doubled since last year is now greater than $2 billion. The quality of the portfolio continues to be credit and performance metrics are improving with average FICO scores. Our originations of [ $6.97 ] year-to-date compared to [ 6.74 ] a year ago.

Delinquency rates at quarter end of 2.4% or solid and losses are stable as a percentage of the portfolio. We do expect delinquency rates to continue to normalize as the portfolio continues toward full maturity with delinquency rates migrating to the 3%-ish range. Our loss reserving methodology incorporates this expectation. The nonrecourse debt funded status of the portfolio also continued to improve as we have improved advance rates for our warehouse facilities and are benefiting from higher nonrecourse debt funding levels from our ABS issuance in the second quarter. Just going to 86% debt tonnage status that you can see on the page, released over $100 million of equity funding back to AutoNation. As we become a more regular ABS security this year, we expect to further increase the nonrecourse debt funding proportion of the portfolio, and we expect to carry out a second ABS transaction before the end of the first quarter 2026.

Closing off [indiscernible] finance, the businesses attractive offerings are driving strong customer takeup, and we continue to expect attractive ROEs in the business driven by profitability growth and the shrinking equity.

Moving to Slide 9, After-Sales. Representing nearly 1/2 of our gross profit, continued its revenue and margin momentum and gross profit posted a third quarter record for AutoNation. Same-store revenue increased 6% and gross profit was up 7% led by customer pay, which increased 10%. Internal and warranty were also higher than prior year, reflecting higher value repair orders along with higher overall repair orders. Our total store gross margin increased 100 basis points to 48.7% of revenue. We remain focused on hiring, developing and retaining our technicians. And as Mike mentioned, these efforts helped us to increase our franchise technician headcount by 4% from a year ago on a same-store basis. The increased technician workforce is a key to consistently driving that mid-single-digit growth in after sales gross profit.

On Slide 10. Adjusted cash flow for the 9 months of the year totaled $786 million, which is about 134% of adjusted net income, and this compares to $467 million or 91% a year ago. The big increase reflects stronger operational performance, including our continued focus on working capital and cycle times as well as CapEx management and prioritization, which resulted in a $40 million lower spend on CapEx in 2025 and '24 as well the recovery from the CDK outage, including the $40 million in business interruption insurance receipts in the quarter. Our CapEx to depreciation ratio was at 1.2x compared to 1.5x a year ago. We continue to expect healthy free cash flow conversion for the full year.

Slide 11, capital allocation. As we've discussed in the past, we consider capital allocation opportunity to either reinvest in the business in the form of CapEx or M&A or to return capital to share owners via share repurchase. Year-to-date, we've deployed over $1 billion in capital, as you can see on the page. We remain prudent in CapEx, which is mostly maintenance-related compulsory spending and totaled $223 million for the first 9 months of 2025, which is 15% lower than 2024, as I previously mentioned. We continue to actively explore M&A opportunities to add scale and density to our existing markets. So far this year, we spent approximately $350 million closing on transactions in Denver and Chicago, which Mike discussed. Share repurchases have been and will continue to be an important part of our playbook year-to-date. We've repurchased $435 million worth or 6% of the shares that were outstanding at the end of 2024 at an average price of $183 per share. In the 9 months ending September 30, we repurchased September 30, 2024, we repurchased $356 million at an average purchase price of $159 per share.

In our capital allocation decisioning, of course, we consider our investment-grade balance sheet and the associated leverage levels. At quarter end, our leverage was 2.35x EBITDA, down from 2.45x EBITDA at the end of last year and well within our 2 to 3x long-term target which gives us additional dry powder for capital allocation going forward.

Now let me turn the call back to Mike before we go to question and answer.

So I think we just go straight into Q&A.

Harry, if you could please remind people how to...

Yes, of course, no problem at all. [Operator Instructions] And our first question will be from the line of Michael Ward with Citi Research.

Thank you very much. Good morning, everyone. I wonder if you can quantify, it looks like the variable gross per unit from 2Q to 3Q went down by about $250. And it looks like -- is it split about equal between the unfavorable seasonal mix with Luxury and then in the BEV sell-up. Is that what we're looking at? And how does that reverse? Or does it fully reverse in 4Q?

Yes. Mike, I'll answer first and then Tom if you've got anything that you want to attend. So I think you saw 2 effects really on the growth. Obviously, everyone is talking about the significant increase in BEV mix, and there's no doubt about it that margins are absolutely -- were absolutely terrible and have been terrible for some time, but we'll talk about our view on how that moderates going forward. So we -- it's still -- even though they increased significantly, it was only 10% of our total mix and it did have an effect on our margin, the biggest effect, frankly, came from our domestic combustion or [ life sales ], where we saw quite a compression, particularly in the middle part of the quarter.

We were able to reverse that to some extent as we came out of the quarter, as I alluded to in my comments, and I was pleased with our exit trajectory, but I think we had too much pressure on our domestic mix, as I said, in the middle of the quarter. And that was the largest contribution to the sequential and year-over-year reduction. I think we've got better balance now going into Q4 with regard to that. And I do think that we are going to see a much better dynamic with regard to supply and demand on BEVs in Q4, and we could have a relatively long discussion about what does the effect of the loss of the $7,500 due on that? And what's the thoughts about that? But I do think that we have a better dynamic in terms of supply, matching demand and therefore, less pressure potentially on margins.

So a long answer to your question. It was actually more from our -- the highest contribution with our domestic sales. And Tom mentioned, they were up [ 11% ] in the quarter. There was, of course, an impact of BEV, but remember, it was only 10% of our total mix. Some of which will get mitigated as we go into the Q4 and you'll obviously get the benefit if we see normal patterns of a better luxury premium mix in December.

Tom, do you want to add anything?

No, I think you hit them all, Mike.

And the flip side of that is you have this record level of finance and insurance per unit. Any reason that won't continue?

Well, I have expectation that team has continued to grow their contribution to our company throughout my 4 years now with AutoNation. And they are led by a great group of people in the dealerships, by the way, in our markets and here. So our expectation is that their performance will continue. And I think the thing that Tom and I are delighted about is that it's really in value-added products. We mentioned the attachment rate, for example, of [indiscernible] service contracts. And it is clear that, that really for us is good for the future in terms of loyalty and in terms of our After-Sales business.

So there's no reason why we would see that not necessarily change. It is and will continue to be mitigated by increased penetration of AN Finance in terms of the periodic reporting of that. But over the long term, the contract turn, we're better off with the overall returns AN Finance delivers rather than the one-off contracts we sell on behalf of others.

The next question today will be from the line of Rajat Gupta with JPMorgan.

I just wanted to ask a little bit of a high-level question on just the auto credit trends. You noted that delinquencies were flat quarter-on-quarter looks like your average FICO mix is a little similar to some of your public peers out there, you know CarMax and others. I'm curious like, is there anything in the data that you see or the performance that you see in your loan book that concerns you with regard to the health of consumer with regard to how maybe losses or delinquencies have been performing within the quarter, maybe in certain cohorts of the consumer? Any more color you can share there would be helpful. And I have a follow-up on the Used car business.

Yes. Thanks, Rajat. This is Tom. Good question. And obviously, there's a few headlines with some of the well-chronicled issues that came through in a couple of the larger portfolios this quarter. Obviously, that makes us double down and look at everything that we're doing, and we're very, very confident in the portfolio. I mean the growth has been outstanding, the financing levels continue to grow, minimizing our equity. But importantly, the portfolio itself is something that we look at very closely. Mike looks at it every week. And we look at not just the delinquencies, the delinquency rates, but we look at loss rates and write-offs, high vintage going all the way back to the start of when we were -- we did this business.

The trends are all in line with what we expected. Our reserving has reflected those expectations and not seeing anything by way of acceleration in anything like repossessions or first payment skips or anything like that, that is not already reflected in how we manage the book. So I'm pretty good, pretty happy knock on wood with how that's been going.

Understood. That's helpful color. Just following up on the Used Car business, you had a pretty strong same-store growth number last quarter. Looks like it slowed down a bit. I'm sure like there's been some effect of the prebuy that happened last quarter that's causing the decel. But curious if we can get an update on some of the initiatives you talked about last time on improving the business there, both growth and profitability, where you are in the time line of that progress? And should we start to see further acceleration in that growth here over the next few quarters?

Yes. I'll give you an answer to that question. I would tell you that one of the things that we talked about was that we believe that we could grow our Used Car business, and we are -- we are growing our Used Car business above the industry. And all of those things are continuing to happen and our margin is relatively stable, albeit there's some downward pressure on it.

So I think if you look objectively at our performance, you will say, yes, it's market, that's a good performance or some people would. So I would tell you that the team and I are really, really focused on what the other possibility here. And we are maintaining higher stock levels for the sale than we would normally have. Historically, I'd like to make sure that we have an inventory turn rate that for me, balances, obviously, the depreciation that we're now back into a normal cycle with how long we're keeping those vehicles in our inventory. And we're not at that turn rate but the level of inventory that we're carrying today. We are typically the team would balance back down to just above their run rate to give them room to grow. But we're not going to do that time. We're going to hold the line with higher inventory on Used for a period of time. While we continue to work on the other levers to get our run rate to get back to the turn levels that we would expect.

Now the consequence of that, of course, is the depreciation effect on our margin will be there for a period of time and will continue, frankly in Q4. And as you know, when you think about depreciation impact and it is completely time based that put some downward pressure on our overall result. So I would say we've made -- we continue to make progress that more headroom, we're not where I or the team would like to be. We're not going to take the balancing approach that we've taken before because we want to work the kinks out of the system. There will come a point that we may have to rebalance Used Inventory down so that we can alleviate some of that margin pressure that we're seeing. We're not there at this moment in time, but we'll make that decision as the quarter continues.

So the short answer is progress above industry in Q3. Our expectations are higher. We are doing numerous things to get there. They haven't all worked in the quarter, albeit the result was good. We're going to hold higher inventory levels than we normally would to make sure that we have the supply that is there as we work through those other things. The consequence of that is pick up increased depreciation, which is accounting for about 0.2% of our margin at this moment in time, and we will stay there in Q4 to enable the organization to grow, and we will see what happens with the overall marketplace. That doesn't mean to say that at some point in the quarter, we will balance our inventory back if we see that the market is not giving us the results that we need. That's what our job is to do. But at the moment, we're holding the line with our inventory, which is why you see our inventory levels where they are on Used. So hopefully, that's enough color for you.

The next question will be from the line of Jeff Lick, Stephens inc.

Tom, I was wondering if you could give a little more detail on the impressive 100 bps of gross margin expansion in service and parts, just kind of what's driving that and how sustainable that will be going forward?

I mean when you look at the performance in the quarter, I would say that the total -- just to reference, the growth was roughly [ 7% ] in growth. And I'd say it's equally balanced between volume and price. And with volume, I'm talking about both parts, number of repair orders and labor hours per repair order. Those were all up and tracking nicely.

Also from a price perspective, there's inflation in the market and we definitely do our part to offset that on a regular basis. And then we probably got a little bit more mix favorability as well. But the initiatives that Christian and the team are driving around technicians and the hiring and training of technicians as well as having appropriate capacity from a service day perspective or working out well for us, and we're able to leverage the investments that we've made. We talked about maintaining a reasonable level of CapEx spend and been able to achieve these results while being thoughtful about the amount of capital we're putting in as well. So I'd say those are the big drivers.

And just a quick follow-up on SG&A, 67.4% as a ratio of gross profit and flat last year, which given your peers' reports that you're the leader in the club. Outlook's pretty impressive. I know you're kind of taking a bit of an outsider's point of view given your previous professional experience in -- just curious where you see that going and what highlights you'd give as to what's going to lead that?

Mike has his expectations. We talked about a range of 66%, 67%, but that's we're driving even more aggressive than that. I think the other important thing is there's a disparity amongst the group in terms of how service loaners are reported. We include the entire expense for service loaners and our SG&A rate as well. So that I think ours is a bit penalized compared to some in the group.

So overall, it's a I agree with you that the performance is good from an outsider's view. But I would say we have a number of initiatives driving productivity on the -- in our variable side, both whether it's on the sales side in the service space, that's really important and drive the outcomes -- unit outcomes also on advertising being very, very thoughtful in terms of return on investments that we're getting there.

And then lastly, there was a whole pool of cost, other SG&A types of costs that we manage every day. We have a number of initiatives I've talked about before. But those are front and center. We look at them every month as a leadership team and course correct when we see things not in the direction we want. I think it's getting the right amount of attention in the company. I expect us to closely manage that. Now we've got investments that we make and those are fairly regular. They can be a bit variable and spike at times, but they're all made with the idea of driving further growth. So that's in terms of how I'm looking at it. I think it's a big area focus.

Mike impressive performance. Best of luck in the fourth quarter.

Our next question today will be from the line of Daniela Haigian with Morgan Stanley.

One question on forward demand. As we've kind of passed through the peak tariff fears as you spoke to, Mike, we're now seeing OEMs revise up guidance is. Kind of clears the bar on improved outlook here. You spoke to decontenting, but how are you seeing pricing on new model your vehicles. Is that relatively unchanged? How are you thinking about '26? Anything you can share there would be helpful.

Yes. So I think you're right in your view. I think the OEMs now have had enough time and are getting to a level of clarity where they have looked at their product plans, look at their supply chains. And the 2 big impacts of tariffs, but also from a powertrain perspective, have driven significant change into all of the OEMs views on their product lineup and the powertrains that they're going to deploy.

And I think that they have, to the most extent, got their heads around that and understand what they want to do and therefore, they're being much more clear and less cautious about their future outlook. A lot of that hasn't really made its way yet into the market. Some of it has, of course. But I would tell you that my view on this is look at pricing and what's come through the system so far, it looks broadly in line with normal pricing that we would expect for the model year changeover. But that, of course, is just a headline. We know that there is, as always, option decontenting. Things that were standard made optional and there is always value engineering that happens with every single OEM.

So at the end of the day, if you were to assess true value delivered to the customer for each dollar. I can't really give you a clear picture on that yet. But we know that the levers that have been pulled are on the supplier side, they are on, obviously, the cost per vehicle side and the bill of materials and also on some of the incentives that have been provided to dealers, whether it's volume growth incentives or other support incentives that do not directly impact net transaction price in the marketplace, but ultimately do impact dealer margins.

So we know there's effect across all of that. Some of that we saw in the quarter. We alluded to that in my incentive comments. I think that's going to continue as we get into deeper into Q4 and we clear our prior model year. But I'm pleased with where the industry is, frankly. We said at the beginning of the year, we thought it was -- we were hoping 5% up year-over-year. And we had no clue really of the turbulence that we were going to see that we have seen this year. And I think the OEMs have largely navigated it well, some better than others are always. So we are hoping that Q4 continues back. We think that the year-over-year comps are higher bar in Q4. And we said that because we wanted to give you an indication of our view of October through the end of December. But as we get into next year and you see some of the more rapid supply chain changes that OEMs are there. I think what they're going to want to do is to maintain the progress in this year. So it's too early for me to call what I think 2026 will be in terms of the total inventory.

But I do think there's a lot more clarity from the OEMs. And I do think we're going to see more potential impacts that will be mitigated to some extent by their actions and dealer actions in Q4.

Great. That's very helpful. And back to Used Car, you spoke to sourcing challenges. Availability should improve at the margin over the next year. But how do you expect the strategy around older Used Cars to shift over time? It's clearly a very fragmented Used Car market? How are you viewing competition from the likes of online pure play retailers? And is there a greater opportunity to grow and consolidate there?

Yes. I'm always -- I always believe that there's opportunity to consolidate, particularly when you add the fragmentation that we have got. I mean even if you take the largest of the players in their forecast, it's a tiny percentage of market. So there's always opportunity for that to happen. But let me try let me try and answer your question in sections and redirect you if necessary.

Firstly, we have continued to see competition for retail grade used inventory and that competition, it has resulted in some upward pressure on wholesale prices. We and the other big retailers benefit from one more channel than some of the pure plays, and that is obviously in our trading, but that channel is not completely isolated from competition because of the level of transparency pricing in the marketplace, which will only increase. But I think we have a very strong sourcing strategy that enables us to keep the level of inventory we want in place, albeit an elevated, albeit at an elevated cost.

Our growth, really, as we alluded to, came from higher-priced vehicles. Others are leaning into maybe lower-priced vehicles. I think as we exhaust the art of the possible from 20,000 units [indiscernible] and above, and we want to continue to grow, we can lean higher into those lower-priced vehicles with obviously, the consequence of the investment required to get them road ready.

But as I mentioned, we're going to hold slightly elevated used inventory in the quarter. Really to see the art of the possible of our sales teams and our marketing teams to get our turn rates back up to what we're used to. They'll be given some time to do that. We understand the consequences of that which will be some downward pressure, particularly around the aging that will be in addition to some slightly elevated wholesale prices that we're seeing. We may have to balance that, as I mentioned before, as the quarter closes. But I do think for us, we have a very strong North Star in terms of what we think we should be capable of with our physical the relationships and the confidence that comes from the brands that we have above our doors and the fact that we have multiple sourcing channels.

So I am -- if you were to talk to any of our market presidents, I would tell you that I am very bullish on Used Car volumes. I understand it doesn't -- it's not a switch. It takes time, and of course, it includes all of the channels. But the reality is most people buy a Used Car within 50 miles of the dealership that's got it.

The final question in the queue today will be from the line of Bret Jordan with Jefferies.

One of your peers yesterday was noting that the consumer sentiment around the luxury space was feeling a little softer. Are you seeing any changes sort of at the underlying demand level at the higher price points?

Yes, I think that -- so I mean, it's a good question because really when we closed out the quarter and we saw the level of activity around hybrid and there's a lot of that, obviously, for us is in luxury space, and we come into what really is a bit of a quiet period for luxury.

I would tell you that I think it is more muted than last year. But I still have expectations we will see a seasonal uptick in December. But I do think it is more muted, particularly as the way as I see October developing. So that's the best color I can give you at the moment.

Okay. And then within the domestic internal combustion GPUs, was it brand specific? Or was there sort of a one-off event in there that is to be corrected? Or are we thinking that domestic ICE GPUs are just under some sustained pressure?

Well, I tell you something. I think some of them self-inflicted, frankly. And that's one of the conversations that we have internally. We've set ourselves strong expectations in terms of how we want to perform in line of the marketplace. And it is always a 3-way balance between what share are we able to achieve with the brands that we've got at what margin level and what marketing expense. And I think we -- as I tried to allude to, probably had some self-inflicted downward pressure in the middle of the quarter that was corrected in September, and I expect that to continue to be corrected.

But you saw all of the domestic players, all of the domestic players chasing volume, domestic players tend to chase volume and they do it in conjunction with their dealers. In other words, they have programs and schemes and relationships with their dealers when they're chasing volume. Everybody participates into driving a very competitive net transaction price, we're very -- we have a strong partnership with all 3 of the domestics and we were supportive as we could, and that had general downward pressure across the piece.

It is true that some domestics had higher downward pressure than others, but that's the nature of the game and the cycles that they're in. I think, as I said, some of our performance was a bit self-inflicted, which was corrected as we came out of the quarter. We just want to make sure that we are growing because I think there's opportunity for us to grow but we do that in an appropriate balance fashion, knowing that for every new car that we sell, we get a customer who has a very high loyalty for us to have 7 years if they keep the vehicle. And large percentage is a great opportunity on used car sales because the value we offer for their trades as well.

So it isn't just one element. We try to think about the best balance we can achieve in the business. Sometimes we get it right, sometimes we push a little bit hard. That's why we look at it every day.

With no further questions on the line at this time. I will now hand the call back to Mike Manley for any closing comments.

Yes. Thank you, Harry. Thank you all for being on the call. As always, we appreciate your questions, and we wish you well. Thank you.

This will conclude the AutoNation, Inc. Q3 Earnings Call. Thank you to everyone who is able to join us today. You may now disconnect your lines.