Asbury Automotive Group Inc

Good day, everyone, and thank you for standing by. Welcome to the Asbury Automotive Group second quarter 2020 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Matt Petone. Please go ahead, sir.

Thanks, operator, and good morning, everyone. Welcome to Asbury Automotive Group's second quarter 2020 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's second quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with me today are David Holt, our President and Chief Executive Officer, PJ Guido, our Chief Financial Officer, and Dan Clara, our Senior Vice President of Operations. At the conclusion of our remarks, we will open the call up for questions, and I will be available later for any follow-up questions you might have. Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature, including those statements relating to the duration and contemplated impact of the COVID-19 pandemic on our business and financial performance, as well as the financial projections and expectations about our products, markets, and growth. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statement, including potential impacts from the COVID-19 pandemic on us, our industry, and our customers, suppliers, vendors, and business partners. For information regarding certain other risks that may cause actual results to differ, please see our filings with the SEC from time to time including our Form 10-K for the year ended December 2019, any subsequently filed quarterly reports on Form 10-Q, and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. It is my pleasure to hand the call over to our CEO, David Holt. David? Thanks, Matt.

Good morning, everyone. Welcome to our second quarter earnings call. We achieved record second quarter results despite a volatile and challenging environment. In a quarter where SAR dropped 34% to $11.3 million, and Americans felt it at home due to the COVID-19 pandemic, we delivered record operating margin of 5.7%. Plus, through our cost control measures and the strength of our business model, we were able to achieve record low SG&A as a percentage of gross profit of 62.7%. and an adjusted EPS of $2.52, up 6% over the prior year. During the quarter, we saw our new and used volumes sequentially improve each week in May and June, with significantly higher profit per vehicle. We also saw our parks and service business rebound in June, and in the month flat in gross profit with the prior year. I am extremely proud of our teammates for stepping up our pickup and delivery business as well as their laser focus around keeping the dealership safe for our guests. Because of their hard work, we were able to deliver record results. In addition, the quarter proved the strength of the new vehicle franchise dealer model. With significantly lower volume due to the macro environment, we were able to flex our cost structure down, rationalize inventory, and improve margins to deliver these record results. Our strong performance is also the result of our pioneering omnichannel strategy we launched over four years ago. In the second quarter, 20% of our guests chose to complete their used vehicle purchase online. While we are pleased with these results, we are focused on further building and refining our omnichannel tools to enhance the guest experience. More to come later this year. We are also pleased that our business model and performance allowed us to navigate the current environment and reengage on the highly strategic Park Place acquisition under more flexible financing terms and more favorable pricing. We are on track to close the acquisition in late August. Looking forward, our main goals are to de-lever and continue to build out our omni-channel tools while working towards becoming the most gas-centric automotive retailer. Finally, I want to thank all of our teammates for their commitment during this pandemic. These results happen because of your passion and perseverance adapting to our new world. Thank you. I will now hand the call over to Dan to discuss our operating performance. Dan?

Thank you, David, and good morning, everyone. My remarks will pertain to our same-store performance compared to the second quarter of 2019. Looking at new vehicles, While SAR for the quarter was at 11.3 million units, or 34% below last year, we focused on retail SAR, which was down 24% for the quarter. In this lower retail SAR environment, new unit sales decreased 23%. Overall, our new gross profit per vehicle was up $436 per car, or 30%, from the prior year period. All segment margins were up significantly from the prior year period. At the end of June, our total new vehicle inventory was 474 million, and our day supply was 52, down 34 days from the prior year. These levels are low because of temporary OEM factory shutdowns. However, we expect the day supply to increase gradually to the summer selling season. Turning to used vehicles. Our gross profit margin was 7.5% of 30 basis points from the prior period, representing gross profit per vehicle of $1,690. We focused on being opportunistic with our inventory, and we were able to increase our used to new ratio by almost 1,000 basis points. The second aspect of our used car business is wholesale. We increased our wholesale gross profit over $4 million. Our used vehicle inventory ended June at $125 million, which represents a 26-day supply, down seven days from the prior year. Turning to F&I, our strong, consistent, and sustainable growth in F&I delivered an increase of $80 to $1,737 from the prior year quarter. In the second quarter, our front-end yield per vehicle increased $357 per car to an all-time record of $3,539. Finally, turning to parts and service. Although our parts and service revenue decreased in the quarter, we were able to recover and were flat in the month of June. In addition, 41% of our customer appointments were scheduled from mobile and web devices. I would like to remind you that our parts and service gross profit margin was impacted by the decision we made to protect the income of our technicians during this pandemic, which cost approximately $5 million. I would like to take this opportunity to express appreciation to all our teammates in the field and our support center. who continue to produce best-in-class performance. I will now hand the call over to PJ to discuss our financial performance. PJ?

Thank you, Dan, and good morning, everyone. I would like to provide some financial highlights for the quarter, which marks a great achievement for our company in an unprecedented and volatile macro environment. Overall, compared to the second quarter of last year, revenue decreased by 20% and gross profit decreased by 18%, driven by the impact of COVID-19. Gross margin expanded by 40 basis points to 16.8% compared to last year, driven by our proactive inventory management and focus on gross profit per unit. Moving down to P&L, we saw SG&A as a percent of gross profit decreased by 530 basis points to 62.7%, on expense reductions and efficiencies gained on personnel and advertising, as well as other cost control measures instituted across the business. Although the operating environment remains uncertain in the back half of the year, we expect our SG&A as a percentage of gross profit to be somewhere in the mid to high 60s for the full year 2020. Our actions to manage gross profit and control expense resulted in an adjusted operating margin increase of 90 basis points to 5.6%. Adjusted EPS for the quarter increased by 6% versus the prior year period. Net income for the second quarter 2020 was adjusted for a legal settlement gain of $1.2 million or $0.05 per diluted share. Net income for the second quarter 2019 was adjusted for an $11.7 million gain on a store divestiture or 45 cents per diluted share and a $300,000 gain or 1 cent per diluted share on sale of real estate. Our effective tax rate was 25.2% for the second quarter of 2020 compared to 25.3% in the second quarter of 2019. Floor plan interest expense for the quarter decreased by $6.4 million over the prior year quarter, driven primarily by the reduction in inventory and the decrease in the LIBOR rate. With respect to capital deployed, we spent approximately $10 million on store improvements and other investments for the quarter. Our balance sheet remained in a very strong position, and we ended the quarter with approximately $747 million of liquidity, comprised of $613 million in cash, $117 million available in floor plan offset accounts, and $17 million available on our used vehicle lot. In addition to strong liquidity, we also have unencumbered real estate with a fair market value of approximately $100 million. At the end of the quarter, our net leverage ratio stood at 1.5 times, well below our target leverage of 3.0 times. This provided us with the capacity and the flexibility to acquire the Park Place stores. Although we anticipate that leverage will increase next quarter as we close on the Park Place acquisition, we believe the accretive nature of the deal combined with Asbury's organic growth and cash flow will allow us to proactively manage our debt portfolio and get back to our target leverage of three times within 18 months. As a result of our commitment to a strong and flexible balance sheet, Our primary capital allocation purpose for the next several quarters will be leveraging. In closing, I would also like to thank our teams across the business who have worked tirelessly during this challenging time to ensure our long-term success. We will now turn the call over to the operator and take your questions. Operator?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Also, if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to ask a question. And we'll go first to Rick Nelson with Stevens.

Thanks. Good morning. I wanted to follow up on inventory, you know, across the industry is, you know, quite lean. That's evidence with your day's supply, you know, especially in the new car side. I'm curious how you see inventory normalizing, you know, the time frame for that and the GPUs, how long you think you can maintain those hot GPUs.

Good morning, Rick. This is David. Related to the new, it varies dramatically by brand. But I would say, as we sit here today, we believe that it'll really be September before we start to see normalization of inventory. We're certainly starting to get vehicles in and we'll certainly get them in in August. But with the demand currently that's out there and the way the supply is coming in, I think it's mid-September before it starts to normalize. On the used vehicle side, A little bit different and probably a little bit tougher to predict. I would tell you, and we normally don't give any guidance, but when we think about July and where we are, July is what June is as it relates to margin and may be better. Volume is probably maybe just a little bit less than June. We anticipate August to be the same as July and similar to June. It's very difficult with what's going on in the world with the pandemic and everything to get too far out making predictions, but we see July being strong and we see August being similar. September is a little bit unknown at this point.

A follow-up to that, SG&A took gross profit. It was 55% in June. I know you're diving, you know, to mid to high 60s, but I'm curious if there's anything structural or, you know, increased spending plans that you guys have in mind here over the near term, why that 55% ratio didn't sustain, especially with the high GPUs.

Yeah, hi, Rick. It's PJ. So with regards to SG&A, I think we need to just reference and level set on the quarter as a whole. When, you know, the pandemic first hit, we were very quick to right-size the business to align with the new environment that we saw going forward. So, you know, that action – primarily with regards to headcount and advertising, you know, set us up to operate in the current environment. And I think going forward, although a lot of that is structural and we have gained efficiencies, we do expect expense – you know, we don't see that as sustainable going forward. We do see expense coming back in as the environment normalizes, as volume increases. So, you know, again, to achieve, you know, a 62.7% SG&A in this environment or even in the mid-60s, which is still below historic, you know, is an achievement. But we do expect, you know, some expense to creep back in as things normally are.

Okay. And finally, if I can ask you on service and parts, nice improvement here sequentially in June. I'm curious your outlook there. When will you get back on track, do you think, for the mid-single-digit growth that we were used to seeing pre-pandemic?

Sure. This is David, Rick. When we look at our business, when we report numbers and we show customer pay, I don't know if Many of our peers do. But you have to remember when we show parts and service customer pay, that includes collision. Collision is really what's taken the big hit for us, and there's a delay in collision. So when April really shut down for sales and service, collision was actually okay. And then collision took their hit in May forward. With less people driving on the road, there's been less accidents. So collision's been a little bit further behind. Parts and service, I would say, kind of like June, is similar in July with some growth in some areas, but we're still lagging in collision. And I would say collision is roughly about, at this point, 10% back of prior year. So when I talk about parts and service mid-single-digit increase, I'm going to now flip a little bit and go just to parts and service and exclude collision. I would expect each month going forward incremental increases. I can't really say what's going to happen with collision, but specifically parts and service, I expect it to go forward. You know, the one unknown to us is what happens in the fall when flu season hits and, you know, could the virus surge and that kind of thing. We're really unsure about the fall. But as we sit here today, we see incremental growth. each week in Parks and Service.

Okay. If I could add just one more question as it relates to the virus and the outbreak, we've seen you get a lot of exposure to Florida. If you could comment on trends there since the recent outbreak.

I would say, you know, again, I think about the news and then I think about our business. What you hear on the news about Florida and Texas is horrible and it's horrific what's going on in the country. I will say we don't see it in our business. Florida still operates extremely well for us. You know, I still hold to that concept, you know, Americans, you can only shelter them in place for so long. We're not seeing a material impact at all in our Florida business that actually is fairly healthy for us.

Great. Thanks and good luck. Thank you.

Next, we'll go to John Murphy with Bank of America.

Good morning, guys. I just wanted to ask a first question on consolidation, you know, in the industry because there's obviously with the Parkside's acquisition we've done and some of the other groups getting more aggressive on acquisitions. As you look at this, you know, some of the deals that are being done in the private market are far above the valuation that your stock is currently selling at. So, you know, I mean, obviously you just did a very good, you know, attractive deal, so we kind of understand that. But on the flip side, you know, the potential for, you know, selling the business either to a large private group or another public, you know, an evaluation that might be more in tune with, you know, some of the private deals that are going on. I mean, is that something... you would be open to or the board would have to consider if that came up?

You know, John, it's not something we think about on a daily basis. I would tell you, you know, I know there's a lot of vibe in the market about growth and how big people can get over the years and consolidation and national branding. We have to remember that this is a franchise business. and that there's dealer agreements with every single one of these brands, and then there's framework agreements on that. So until those documents materially change, I don't see the massive consolidation that you might be questioning.

Okay, that's very helpful. I mean, you think that the framework agreements and even the franchise laws actually prohibit somebody getting significantly above, you know, 2% of the national market or something in that range. Is that a fair statement roughly?

Well, it's unfair for me to say what everyone's framework reads, but I would tell you once you start having multiple rooftops of any brand beyond your dealer agreement that exists, you have a framework agreement. And within those framework agreements, there are limitations. and how many you can acquire in an annual season, so to speak, or a period. So there's a lot to a framework agreement and what's involved. And for Company A to buy Company B of 40-plus stores overnight would take a significant amount of work with the manufacturers to make that happen, and it would be a true test of some documentations that are out there.

Got it. Okay, that's very helpful. And then just a second question around SG&A, and obviously the performance was on the quarter. It sounds like you'll hold on to a decent amount of it, but you do expect some normalization there over time. You know, as you look at the omni-channel, you know, efforts and as that is ramping up, I think you were saying you've done a lot of your sales online in the quarter, particularly on used. I mean, is there an opportunity, you know, as you stress or leverage that omnichannel, you know, effort that the SG&A could structurally come down over time? I guess simply, you know, is SG&A dollars on a new or new sale much lower if you're doing it online?

Absolutely. There's no question about it. And we're very, we're focused on the transaction online, not reserving a car, not holding a car. you know, not processing a piece of the deal. We're very focused on the complete transaction. We quoted the number of 20% on pre-owned. We're proud of that. And that's not reserving or holding. That's transacting. And the 40% of our appointments online, it just shows what we've been working on over the years. We have more tools that we're looking forward to launch later in the second half of this year. that we think will hopefully get us, we believe it will get us to hopefully a higher plateau. So very focused in keeping our heads down and just really focusing on getting better at what we do and more efficient at what we do. Our discipline in SD&A in the quarter showed. We're proud of that. Some of the costs that will leak back in in third quarter, some of our vendor partners that gave us discounts, you know, they're not there now. So those costs are naturally going to come back in. But we're disciplined on keeping the headcount where it is. We're disciplined on keeping our ad dollars down. I think we're one of the lowest in the space, if not the lowest in the space. So I think we're showing efficiency. I think once we feel like we're at a point where we can really put the foot on the gas in the highway, then we'll chase volume a little bit. But right now we're trying to get more efficient at what we do.

And omni-channel SG&A to gross, and if you go online, I mean, is that something that could be as low as 50%, or is that just way too aggressive as to how far the opportunity could be?

Yeah, I'm smiling. I really couldn't touch that number. It would be unfair for me to say. It's more than fair to say that there's an opportunity over time to lower SG&A with online transactions.

Okay, and then just lastly, used vehicle pricing has been, you know, miraculously, you know, strong, sort of defies a lot of the factors in the market, except maybe one, that there's just this incredible underlying demand for travel utilities showing up in used as the new vehicles just aren't on the lot to sell. I'm just curious what your interpretation is of, you know, strong used vehicle pricing and what it means to your business, because it seems like it's a, you know, a keystone here that's undeniably, you know, strong. I'm just trying to understand how you think about that, what that means.

Yeah, again, I said it, I think, early in July. You know, we had a perfect storm event happening with a lot of things. And with the manufacturers shutting down and there's still a demand out there to purchase cars and the average age of ownership is almost 12 years, you do have some pent-up demand. And there's a lot of pre-owned vehicles on the market. You know, I'd say every quarter, any company, you know, what did you do right, what did you get wrong? You know, I'll tell you one of the things we got wrong in the quarter. I thought we were smart not to wholesale our cars and take any kind of loss when the market really dropped in March because we didn't think it was real. But in hindsight, we could have been more aggressive at buying more inventory, and that's something we didn't do. We chose to stay conservative and just manage the growth. Business is still strong today in use. I anticipate August won't be any different. September is a natural slowdown after Labor Day. in a normal year, I would call 2020 anything but normal. So it's really tough to predict what September comes, but there could be that natural slow in September.

Okay, great. That's very helpful. Thank you very much.

Thank you.

We'll go next to Ryan Sigdahl with Craig Hallam Capital Group.

Good morning. Thanks for taking my questions. Just as it relates to Park Place and digital, you know, how do you think about allocating both financial and human resources towards, you know, the integration of Park Place versus digital capabilities as the industry rapidly shifts online?

This is David Ryan, and I'll address that. Yeah, I've been lucky in 34 years to work for a lot of great companies, a lot of great people, and I've done a lot of acquisitions. And acquisitions are fun to do, but integrating them is extremely difficult. This is going to be 1,700 employees, a lot of stores, a lot of revenue. I'll tell you what attracts us most to this deal besides the obvious are the people there, but it's also the systems that they have. You won't find a company where we haven't or I haven't seen it in my career where we align so much operationally right down to the softwares that we use. both from DMSs to HR software. So we see this as a fairly easy integration, even though it's a large-size one. We feel that their strength is delivering a high level of service, and our strength is the digital side. We think we can learn a lot from them, and they can learn from us on the digital side, and we're very excited to get the acquisition done and start chipping away at that.

That's helpful. One other one for me. So one of your dealer peers announced it's rolling out a national brand for its digital initiatives. Where do you guys ultimately see your positioning in digital? Is it with a unified Asbury brand? Is it the Push Start brand? How do you think about kind of a nationwide role out there?

Yeah, I would say when you think about branding nationally, I'll go back to the dealer agreements and framework agreements. You know, I'm a small Mercedes dealer in any city. I have restrictions as to where I can market that vehicle and what I can do. We all have restrictions on where we can market our new vehicle sales service to some degree and CPO. Where there are no restrictions are out-and-out pre-owned sales. But I would tell you Cox Automotive is pretty good on doing studies and everything else like that. And, you know, if you look at their 2020 Car Buyer Journey Study, on the pre-owned side, 87% of the people that purchased the used vehicle purchased it within 60 miles of where they live. And on the new car side, it was 93%. So the way we look at it is we see brick and mortar as an expense, and we see digital as a highway to do business. And we feel like our omni-channel approach, we have enough facilities to facilitate the deliveries of the vehicles as well. So we look at unlimited potential through our rooftops. We think our local branding names within the market have value, and we'll go after it. Just like up here, just like on the private side, we all sell pre-owned cars all over the country. When people are looking for certain cars, they go after them. But, you know, 87% of your business is done within a six-mile radius, and we still see that within our business as well. So we think there's high efficiency through online. We think the true savings in the SG&A is brick and mortar is not needed. It's all online. And when you can truly complete the transaction 100% online and make it fast and transparent for the consumer, I can't see how you're not likely to garner good results and acquire more business from doing that.

Great. That's it for me, guys. Good luck. Thank you. Thank you. Next, we'll go to Armin Sinkovicius with Morgan Stanley.

Great. Appreciate the question. Notice that your import GPU was up quite a bit here. Maybe you could talk about the environment here with regards to the one-degree domestic and import brands. and then also how incentives have been trending through the quarter and into July.

Good morning. This is Dan. I'll take the question. So, yeah, we saw nice improvement across all segments from a luxury standpoint. I'll address that one first. Again, that goes back to the supply and demand. We made the conscious decision to be smart and not just let cars, retail cars that are hard to replace right now because of the OEM shutdown and what have you. From an import standpoint, same as a similar situation that we experienced with luxury. We have seen some OEMs have supported with factory incentives more than others. But in the grand scheme of things, I believe everybody was was a very key player and a very good partner through the pandemic. And when you go down to the domestic, again, they were affected by the factory shutdowns. There was another domestic that prior to COVID also had another factory shutdown. So even more of a limitation when you come down to a day supply. And again, it goes down to the conscious decision that we made of holding to the product, making good, smart decisions in an environment where it is tough to replace the unit that you just retailed.

The only thing I'd add for color on that, you know, one of our core principles is our partnership with our OEMs. We're a franchisee. We value them. Hopefully they value us as well. And we want to know what's important to them, and we want to execute on that. They supported us extremely well through the pandemic in so many ways, and we're very thankful for that. I would tell you, especially in the midline import as it relates to Asbury, it was very much a conscious decision for us to really just focus on margin and not chase gross. And when you're in secondary markets, we're not with most of our midline imports, but when you are, you're naturally going to be higher on gross profit per unit. When you're in metro markets, it's a little bit more competitive, so we're very pleased with our results for the midline import for the quarter. But it was a focus to not chase volume and really just focus on margins.

And you mentioned about 20% of your sales, you know, involved, you know, the digital framework. How has that trended, you know, from COVID to, you know, the opening? Does that increase, decrease, remain flat? You know, what's been the trend there?

Sure. The number moves around a little bit, but essentially pre-COVID, excuse me, it was around 10%. So, it jumped up to 20%.

Okay. And how's that been looking since, you know, you've been able to sell cars in dealerships and people have been able to, you know, have more options than just, you know, delivery and curbside pickup? You know, there are obviously, you know, restrictions there by jurisdiction.

Sure. The number hasn't really moved yet. It certainly could at any point in time, but it hasn't yet. Okay.

Great. Well, thank you for taking the questions.

Thank you.

Next, we'll go to Rajat Gupta with JP Morgan.

Hi. Good morning, everyone, and thanks for taking my questions. Just to follow up on the omni-channel offering, You talked in your prepared remarks on, you know, how you're working to enhance that further. Could you give us a sense of, you know, what kind of steps you have in mind there, you know, any bottlenecks that you think that you would want to improve on or just any specific parts of the offering that you're going to be more focused on going forward? And I have a follow-up.

Thanks. Sure, Raj. This is David. Yeah, you know, when we When we launched the loan marketplace, we announced last year that we were the first to have it. And basically, you could apply online and you instantly got back from the large lenders with their logo, what the approvals were and what the rates were. We didn't pre-announce it because it's a competitive space. I would tell you in the second half of this year, we will launch tools that don't currently exist. no one has out there at this point in the automotive space, certain elements of the transaction online. So there will be more to come, but just because of the competitive nature of our space, we don't want to talk about it yet. I anticipate things could change, but I anticipate talking about it in October.

Got it. Got it. We look forward to that. And here's some part, please. I know it's not closed yet, but, you know, could you give us any sense from, you know, just the same store metrics within that group, you know, how that has performed in the second quarter and what we're seeing here into July across the different business lines?

Sure. You know, respectfully, it's still privately held and really don't want to disclose too much of its personal information, but, I guess a general statement I could make, for the month of June, he's been in business a little bit over 33 years. It was his most profitable month he's ever had. Their stores are performing very well and holding up very well, and it's certainly transitioning that way into July as well.

Got it. And you mentioned earlier, you know, I think to Rick's question, that – you know, July maybe saw a little bit of a slowing versus June in terms of volumes. Was that more of an industrial dynamic, or is that more of a conscious decision on your part, you know, because, you know, auction prices are so high, or just curious as to, you know, was that more of a conscious decision, like, just to maybe, you know, hold off on, like, sourcing expensive vehicles? Yes.

Yeah, I would tell you it's a little bit of everything. First, the day supply is low. So naturally, sales are going to slow a little bit with that. And then, you know, the number one source for most new car dealers for used vehicles is trade-in. So there's an offset there. To your point about buying cars right now, we're trying to realize we're not just buying for a moment in time or a quarter, but it's over time. And we want to stay conservative, understanding that at some point the market's going to move a little bit. So we're buying what we need. We're trying to be opportunistic. We're buying directly from consumers. We're doing a lot of equity mining, as most dealer groups are, I'm sure, and trying to be opportunistic. But I think our approach right now, our mindset is, how do we get our highest returns? And that's our main focus now. How do we generate as much gross as we possibly can while keeping our expenses down to come out on the other side of this.

Got it. Great. That's super helpful. Thanks and good luck.

Thank you.

Next, we'll go to Stephanie Benjamin with SunTrust.

Hi, good morning.

Hi, Stephanie.

This is to kind of circle up again on the digital initiatives. I wanted to hear maybe a comment that you had about those customers that chose to purchase online or through the digital channel, that 20%. How many of those customers chose the, or roughly speaking, chose the home delivery versus in-store pickup? Just curious what you're seeing from that trend.

Yeah. You know, Stephanie, it's a great question. And like anything we launch, I'm always wrong. I anticipated a very high, when we did this years ago, a very high delivery rate at home for obvious reasons. It was a little bit more than expected in the beginning, but it quickly flipped. The majority of consumers are choosing to take delivery at the dealership. I'm guessing the reason is they want that relationship with the dealership on the parts and service side and want to meet people there. We certainly do do home deliveries. I would say we're doing more of the pickup and drop-off on service than we are deliveries on the actual transactions when they purchase a car. Naturally, out-of-state purchases are certainly being transported by trucks, but local transactions that are done are mostly done at the dealership after they've purchased it online.

Got it. That looks helpful. Thank you. And then also, I wanted to touch on with your digital initiatives, what you've seen from the adaption or, you know, penetration of really getting some of those, you know, additional or warranty or service sales via, you know, also going through the digital platform or is that an initiative that may be expanded as we look forward? Just any color there would be great. Thanks.

Good morning, Stephanie. This is Dan. We've seen the team adapt pretty good to the new way of doing business with the digital transaction and at home delivery. We have several, the tools that we utilize afford us the ability to be able to further enhance the experience by being able to present the product in a digital aspect. And, you know, the team did a very good job and we saw positive results from our consumers in this transaction, and therefore you can see the consistent and sustainable growth that we delivered in F&I.

And I would add, I would say if you truly analyzed our online transaction tool, there's three key areas of what you call weakness or opportunity to be better. Those are the ones that we're focused on that we'll be launching, and one of them is related to F&I. We're lucky that our F&I numbers are holding up online as they do in the store. But in my personal opinion, our presentation of F&I products online can be a lot better than what it is.

Got it. And that's all I have. Thank you.

Thank you. Thank you.

We'll go next to Brett Jordan with Jefferies.

Good morning, guys.

Good morning.

On the discussion of the customer pay impact and the collision softness, I think you mentioned it was at 10% back of prior year. Is that saying the collision is running at 90% of prior year levels, or it is running at 10% of prior year levels?

Yeah, and that number was for July, and we're running at 90% of prior year. So we're off 10%.

Okay, and what would have been the trend of improvement? I guess what would June or May have been versus prior year?

Yeah, we had collision was backwards about 30%. Well, we're, you know, 70% if you want to do it that way. Okay. To be clear, we were generating 70% of prior year.

Okay. Okay. And I guess you commented that Florida has been strong despite sort of COVID re-outbreak. Are there any markets that are outliers? You talk about regional sequential improvement. Are there any particularly strong or weak markets in the recovery?

No. I would say, you know, early on, end of March, beginning of April, there was. I would say once you kind of hit that mid-April point, you were seeing fairly consistent recovery everywhere. Colorado, we only have a couple of stores out there, but it's been extremely strong for us. And, you know, they had some tough shelter-in-place regulations early on, and we were still amazed at the business that was coming out of there. So I think we certainly had our lumps along the way, and like a lot of our peers, I'm sure, you know, we had moments and times where we had stores physically closed for periods of time for a litany of different reasons, whether it be state-regulated or a virus breakout. But, you know, it's just slowly coming back over time.

Okay. And one last question. I guess with so many public players now focusing in the used car space and promising big growth, do you see auction activity getting any less rational or are bids becoming more competitive in that channel?

Yeah. And I would say, you know, we know differently than our peers, I'm sure. We constantly – look at the competitive space of what people are doing and what people aren't. You know, in the last 120 days, some of those national brands were not acquiring cars from consumers. They shut that piece down for a period of time. I think, you know, our goal is slow, sustainable growth, and we agree with Coxon that 87% of the people that purchase that pre-owned purchase it within 60 miles. We think we have a tremendous opportunity to grow our pre-owned business. I think our focus really right now is perfecting that online piece, and we have not done that yet. And that's why we keep quoting actual percentages where I don't think some others do. The reason we do that is to hold ourselves accountable to a number and really want to get better. But we believe our growth comes when we have a better tool and a world-class tool on the market. and we can convince the consumers to transact online and that it's safe. You know, it's different when you think about buying a car online to buying something on Amazon. When you're buying something on Amazon, you're not trading anything into them, and when you don't trade anything into them, you don't owe any money on it. So it's more complex when you're doing a vehicle transaction, and there's different pieces of that element that have to be thought through when completing that transaction online. But That's where our focus is in growing our business. As far as national brands, you know, we think within the markets we do business in, we compete really well. We're a franchisee. Our partners are very important to us, and we understand our restrictions around, you know, nationally marketing the new vehicle franchises. But on the pre-owned side, it's clearly an open market. But it's like anything else. You know, if you're going to ship a 5,000-pound item, 10 states, there's certainly a cost associated with that, and whatever that cost is, is it that much of a savings not to buy it locally? So there's just a lot of thought that has to be put into what that landscape looks like. Great. Thank you. Thank you.

We'll go next to David Whiston with Morningstar.

Thanks. Good morning. First, just an accounting question on the legal funding gain. Was that for GAAP and SG&A or other income?

That was other income.

Okay. And earlier, you talked about SG&A will be coming back up as volumes come back up. Is that just almost entirely from hiring more people as volumes come back up?

No. It will be a combination of, you know, You know, as volume comes back, you know, you'll see, you know, there'll be a little bit of pressure on overhead costs, that's outside services, bank fees, T&E training. But you'll also see, yeah, you could also see, again, adjust headcount to match the environment. And then also on advertising. you know, we may look to, you know, deploy additional advertising dollars, again, depending on the volume of the business. So it really just depends on what we see. And then, you know, and then also there could be pressure on the denominator side, the gross profit side, again, as volume creeps back in.

The one thing I'd add to that, David, like our peers, You know, when tragic events like this happen, you get to right-size your business and focus on other things. We're very disciplined right now in not adding back headcount and would only do that if we saw a material difference in our business. We're very focused on production per employee, and it's higher than it's been in a long time, and that's part of our success right now, too, and we certainly want to keep it there. As we sit here in July and coming forward, you know, we're still seeing good margin and anticipate strong results with very disciplined SG&A. But as you know, that forecast of mid-60s to upper 60s was full year. And the one element that none of us can predict is that fourth quarter and what could happen in the fourth quarter. But in the short term, you know, we'll stay disciplined and take advantage of what the market's giving us right now.

I think that's helpful, and then on used vehicles, there's an adverse supply shock in that space due to a collapse in new vehicle sales, so used vehicle pricing has come up pretty rapidly after an initial collapse, just like it did in 08-09, but do you see that used vehicle pricing dynamic maybe moderating in the second half of this year, or is it not until 21?

Yeah, that's a great question. I don't know the answer to that. You know, again, I think the fall will dictate if there's going to be a material change then or if it will weather through a little bit longer. I don't see anything changing in the next 45 to 60 days. And I know that's not a great guidance or time period, but it's such an unusual period right now with so many different dynamics going on. It's very difficult to predict. July is every bit as strong as June in a lot of ways. As we sit here today, and I know August is only a few days away, we anticipate August looking the same, but certainly that could change on a moment's notice as well. Okay, that works. Thank you. This concludes our discussion today. We appreciate your participation on the call and look forward to speaking with you in October. Thank you.