AutoNation Aktie

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.

Hello, everyone, and thank you for joining the AutoNation Inc. Q2 Earnings Call. My name is Harry, and I'll be your operator today. [Operator Instructions]

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

Thank you, Harry, and good morning, everyone, and welcome to AutoNation's Second 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 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 investors.autonation.com.

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

Thanks, Derek, and good morning, everyone. Thank you for joining us today. I'm going to start on Slide 3. Obviously, we're very pleased to report an outstanding second quarter. We delivered material improvements compared to the second quarter last year, and the numbers were strong even after removing the year-over-year impact from last year's CDK outage.

Our sales of new vehicles increased 8%, and we gained share in the markets we serve and grew sales by more than 5% on a sequential basis. This performance was led by our Domestic segment, which increased 19% from a year ago and 14% from the first quarter on a same-store basis. We also increased new unit profitability on a sequential basis across all segments.

As was the case with the industry, our unit sales growth was strongest at the start of the quarter and moderated in May and June. And clearly, there was a pull ahead of sales in late March and April in reaction to the tariff announcement, and it stands to reason that some portion of that demand was pulled ahead from the latter part of the second quarter. Used vehicle gross profit increased 13% year-over-year as we benefited from stronger unit sales, stable unit profitability and improved performance in wholesale. Our unit sales increased 6% from a year ago with stronger performances for the over $40,000 and under $20,000 price points.

The team continued to do a great job acquiring vehicles through trade-ins and directly from the consumer through our We'll Buy Your Car effort. These channels accounted for over 90% of the vehicles acquired in the quarter. We ended June with over 28,000 used vehicles and inventory, which I believe positions us well for the second half of 2025.

Customer Financial Services gross profit also increased 13%, increasing on a per unit basis sequentially and year-over-year. We continue to attach more than 2 products per vehicle, with extended service contracts continuing to be the top offering. Our finance penetration is stable with around 3/4 of units being sold with financing.

The momentum in After-Sales continued. We delivered record revenue and grew our gross profit by more than 12%, with gross profit margins expanding by 100 basis points to record levels. And Tom will take you through the details, but the results were strong on both the sequential and year-over-year basis. The sequential increase reflects 1 additional service day as well as improvements for our internal reconditioning. Customer pay and warranty was about flat.

Now we continue to focus on our technician workforce by recruiting, retaining and of course, developing our technicians. And I do think the efforts are paying off. Our turnover has decreased, and technician headcount increased by about 3% from a year ago on a same-store basis. The strong momentum at AN Finance continued. Originations doubled from a year prior. And as the portfolio has grown, the team is delivering on leveraging its fixed cost base, enabled continued growth and profitability.

During the quarter, we completed our inaugural AN Finance asset-backed securitization, and the transaction was very well received. We expect to regularly access this market as the portfolio grows. Our Q2 performance, combined with our share repurchases, helped us to grow our adjusted EPS by 37% from a year ago. This was the second consecutive year-over-year increase in adjusted EPS. Excluding the estimated impact from the CDK outage, adjusted EPS was still up mid-teens from 2024. All in all, a great result and great performance by the AutoNation team.

Now I know tariffs continue to be top of mind. And apart from the volume shifting I mentioned earlier, we saw limited additional impact in our Q2 results from tariffs. MSRP and invoice prices have been stable, and the June CPI report showed continued modest month-over-month declines in new and used vehicle pricing. We do expect the ongoing dialogue between our OEM partners and the U.S. administration to result in clarification and of course, finalization of the auto tariff structures in the coming periods. Now this process also includes our OEM partners' full evaluation of supply chain footprints and planning to optimize tariff efficiency and to establish their forward pricing structures.

We believe the objective of maintaining market share, particularly in critical segments, [indiscernible] equally with the desire to offset any new tariffs. And as I said previously, we expect that AutoNation, to some extent, will be cushioned from many new tariffs by a cross-shopping effect, whereby demand for non-impacted or lesser impacted brands and models will potentially supplant those for more effective counterparts. And naturally, in this situation, we hold both sides of the trade with our broad portfolio of brands and models, which I think gives us a distinct advantage.

Now to close, we're encouraged by some of the provisions contained in the recently enacted U.S. federal statute, which includes interest rate deductibility in auto loans and bonus depreciation for commercial enterprise. Although we're not forecasting a bonanza of new demand. But as you'll appreciate, every incremental actions to encourage vehicle purchases is very welcomed by me and the team.

Now I'll turn the call over to Tom to take you through our results.

Thank you, Mike. Let me kick off with a quick reminder that our second quarter 2024 operating results were adversely impacted by the CDK outage and that our second quarter 2025 operating results were adversely impacted by the tariff-related shift of volume into the first quarter.

So with that, I'm on Slide 4 to discuss our second quarter 2025 P&L. Our total revenue for the quarter was $7 billion, an increase of 8% from a year ago on both the total and same-store basis. We achieved attractive same-store growth across the entire business, including double-digit growth in After-Sales and Customer Financial Services. We also achieved a 9% increase in same-store new vehicle revenue as we increased new unit volumes across all 3 segments.

The same-store gross profit of $1.3 billion increased by 10% from a year ago. The year-over-year gross profit performance included same-store After-Sales growth of 13%, CFS growth of 13% and used vehicle growth of 12%. The reported gross profit margin of 18.3% of revenue was up 40 basis points from a year ago, including a 100 basis point increase in After-Sales and a 50 basis point improvement for used vehicles, offset by the moderation of new vehicle unit profitability.

Adjusted SG&A, 66.2%, improved as expected and was at the lower end of the 66% to 67% range for our ongoing expectations. Adjusted operating income margin of 5.3% increased from a year ago and from the first quarter. Below the operating line, floorplan interest expense increased by $9 million from a year ago -- sorry, decreased by $9 million from a year ago, as average rates were down approximately 100 basis points, combined with lower average outstanding borrowings. Nonvehicle interest expense was approximately flat from a year ago.

And as a reminder, we reflect floorplan assistance received from OEMs in gross margin. This assistance totaled $35 million compared to $32 million a year ago. So including these OEM incentives, net new vehicle floorplan expense totaled $9 million, which was down from $21 million a year ago. All in, this resulted in adjusted net income of $209 million compared to $163 million a year ago, up 29%.

Total shares repurchased over the past 12 months decreased our year-over-year share count by 6% to 38.3 million shares, benefiting our adjusted EPS, which was $5.46 for the quarter, an increase of $1.47 or 37% from a year ago and $0.78 or 17% from the first quarter of 2025.

Before I get into new vehicles commentary, I wanted to point out that our GAAP reported numbers included a noncash impairment charge of $123 million after tax or $3.21 per share. Our accounting policies require that we test our goodwill and intangible assets for impairment as of April 30 each year. The charge includes $65 million for our mobile service business and $54 million for our franchise rights related to 9 stores, with 90% of that charge relating to a single domestic brand.

Slide 5 provides some more color for new vehicle performance. New vehicle unit volumes were a strong point for the quarter, increasing 7% from a year ago on a total store and 8% on a same-store basis. Full store unit sales were up across our 3 segments with Import units up 4%, Premium Luxury up 5% and Domestic up 17%, reflecting favorable supply, better incentives and good performance by our commercial teams.

By powertrain, hybrid new vehicle unit sales, which is about 20% of our volume, were up more than 40% from the second quarter of a year ago. Battery electric new vehicle sales, which is about 7% of our volume, were up nearly 20% from a year ago, reflecting OEM actions with incentives and some pre-buying ahead of the termination of government incentives. Internal combustion engine new vehicle sales were up about 1%.

Our new vehicle unit profitability averaged $2,785 for the quarter, in line with the first quarter. And unit profitability increased for all 3 segments on a sequential basis. New vehicle inventory ended the quarter at 41,000 units compared to about 44,000 units a year ago. This represents 49 days of supply, down 18 days from the second quarter of last year and up from 38 days at the end of March. While we don't expect the first quarter and second quarter same-store unit growth of 7% and 8%, respectively, to continue into the second half, we are encouraged by the last couple of weeks of new vehicle sales activity after a slow start to July.

Turning to Slide 6. Used vehicle retail unit sales improved on a year-over-year same-store basis by 6%, which was fueled by double-digit growth in lower-priced, i.e., less than $20,000 and higher priced, i.e., greater than $40,000 vehicles along with more modest growth in our mid-priced vehicles. On a sequential basis, the number of used vehicle retail units increased by 3%. Average retail prices were stable.

Used vehicle retail unit profitability remained stable versus last year and sequentially at $1,622 per unit. We remain focused on optimizing vehicle acquisition, reconditioning, inventory velocity and pricing. Total used gross profit was up 13% from last year, reflecting the retail unit sales growth, stable retail unit profitability and better wholesale results. Although our supply of used vehicles has been at its highest level since June 2022, supply availability remains a constant challenge relative to our sales ambitions, driven by lower new vehicle production during COVID. Thankfully, we continue to be competitive in securing used vehicles from our retail operations, including trade-ins, We'll Buy Your Car, service loaner conversions and lease returns. We source more than 90% of our vehicles from these channels and are encouraged by our used vehicle inventories heading into the second half of the year, as Mike mentioned.

I'm now on Slide 7, Customer Financial Services. The momentum in CFS performance continued once again during the second quarter. Gross profit was up 13% on a same-store basis, reflecting an approximate 7% same-store increase in retail vehicle sales and a 6% increase in unit profitability. More than 70% of our CFS revenue and profit comes from product attachment, which remains strong at about 2 products per vehicle sold.

Our finance penetration rate for the second quarter continued to be nearly 75% of vehicles sold. The 6% increase in unit profitability which I mentioned reflects increased profit per product contracts sold and higher product penetration. The continued unit profitability performance in CFS is even more impressive if you consider the growth of AN Finance, which, while superior in long-term profitability, dilutes our CFS unit profitability in the short term. Without this AN Finance dilution, our CFS unit profitability would have been approximately $140 per unit higher this quarter.

Slide 8 provides an update on AutoNation Finance, our captive finance company. The business' attractive offerings are driving strong customer takeup, and we continue to expect strong ROEs in the business. During the second quarter, we originated $464 million in loans, bringing the year-to-date originations to $924 million, which is up more than $0.5 billion from the first half of 2024. We had approximately $150 million in customer repayments.

The portfolio delivered interest income of $48.6 million in the second quarter, which is more than 80% higher than 2024, and operating income more than doubled. The quality of the portfolio continues to improve. Our credit and performance metrics are improving with average FICO scores on originations of 698 for the second quarter of 2025 compared to 675 in the second quarter of 2024.

Delinquency rates, so 30-day plus at quarter end of 2.4% are solid, down from 3.8% a year ago. That benefited from the sale of the mostly subprime legacy CIG portfolio. As the new portfolio continues towards full maturity, we do expect the delinquency rates to normalize to the 3%-ish range.

As Mike mentioned, we completed our inaugural ABS issuance in the quarter. Demand was very strong. We were seeking $500 million in financing, and we actually received $3.5 billion of confirmed offers, so 7x oversubscribed. This allowed us to upsize the offering by $200 million to $700 million. We're also pleased with the 4.9% weighted average coupon rate. Fixed rate securitization also removes floating rate exposure for a substantial portion of our fixed rate loan portfolio.

Equally as important is the debt funding rate, meaning the portion of the portfolio that is funded with debt as opposed to buy our own retained earnings. Higher debt funding rates lead to higher overall returns for AutoNation shareholders. The debt funding rate for the ABS transaction was 98%, which helped to bring the debt funding rate for the overall $1.8 billion portfolio from 74% at the end of the first quarter to 83% at the end of the second quarter.

As we become a more regular issuer of ABS securities, we expect to further increase the debt funding levels of the overall portfolio, and we're planning for another ABS transaction later this year. We expect to continue using ABS funding as a portfolio financing vehicle, not a true sale of assets. So the finance assets will continue to be included in our consolidated financial statement.

Moving to Slide 9, After-Sales, representing nearly 1/2 of our gross profit. The business continued its revenue and margin momentum, and gross profit was once again a record for AutoNation. Revenues were up 12% year-over-year on a same-store basis with increases in customer pay, which was up 10%; warranty, up 25%; internal work, up 14%; and wholesale, up 8%, all offsetting a 6% decline in collision revenue as that industry has struggled to offset a declining proportion of repair to replace insurance decisioning.

After-Sales gross profit increased by 13% on a same-store basis from a year ago. The increase was driven by a 7% increase in the volume and content of repair orders and a 5% increase in the gross profit per repair order. For the second quarter, our reported After-Sales gross margin rate was 49%, up 100 basis points on a total store basis from a year ago, reflecting improved parts and labor rates, higher tech efficiency, scale benefits and higher value orders.

We continue to develop and promote our technician workforce. As Mike mentioned, the year-end technician headcount was up 3% from a year ago. I should say the quarter end headcount was up 3% from a year ago on a same-store basis, and our technician efficiency continues to improve. We expect our After-Sales business will grow roughly mid-single digits each year.

To Slide 10, adjusted free cash flow for the first half totaled $394 million or 100% of adjusted net income. And that's compared to $519 million and 140% conversion -- 147% conversion a year ago. As we mentioned last year, the CDK outage impacted the timing of certain payments in the second quarter of 2024, which resulted in higher adjusted free cash flow and conversion. We view conversion greater than 100% as a healthy performance and remain focused on sustaining this level through cycle time enhancement initiatives as well as by prudent allocation of capital to CapEx.

For the first quarter -- sorry, for the first -- sorry, for the second quarter, our capital expenditures to depreciation ratio was 1.2x compared to 1.5x a year ago. We continue to expect healthy free cash flow conversion for the full year.

And as previously disclosed, we submitted claims under our cyber insurance policy seeking recovery for estimated business interruption and related losses caused by last year's CDK outage. Earlier this month, we received insurance recoveries of $10 million related to these claims. We expect to receive additional insurance recoveries in connection with this matter during the second half of 2025, and we're accounting for these recoveries as income when they are received.

On Slide 11, as we've discussed in the past, we consider capital allocation to be an opportunity to either reinvest in the business in the form of CapEx or M&A or to return capital to our shareholders via share repurchase. CapEx is mostly maintenance-related compulsory spending, and it totaled $154 million for the first half of 2025, which was 15% lower than 2024.

We continue to actively explore M&A opportunities to add scale and density in our existing markets. So far this year, we've closed on 1 transaction constituting 2 franchise stores, and we expect additional activity in the second half of the year.

Share repurchases have been and will continue to be an important part of our playbook. Year-to-date, we purchased $254 million or 4% of shares outstanding at the beginning of 2024 at an average price of $164 per share. In our capital allocation decisioning, we also consider our investment-grade balance sheet and the associated leverage levels. At quarter end, our leverage was 2.33x EBITDA, which was down from 2.56x EBITDA at the end of March, and well within our 2x to 3x EBITDA long-term target, which gives us additional dry powder for capital allocation in the back half of the year.

Now let me turn the call back to Mike before we address questions you might have.

Yes. Thank you, Tom. So we got off to a great start in the first half of 2025. And I think our quarter performance was strong both on a year-over-year and sequential basis. And I think we're enjoying strong performance across all of the business lines, as Tom just took you through. And I think the work the teams are doing focused on both growth and efficiency are paying off. And you can see the results in our operating performance and the cash generation.

I do just want to make a couple of comments on the impairment that Tom mentioned, specifically around our mobile service business. Developing an independent mobile service offering has given us the ability to provide incredibly convenient service options to our customers. And there is no doubt that it is and will continue to be very additive to our brand. But it is also clear that it has to be done in an efficient and effective way. If not, particularly with a scarce and valuable resource such as technician labor, we will find better uses for that resource. And frankly, over the last year or so, it's been both the challenge and the learning.

I do think now that we have a very clear understanding of how to run mobile service effectively in a way that we'll retain the majority of the convenience that we offer but contribute much more effectively to our income. Because of this, it's going to have a different growth profile than our original expectation, hence the technical accounting treatment. But I do want to be clear, I have no doubt this business has the potential to bring significant benefits to our organization. I'm very pleased that it's part of our portfolio. It's already helping to facilitate the growth of our emerging free service business. And it is now providing flexible labor resource to our dealerships. And of course, it's allowed us to in-source a number of products and services that previously we had to subcontract.

Excuse me, Derek. Not enough tea this morning so far. So as you can imagine, from my point of view and from the team's point of view, it remains a very important part of our growth, and the expectation now is that it will deliver a positive contribution as we progress into 2026. And I'm really also confident that we have the right team in place to do that. We've got some excellent people working in this area.

So with that, I am going to, Derek, hand it over to you for Q&A. Thank you.

Yes, Harry, if you could please remind people how to get in queue for questions.

Yes, of course. [Operator Instructions] The first question today will be from the line of Michael Ward with Citi Research.

Thank you very much. Good morning, everyone. AN in the past has been less active than the other dealers on the acquisition side. But some of your comments, it sounds like maybe there might be some more opportunities. Could you just talk a little bit about what kind of flexibility you have, what kind of size you might be looking at, what the market is like, what your priorities would be? Would you consider going overseas into the U.K. or some of those markets? What is going on in the M&A landscape from your perspective?

Yes, Mike, thanks for the question. I just have a couple of quick comments and then let Mike share his thoughts. But between M&A and repo, we've spent similar amounts in the first half of '24 versus first half of '25, roughly $325 million to $350 million. On repurchases, given the environment and particularly with the tariff uncertainty, we're a little cautious post the tariff announcement. But as I said, that remains a huge part of our playbook.

We have seen improvement in the M&A pipeline. And consequently, we built up a little bit of dry powder over the quarter and the residual effect, as I said, was an improvement in our leverage by 0.5 basis points, but we're committed to both share repurchases and M&A. It is a strong pipeline. Mike, anything else you want to add to that in terms of Mike's question?

I just think I'll just add some clarity as Michael also asked about I think, scale and territory as well. I think we talked about this a little bit in the past, Mike. We have a very clear picture of the density we want in marketplaces where we can really subtract the biggest benefit from the processes and the scale that we bring. So we're very, very focused on, if you like, tuck-ins in those marketplaces to continue to unlock those synergies, but I think are much, much more reliable in terms of delivery after M&A. That doesn't mean we wouldn't look at a market outside of the U.S. But I think that our anchor is always what happens to the earnings per share that we deliver to our shareholders. And that has been our guiding capital allocation principle, really understanding the impact of that over time.

So on the M&A, we obviously benefit from additional cash, and that gives us implications for leverage. So we take that into account, but very, very focused on what is the most benefit we can deliver, not immediately, but over the medium, long term to our shareholders from an EPS perspective. So outside of that, Tom, I have nothing to add.

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

Great. I wanted to follow up on Tom's comments on just the July pickup after a slow start to the month. Curious to get a thought, Mike, why that might be happening? What are you seeing out there in terms of just the consumer landscape? As we're also getting some certainty around the tariffs like with the Japan deal, hopefully, you'll get some more deals. How do you see the demand outlook playing out for the next few months? And relatedly, how do you see the OEMs reacting to these costs and what the implications could be for dealer margins in the second half? And I have a quick follow-up. Thanks.

First, good to hear from you. I'm going to go first and then, Tom, you can obviously talk about your comment. I thought as we came into this year, I was kind of thinking a 5 to 10 improvement in size. I still think that -- I think that we have seen fluctuations around that trajectory, but I still believe that's where we can end up. It's good to see that we're certainly in some tariff deals, that's obviously going to continue and the major trading partners are still out there. But I'm certain that they understand the importance of getting to a conclusion.

That will translate to more transparency in terms of the OEMs' actions and what they're doing. We're still a little bit uncertain in that area, particularly as we go into model year changeover, not just on new vehicle prices but also on parts prices. But I think what we've seen already and what we've discussed in the past will be the prevailing approach, and that is to try and maintain their competitive position in the marketplace on their critical models. And I think because of that, you will see price increases in the marketplace, but very, very measured and very, very deliberate. I think you'll also see adjustments over time to OEMs' portfolios.

From a margin point of view, I think the quarter is very interesting. We saw sequential improvements in our margin. But I do think that you're going to see stability for the balance of the year. That doesn't mean to say that we're not going to see periodic changes. For example, we know that the best stimulus, for example, is going to come out in the marketplace. That is going to [ older ] sales patterns and margin patterns for a period of time. It's inevitable.

So there's going to be periods where, as we've seen before, you may see a slight improvement in run rate and volume followed by a slight decrease in run rate in volume, but I am optimistic for the full year. I also believe that, as I said, there's going to be some margin stability for the year. But I do think that there will be still even though, to your point, is very accurate, I still think there are going to be fluctuations around that general trajectory in both of those areas.

I think from an inventory position, we're positioned well. I thought towards the end of last year, we may be too low in our day supply, and I think the team have looked at that and managed really quite well, particularly on new vehicle inventory. And I think our used team and our general managers and our regional operators build inventory on used because they are bullish on the used car market. And I don't think I'm talking about the overall market because we don't have an influence on that. But we're a relatively small player, and I think they have aspirations to grow that. And we're going to support them and see how well they do and give them the resources. And we saw as Tom went through in the results, I think a good result in the used side. And I think that's going to be their focus. So that's kind of how I'm viewing the back half. And I think Tom may want to just add a couple of things.

Yes. Just on July specifically. I mean, if you look at the first half of the year, it's really robust. I mean, 7% in the first quarter, 8% in the second quarter in terms of unit growth. And April was also very strong. As Mike mentioned, we gave back some of that [ blend ] in May and I think also a bit in July. And as a result, I think the first half may have felt that impact. But it seems to be settling into the mode that Mike mentioned. It's going to take a few more weeks to get under our belt, but it does seem to have turned in a good direction for us.

Understood. That's helpful. And obviously, great execution on the used car side. Just a quick follow-up on AN Finance portfolio ramp. Any updated thoughts on just penetration targets for the rest of the year? How should we think about just the cadence there? And any changes to the outlook around the rest of your profitability in that segment?

No, I think the -- we do fully expect the business to continue growing its penetration. We've got some new internal initiatives that are in place to drive that even higher mostly on the used side, but also were applicable on the new side. And I think the profitability of that business continues. I mean, we were -- a year ago, first half, we were like minus 6 in terms of loss. And we're -- actually, we improved by $6 million year-over-year from a loss position to where we are year-to-date. I expect that trend to continue as this portfolio grows and we get some of these upfront required accounting losses behind us. It's going to scale very nicely. Pretty stable fixed base of cost. Also, we can manage that portfolio well, which the business is doing, as I mentioned, with delinquency. It should be a nice grower for us.

Yes. But I think you -- that's also compounded by the results that you and Jeff and the team deliver some [indiscernible]. I mean, [ released equity ]. And I think added to the confidence in terms of how the market's viewing that portfolio and viewing the credit risk in that portfolio. So I would agree with you we said. And I think that because the demand was so good. It actually gave you more flexibility from a capital point of view than we were thinking. Yes, I agree.

The next question today will be from the line of Doug Dutton with Evercore ISI. My apologies, Doug. We were getting some background noise on your line. I'll just try opening it once more. Apologies, Doug. We are getting a lot of background noise on your line. If you're able to dial back in, that would be great, and we will get you back in the queue.

The next question today will be from the line of Bret Jordan with Jefferies.

In the After-Sales business, could you talk about car count versus price and maybe what you see in pricing in the second half or you start to see parts inflation passing through in the ticket?

Yes. So when I think about our performance in After-Sales, broadly, we saw both increase in volume and increase in price and different ratios, obviously, dependent on the segment where we are. But one of the big things that [ Christian ] is focused on is to balance the penetration of the vehicle parts that we're responsible for in a very, very sensible way with pricing.

So from our point of view, as we think about pricing, that's more in our control, which is clearly our labor. It is constantly checking the marketplace to make sure that we are priced fairly and represent good value for what we provide as well as maintaining a competitive position. So I think that you're going to see from us, a limited pricing on average. Remember, we have 300 different pricing dynamics going on at any given time out there. So sometimes when you talk about the average, you lose -- you obviously lose the context of what's happening in each market, and that's how it has to be managed. He's managing it with his team, each market.

From an OEM point of view, we have seen obviously some pricing, some of that is their normal midyear pricing that they've taken. Some of it, they've been more explicit than it is pricing that they're taking in general as a result of inflationary increases on their side. We're not -- that is not clear across all of the OEMs at this moment in time. Reference our earlier conversation, we are beginning -- they are beginning to get more certainty of their trading conditions, which ultimately they then have to decide how strategically they're going to play it out. But some have shown us that they have taken pricing. I would say that it's, in my view, is limited and in my view, the ones that have moved have been very targeted, and they're clearly thinking about their competitive position, particularly around those non-captive parts in the marketplace.

And I think for us, our big focus is around that penetration that I alluded to. Broadly, 1 in 2 of the vehicles in a 7-year part come back to a franchise dealership. And I think that represents a significant marketplace that is addressable from us. So Tom talked about focus on retaining, growing the technician base. Obviously, that's a highly competitive market, a big focus for the team there, but also making sure that, as I've said, we are appropriately priced so that we can reconquest some of those customers back into our business. So I would say less on the price, hopefully, more on the volume, but we'll see how the market plays out.

I spent some time talking about expectation for the industry. Obviously, if my expectation was as I said, and you saw a big first half, it means there may be some pressure on new volume in the second half. And there's no doubt that from a macro point of view, I think you're going to see an inflationary impact, to some extent, I think, is inevitable. And what that has done in the past is it helped you in terms of velocity on the After-Sales side. So we're trying to make sure that we have the resources, we increase our resources. That will help us in both those situations should it happen. So better flexibility, but to sum up again, I'm hoping that what we see is continued volume and pricing where it's appropriate in the marketplace. Tom, do you want to add anything?

A quick follow-up. Just a quick follow-up. Can you give us an update on AutoNation USA, sort of -- obviously, there's a scarcity of good used inventory. But how do you see that strategy going forward in the next year or 2?

Well, it's -- it goes back to what I talked about in terms of market densification the market. We know AN USA is additive once we've got a certain amount of density. And we know that if we have an AN USA, that's a long way away from any supporting businesses, it's a very, very tough business.

So what we've done now, many years ago, we had this big growth forecast, which I talked about in the past, and we've moderated that. You're going to see additional openings of AN USA businesses this year. For sure, they're already planned. They're already in development. It's going to be much, much more deliberate. And you will see from where they are opening that it fits into that pattern that I talked about.

What the team is working on is obviously to minimize the overlap in terms of what these businesses offer to the marketplace. We're not fully optimized there, to be perfectly frank. I think they're doing a lot of work to make sure that there is any unnecessary overlap in terms of product offering, warranties and those things as eradicated because that doesn't make a lot of sense. And as I said, we've done a lot of work there, but more work to come. But as I said, it's very additive when it goes into a market that already has density, it's going to continue to grow, but it's going to be very methodical growth.

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

You spoke to uplift to parts and service, investments in tech productivity. What does capacity and availability look like to continue to grow the segment? And then thinking out next 1 to 3 years, what are the puts and takes for the top line? On one hand, you have vehicle and affordability weighing on SAAR that could create demand for reconditioning but at the same time, could limit the origination of newer cars that have that stickiness on the service side. So what are you looking out for? And what's the outlook on that top line?

Well, I think you're exactly right. I mean whether you talk about new vehicle, used vehicle service or parts, the primary focus for us in the areas that we can influence is affordability. So make sure that what's not happening is demand getting stifled or snuffed out purely because it's been priced out of the marketplace. We don't have full control of that, as you know, but it's also top of mind for every OEM. Every time we talk to our partners, they're very, very focused on that. And you know the challenges that they're working through at this moment in time.

So as I think about the marketplace and the broad set of products and services that we offer, the reality is, firstly, from a new volume point of view, there's still pent-up demand. I have 0 doubt about that. How that gets released is going to the governor on that is obviously going to be the economic environment and how new vehicle affordability plays out in the coming months and years. If it doesn't manifest itself in new vehicles, some of it tends to move into used vehicles. So you have to be agile, I think, in terms of how you move between the segments and how you're thinking about that development. But there is no doubt that there is and will remain our opportunity in the After-Sales side of the business. And it comes with multiple benefits that we've discussed on plenty of occasions. And therefore, I think if we can continue to build our internal resource and at the same time, convert some of that market that originally came from us back to our service departments, whether it is our physical service departments or our mobile service departments, then there's still going to be opportunity for us to go into the future. Hopefully, that's touching most of the points you wanted us to discuss.

Yes, absolutely. And then one thing...

Sorry, you had also mentioned capacity. As we've said in the past, there's -- we have plenty of physical capacity. And we're continuing to drive the technician workforce up as well.

Great. And then one follow-up on the used side. You spoke to last quarter seeing greater opportunity in lower-priced vehicles. And in this quarter, you definitely saw that with the barbell of strength from sub-$20,000 over $40,000 vehicles. How do you view the competition? Or are you seeing much competition in the marketplace from the likes of the online pure-play retailers? And is there a greater opportunity for AutoNation to grow and consolidate in this market?

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

But I think the market is so large -- and the combined, if you like, public retailers, whether they are digital technology play or they're technology and physical play, market share is so small that there's plenty of room for all of us to grow. And I think that's -- regardless of the CEOs you speak to, I think their answer is going to be almost cut and paste of what I've said. I think we all view it as an area that there's opportunity to grow, and we're all looking at different ways to try and grow.

The advantage we have that I think is often overlooked is when you have and the privilege of representing a manufacturer in a marketplace and you are selling a late used vehicle of the same brand, it adds tremendously to the customers' confidence, in my view, if it comes from a franchise dealership with the same OEM brand above their door. And that's where we are working increasingly with our OEM partners because they offer franchise dealers, I think, a phenomenal advantage in their certified preowned programs. And frankly, we need to do a better job there. And the teams are really focused on that because what comes with that is also a higher propensity to use our service departments.

So again, probably a longer, more wandering answer than ideal, but there is opportunity. Clearly, there's a lot of competition out there, but it's a very, very big market, and it's one that we're focused on. And it's one that is much more in our control than maybe some of the other things. So yes.

Absolutely. Competition makes us all better. Thank you.

The next question today will be from the line of Jeff Lick with Stephens.

Congrats on a great quarter. I just wanted to ask on the SG&A percent of growth, that's a pretty strong performance. I was wondering if you maybe can parse out the parts where there was kind of true real cost efficiencies, operational improvements, where you're seeing benefits versus the stuff that may be caused by just the increase in growth, taking the percent of growth down?

And then a follow-up question. I was wondering if you could also talk about AutoNation Finance and just how the business lives with the legacy business. And do I know about 80% or so is used. But I'm just curious how those 2 businesses are kind of -- as they're growing, living with one another.

Yes. Thanks, Jeff. On the SG&A piece, as you know, our SG&A is comprised of the marketing expense, comp and ben as well as other SG&A to run the dealerships. Each of those areas has extreme degree of focus in terms of how the spending plans work. We sit down every month and reset our expectations on marketing as an example. We have a new CMO in place. It's bringing a lot of interesting new channels for us to explore, but with the idea of being more productive in that area.

Compensation, we try and maintain as much variability and incentive structure in place as we can. We think that is working well for us. And then on the other SG&A, a number of different categories there that are a big focus for us. For example, we have a number of initiatives in our physical plant, whether it's to standardize on the HVAC side, the equipment and the thermostats and the set points that we have across the landscape or to install LED lighting, which is much more efficient in terms of the physical plant. And so those are the types of examples of things that we've got that we're working with, and we'll continue to make and drive productivity in other SG&A.

In terms of ANF or AutoNation Finance in terms of its coexistence with the business, I mean, it is -- I mean Jeff Butler, who runs the business for us, is part of Mike's leadership team. He's involved in every single discussion. They really do an excellent job of driving growth, not just in AutoNation Finance, but in other areas of our business. A perfect example is in CFS, where we talk about 70% of CFS being product attach rates. AutoNation Finance has a superior attach rate relative to other potential lenders. And it's because of that knowledge that they bring to the business and what the customer needs are. So in addition to being good holders of the company's capital and driving growth in that portfolio and performance of that portfolio, they have an eye towards influencing outcomes in the [indiscernible]. It is working well. So not only are they delivering results in their P&L, but they're helping to influence the rest of the business.

I'll just add a little bit to that. But I thought that was good. I think one of the things that we established at a very early stage with our finance company is that it was a competitive environment out there. And we wanted to establish that as a cultural issue. Now that doesn't mean to say we can't obviously put them in a prime position. Clearly, that's there. But I think from a mindset point of view, they have to recognize that the service levels that they provide to our customers and to the dealerships by their customers is fundamental.

So whether it's the response rate, the time of response, whether it's their book to look, whether it's their flexibility in terms of structuring deals or their contracts in transit, Jeff holds his team to very, very high standards, above the standards that are being produced by our other partners in that area. And over time, that level of service to our CFS directors in-store, the General Manager in-store means they are a valuable partner. And it takes time to build up, but I think Jeff's really establishing that with his team. There is -- from my point of view, obviously, there's right to business, but the way they behave, there is no right to business. It's earned, and that has already yielded great results and remains the cornerstone of their focus.

Our final question today will be from the line of Doug Dutton with Evercore ISI.

Hey, team. Apologies for the connection issue earlier. If this doesn't work, you can feel free to just kick me off. I'm going to ask one quick one here.

It sounded like you're running your vacuum or something.

Believe it or not, I wasn't. I'm locked in on the model here. But just first question or my only question is just on PP&E CapEx. It looks like it's come down quarter-over-quarter for the last few quarters, with the exception of Q4 last year. Is that by design? Is there some reason that we should expect a lower run rate going forward? Can you maybe just talk through that?

Yes. Great question, Doug. We've -- I don't think it's like a concerted effort to reduce CapEx, and it can be cyclical. Most of it, as I was saying, has to do with our franchise stores. And it depends on where you are in each OEM's cycle in terms of putting out their the models of their stores. And sometimes you get in lulls and sometimes you get in peaks.

I will say that we -- on top of that is a variable. We have tightened the overall CapEx process internally, trying to be as focused on returns as we can, trying to prioritize the cash flows and to sequence the spending in a way that we can absorb. There's a lot of mouths to feed when it comes to CapEx, and I think we're prioritizing the best way we know, which is return focus where you can and where it's compulsory, making sure you're supporting it in a way that can be smooth and over time as is allowed. That's kind of what I would characterize.

Yes, I'm just going to add something to it because I don't think you reflected the stuff that you and the team are doing. I mean, the -- it's very easy in under this banner of maintenance capital for people to put projects through that, frankly, are not additive to the returns that we deliver just consume capital. And I think Tom and the team have put in place progressively the right level of oversight and the right level of rigor to make sure that even if it is so-called maintenance CapEx, that it comes with the same return that you'd expect from dollars invested in other parts of the business.

It isn't always easy to identify that with the same fidelity that you would, for example, the share repurchase or with M&A, but that is certainly the discipline that's in place. And to your point, I don't know whether we are in a down cycle at the moment. I know all of the projects that are coming through, but there's no doubt that rigor means that people are thinking very carefully before they just ask for capital in this company. And congratulations to you and the team for that.

Yes. Thanks, Mike.

I think that's helpful color. And that's all I've got, guys. Congrats on a great quarter.

Thanks, Doug.

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

Yes. Thank you. Firstly, I'd like to thank all of you coming on the call and for your questions. It is definitely appreciated by the team and I. And often, we finish this call with as much insight from you as hopefully we give to you. And the idea here is to give you as much insight as we can and as reasonable for the running of the business.

I'm just going to end simply today to say that, obviously, as I mentioned at the beginning, the first half was a good half for us, but it is only half. We obviously have the balance to go. And as always, it's as much as Tom and I are the ones sat in the room taking the calls, it is all of the people in the business, and I don't say it with any [indiscernible] at all. I think we have some of the most amazing people in this industry, and I'm very pleased to be part of the team with them, and I want to thank them for H1 and just remind them, let's try and do it all again for H2. So thank you, everybody.

This concludes the AutoNation Inc. Q2 Earnings Call. Thank you for joining. You may now disconnect your lines.