AutoNation, Inc.

Good morning, my name is Alex and I'll be your conference operator today. At this time, I would like to welcome everyone to the AutoNation First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star too. Thank you. I would now like to turn the call over to Ankur Shah, Manager of Investor Relations. You may begin your conference.

Good morning and welcome to AutoNation's first quarter 2022 conference call and webcast. Please ensure that your lines are muted until the operator announces your turn to ask a question. Leading our call today will be Mike Manley, our Chief Executive Officer, and Joe Lauer, our Chief Financial Officer. Following their remarks, we will open up the call for questions. I will be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward looking comments. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks 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 earlier today and in our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. And now, I'll turn the call over to AutoNation's Chief Executive Officer Mike Manley.

Yeah, thanks, Ankur. Well, good morning, everybody, and thank you for joining us. Firstly, I am pleased to report that the momentum with which automation ended 2021 continued through to the first quarter of this year. From our view, consumer demand for personal vehicle ownership remains strong across both our new and our used channels, and our service and parts business is clearly showing the benefits of both increased miles traveled and our focus on increasing our penetration into the after-sales market. And really, as a result, today, AutoNation reports record first quarter performance with earnings per share of $5.78, which is an increase of 103%, and revenue of $6.8 billion, which increased $849 million, or 14% compared to prior year. Now, from a new sales perspective, our performance reflects the effect of continued tight supply basically with volumes down and new margins stable from the end of last year. At year-to-date, I can say compared to prior year, we've not seen any reduction in lead demand for new vehicles or really any perceivable segment shifting as a result of current economic conditions. Now, our used car performance reflected good volume growth on a same-store basis and the continued expansion of our Alternation USA business, and this helped maintain our revenue and total gross profit. Now, during the quarter, we sharpened our analytics capabilities, which are increasingly educating our buying, placement, and pricing decisions in the used market. And these disciplines are a work in progress, but I think you can clearly see they're going to have a beneficial impact on our business. For example, during the quarter, we recognized the need to rebalance some of our used vehicle inventory to help improve turn and margin. And as a result, in the quarter, we saw temporary reduction in used margin per unit sold. But because of these actions, as we enter the second quarter, margin return have already improved. As we all know, success in the used car market is basically dictated by your ability to manufacture great quality, well-priced, desirable used cars. And this clearly covers key elements of the business, including efficient and effective reconditioning, for example. But it all starts fundamentally with your ability to competitively acquire used inventory. And with strong consumer demand, We continue to focus on our self-sourcing capabilities for used vehicles, which I think further strengthens both our franchise dealerships but also our Alternation USA businesses. And as I've mentioned before, nearly all of our pre-owned vehicles retail to self-source, which includes our growing We Buy Your Car channel, which purchases directly from consumers. And when I look back at the first quarter, we self-sourced 94% of our pre-owned vehicles that we acquired. Now, as previously announced, the company entered two new markets this quarter with Alternation USA Charlotte in North Carolina and Alternation USA in Charleston in South Carolina. And our Alternation USA stores continue to exceed our expectations, and these two new stores were both profitable during their first four months of operation. And we remain on plan to open 12 additional stores over the year. And our target, as you know, is to have over 130 of these stores in operation from coast to coast by the end of 2026. These stores will continue to leverage the automation brand, the scale that we have, and our proven customer-centric processes to capture a larger share of the used vehicle market. Moving on to after sales, as I mentioned earlier, our team delivered what I consider to be a tremendous quarter with an increase in after sales gross profit of 19%. And I'm going to come back to this a little bit more in my closing comments. We continue to build our compelling customer value proposition through the combination of our digital tools and physical assets and going to leverage not just our existing business, but also Automation USA growth plan and our embedded structure improvements coupled with the rich data analytical capabilities that we continue to build, and this is going to help grow and strengthen our business and the Automation brand. But before I hand over to Joel, who's going to take you through our results in more detail, I'm going to briefly touch again on a topic that we did discuss last quarter when we reviewed our year-end results. During that time, I talked about a number of key profit drivers and disciplines that now are structurally embedded into the group, such as our used to new sales volume focus, our customer financial service performance, our after sales penetration and margin expense control. And I'm pleased to recognize that when I review the results for Q1, you can again see the benefits of this focus and discipline coming through strongly. Great performance from our sales and CFS teams, growing our used business and our per unit CFS performance. Our service and parts teams, led by our technicians, service lane advisors and and our past teams delivered strong performance improvement. And as you see, all of our associates, and frankly that's whether they work in our dealerships, collision centres, auction or support functions around the country, demonstrated the continued clear focus on margin but also expense control discipline. I think these things are important and I touch on them again because performance efficiency and effectiveness in these areas, my view, is sustainable and as such really do help decouple our company from the more circumstantial elements that could be viewed as transitional, such as supply and demand-driven constraints. Now, these embedded structural improvements in our performance should not be discounted because ultimately they do translate into long-term sustainable value, and they provide us with more control over where we're going and the opportunity to focus on expanding and developing our customer-centric personal transportation solutions while driving results for our manufacturer partners. So I just want to end this introduction by congratulating all of the people that work at AutoNation for the results they delivered in the quarter, thanking them for what they do. And with that, Joe, I'm going to hand over to you.

Thank you, Mike, and good morning, everyone. Today we reported first quarter total revenue of $6.8 billion, an increase of 14% year over year. This increase was driven largely by used vehicle revenue up 47% over the same period. Supply chain disruption continues to govern new vehicle availability as we saw a 6% decline in new vehicle revenue as we effectively sold every new vehicle received with inventory falling below year-end levels. We continue to see demand exceed supply during the first quarter. With this, we remain focused on optimizing new vehicle margins and sourcing used vehicle inventory to support sales in our AutoNation USA expansion. For the quarter, total variable gross profit increased 31% year-over-year, driven by an increase in total variable PVR of $1,671, or an increase of 38%. A decline in new units of 19% was partially offset by growth in used units of 11%. Our after-sales business continues to gain momentum, with after-sales gross profit increasing 19% on a year-over-year basis. Taken together, total gross profit increased 27% compared to the prior year. Shifting to cost, we continue to deliver significant SG&A leverage due to strong cost discipline and robust vehicle margins. First quarter SG&A as a percentage of gross profit was 56.6%, a 610 basis point improvement compared to the year-ago period. As measured against gross profit, our metrics improved across all key categories, with overhead decreasing 210 basis points, compensation decreasing 340 basis points, and advertising decreasing 60 basis points. The combination of strong growth and gross profit, strict cost discipline, and opportunistic share repurchase generated net income for the quarter of $362 million, or $5.78 per share. EPS was up 107% versus prior year adjusted EPS of $2.79. This reflects our eighth consecutive quarter of all-time high adjusted EPS. Turning to the balance sheet liquidity, our cash balance at the end of Q1 was $608 million, which mainly consisted of proceeds from our recent notes offering. Combined with our additional borrowing capacity, total quarter end liquidity was $2.4 billion. We continue to deploy capital to grow our business and drive long-term shareholder returns. During the first quarter, we entered two new markets with AutoNation USA Stores, as Mike mentioned earlier. We've also continued to repurchase our own shares. During the first quarter, we repurchased 3.5 million shares for an aggregate purchase price of $381 million. We purchased an additional 1.4 million shares thus far in Q2, for total year-to-date repurchase of $518 million, or almost 8% of our shares outstanding at the beginning of this year. The company has $376 million available for additional share repurchase under our current authorization. And as of April 19th, there were approximately 58 million shares outstanding. We continue to maintain ample capacity on our balance sheet. At the end of the first quarter, our net leverage ratio was 1.3 times net debt to EBITDA slightly lower than at the end of the fourth quarter and well below our historical range of approximately two times to three times leverage. We continue to demonstrate strong operational execution and disciplined capital allocation. Going forward, we remain focused on leveraging our balance sheet and strong cash flows to drive long-term shareholder value. With that, I'll turn the call back over to Mike.

Thanks, Ed. Just a couple of comments for me before we get into Q&A session, and that's around our structure and the people that we have. You'll have seen some announcements as we got into, well, really finished last year and got into the first quarter of basically some realignment of our existing businesses. The couple that I want to touch on is obviously the two new chief operating officer roles that we have with Dave Kohler coming in. David's going to look after our non-franchise businesses so that we can make sure we have appropriate focus on that. There's going to be significant growth opportunities, some of which you already identified, some of which is work in progress, but Dave and his teams will be making sure that that gets the focus that it needs. And then Steve Quark will look after our franchise businesses. And that, again, remains our core business, naturally, and we'll get the additional focus of new roles that we brought into the organization, which basically are market brand president roles. That's going to strengthen our relationships with our manufacturers, but really give the focus so that we can work really alongside our manufacturer's partners across our three automotive segments of domestic, import, and premium luxury. So what I think this will do is it will bring significant focus based upon individual brands within our overall automation group, but also now tease out areas of the business that really do offer, I think, significant growth with the right level of focus and dedication. And with that, I think, Joe, we can open it up for questions.

At this time, I'd like to remind everyone, in order to ask a question, please press Start, the number one on your telephone keypad. Our first question comes from the line of Rajat Gupta from JP Morgan. Rajat, your line is now open.

Great. Thanks for taking the questions. You know, just had a first question on the used car business. You know, the GPUs there normalized faster than maybe what we saw at, you know, your peers. You know, Lithia still had pretty good margins there. I'm just curious as to what drove that normalization. Was it more of prioritization on growth versus margins? Was there something else to highlight there that was more temporary? Maybe if you could start there. Thanks.

Yeah, sure. This is Mike. No, it's completely temporary. As I mentioned in my comments, towards the end of last year and progressively through Q1, we've been, I think, strengthening our data analytics with regard to used vehicles, not just in terms of being more precise in what vehicles, what segments, what geographies. are moving and in which direction but also how that applies to our inventory levels and frankly I didn't like some of the as a result of that frankly I didn't like some of the profile that we had and I wanted to make sure whilst we were developing a very strong quarter that we took the necessary action to realign it and I'm pleased to say that was completed in the quarter our turn rates have improved and our margins are rebounding in the way that I hoped they would so I just think it was appropriate action based upon a continued focus on us in terms of data and data analytics

Understood. So do we expect margins to move back higher here going forward? Obviously, there are other governance around used car pricing and some factors that they're probably not in control. But maybe if you could help us understand, where do we expect those used car GPUs to settle relative to what they were pre-pandemic?

That already moved up.

As a result of the actions, we completed what I wanted them to get done in the quarter. So they've already moved up. I think when I think about GPUs, even though we have seen some movement from pre-pandemic levels, the actual margin on the basis of sales prices remain relatively flat. What I expect is we bring additional efficiencies in the business in terms of the conversion of a raw purchase of a used vehicle to get it prepped and ready for sale and the speed of getting it to market, that there's actually opportunity to us to improve margins beyond what you saw pre-pandemic in Houston. So that piece is very much a focus internally, and it talks to some of the things that I commented on in terms of some of the structural changes that we're making. But the raw margin that you see reflected in the quarter was driven by exactly what I said. It really was a realignment of some inventory. That was completed in the quarter. The guys are delivering margins that are much better and heading in the right direction. But as I mentioned, I still think there's even further upside.

Thank you.

Got it. Got it. Great. Thanks for the color. And maybe, you know, you mentioned last quarter that, you know, you have a captive Finco in your mind that you plan to, you know, maybe, you know, build at some point. Curious, like, if your thoughts on that have evolved at all over the last couple months, you know, where are you, you know, in that planning process? You know, when could we expect to see that? And And maybe, like, if you could comment on, like, just the broader, you know, auto lending environment today, you know, is there any stress that you're seeing, you know, in terms of, you know, ability, just ability for lenders to pass on some of the interest rate increases that you're seeing on the benchmark side? You know, just maybe if you could, you know, frame that as well, you know, along with, you know, just updated thoughts on the capitals.

When you said my thoughts evolved on the need for us to have a captive thinker, no, but they've certainly solidified. I view it as an important piece of the business for us going forward for our Alternation USA stores. I think when I think about our business, one of the reasons why I wanted to slightly restructure it was to enable us to put in place the tools that Alternation USA needs to be successful going forward. Obviously, on the franchise side, we have relationships with our OEMs, and that's vitally important. But we have a business that is in a growth phase. It will continue to grow. It's proven that the model is working, and it needs, in my view, to have the flexibility of its own thinker. That thinker, like most successful thinkers, will not be responsible for picking up the whole book. Naturally, you're going to remain in partnerships with people that have been supportive during your period of growth before, and I expect that to happen going forward. You will absolutely hear more on this subject as the year develops, but one of the things that we will do, as I think the group has always done, is not rush the purchase. I think that there are opportunities in the market that are interesting at this moment in time, and as we find what is the right opportunity and the board agrees with that, we'll make the appropriate move. In terms of our conversion rate on used, I can tell you it remains strong. At this moment in time, we are not seeing a drop off in terms of conversion. You can see from our CFS, our customer financial services performance, that in fact that's improving. It's been a strength of ours and continues to be a strength of ours. So at this moment in time, what I can tell you is when I look at both the top level of inquiries and also some of the conversion rates by mix, we're not really seeing any dramatic shift except in the sub, I would say, $22,000 mark, where we are seeing a drop-off of not raw inquiries, but really a drop-off of conversion, and that's more to do with inventory. As you know, that inventory is relatively tight across the industry, and we're seeing the same thing, but it's being more than supplemented by an increase in plus $40,000 inquiries. So did that help paint some color for you?

Yeah, absolutely. Thanks so much for all the color and good luck. I'll get back to you.

Thank you.

Thank you. Our next question comes from Adam Jonas of Morgan Stanley. Adam, your line is now open.

Hey, Mike. Is there a precedent for OEMs to raise MSRP's intra-model year that you've seen?

I have seen OEMs make what I would call inflationary price adjustments during model years. It's certainly something that I have seen on multiple occasions. They're typically in response to, as we see, inflationary pressures in the marketplace, but some of those may not be a pure MSRP. Some may be incentive adjustments as certain things change in the marketplace. So that is not unprecedented in my view or my experience.

Thanks, Mike. Another one on Ford and Jim Farley. I believe you have 42 Ford stores. I hear Ford made some comments in February saying, and I'm kind of paraphrasing here, Mike, bear with me, that dealers that would charge significant markups on the Lightning won't be allocated. Now, I'm not a lawyer, but that sounds like getting close to disenfranchisement talk. Is that legal? Is Ford actually able to unallocate someone that charges over MSRP for product in the current franchise agreement?

What I would say is that, and I'm not an attorney, so I'm going to give you my view. What I would say is that There are mechanisms, and this isn't a Ford thing, by the way, and I will tell you that Jim's sentiment in this area is probably going to be echoed by most of the OEM CEOs. What I can tell you is that OEMs in the current franchise agreement need to treat their dealers, whether it's a large group or individuals, broadly in a similar manner that's in keeping with state franchise laws. Now, having said the obvious, which that was, Obviously, there are mechanisms that OEMs want to and do employ to try and make sure that the value they perceive in their vehicles pass on to their customers. So Jim's reacting to a huge amount of demand for Lightning, which is in the marketplace. And as you know, they've now shut off reservations for that vehicle. And what he's trying to do, which I think is reasonable, is to make sure the vehicle hits the market at a price point that is supportive of the brand of the F-150.

um there are many ways that he can many ways he can influence that and a lot of those ways are within the franchise regulations some of which may be outside but there are a lot within okay mike if i can just squeeze in one more please appreciate it uh agency model seems like from my perspective that seems like a good development for a company like auto nation to kind of just let you focus on the areas where you uh are have greater capability and and and where you win on service and efficiency i would love your thoughts on on that at a high level am i wrong that if if we are in some circuitous way ending up in some kind of fixed commission and or fixed percentage or whatever that that's that's not necessarily a bad thing i know there's a lot of details there but love your love your thoughts high level thanks yeah no problem so um

You can throw whatever words you want at it, whether you call it an agency or whether it's a dealership agreement or a dealer agreement. One of the things that, in my mind, is absolutely certain as we move forward is that there needs to be much less friction in the sales process than there has historically been, and there needs to be more price transparency. And I think that the reset that we've been through over the last two years is a good opportunity, particularly with the transition to new powertrains, to make sure that that continues in the marketplace. And for me, what we've recognized is that there is opportunity to remove cost from the distribution channel, and there is opportunity for us to encourage customers to maybe pre-order more than they've done in the past, which also adds some efficiency. I think given the increased price of electric powertrains, that that should be passed on to the customer to make sure that this transition is as smooth as possible, and automation will be a part of that. And that means reasonable margins for the work that we do, and it means we'll continue to compete as a customer-focused business. So, in principle, I'm agreeing with what you said. I just don't particularly want to label it an agency model or anything else because, frankly, I think it's good business.

Appreciate it, Mike. Thanks.

Thank you. Our next question comes from John Murphy of Bank of America. John, your line is now open.

Good morning. Good morning, Mike. Maybe just to follow up on the pricing and maybe the more important question is, are you seeing OEMs increase invoice pricing to you? I mean, MSRP is a suggested price in the market, but what you get charged is the invoice. So it seems like that might be a more important thing to focus on because they're looking at the grosses that you're making and you're making big grosses on new. So is there any increase there to maybe kind of claw back some of that and share a little bit in the wealth on the GPU a little bit more?

So, John, I apologize. We have 30 brands. I'm going to have to talk a little bit more general, and if you want to circle back with us, feel free to do so. Yeah, when OEMs make the interim, and Adam asked the question, interim model year changes that are due really to inflationary pressures typically in the past, that results obviously in an increase to us, or they don't get any benefit from it. And ultimately, therefore, a portion of that gets passed into the marketplaces. It's interesting, isn't it, because what's actually happening today is vehicles are being sold at MSRP and the margins that we are getting are as a result of vehicles being sold at MSRP. I thought that fundamentally that was the business model we were supposed to be achieving and I never was able to achieve it as a CEO of an OEM for a whole host of reasons, partly because the levels of inventory that were in the retail network had to be turned and they had to be turned in a fashion that meant heavy discounting. We're not in that position anymore. The last time I looked, many OEMs were also benefiting from improvement in terms of their margin, and I think, frankly, that's going to continue. So if you want more specific details, then feel free, as I mentioned, to reach out to us. But if I look generally at our new car pricing now, our new car pricing is automation. The quarter was very stable, very stable. So I, in fact, saw... downward in terms of our average price on new vehicles, which was driven by mix, not driven by incentives or further discounting. So I think we've now seen a level of stability in new car pricing that we didn't have through the early part of last year. So obviously the year-over-year comps are quite large at this moment in time, but as we get into the second half, you're going to see them stabilize down significantly.

Yeah, I'm sorry, Mike. Maybe to be clear, I mean, right, I mean, your gross is a function of what you charge the consumer less, your invoice price from the automaker that you're charged, you know, net of any kind of floor plan financing assistance. So I'm just curious, have you seen any actions by the automakers on the pricing to you on the invoice that would change, that, you know, that it seems like it's an increase relative to the MSRP, meaning are they narrowing the gap between the MSRP and the invoice they charge you? The MSRP is what's in the market. The invoice is what's charged to you. I'm just curious, is there a change in that gap?

Yeah, now I understand your question, John. All right, sorry.

No. Okay. I'm not saying... Yes. Second question, and because I can only do simple math, let's just think about this in simple terms. I mean, the buybacks basically improved your EPS by 5.4% in the quarter, if you look at the 66 versus the 62.6 from the fourth quarter to the first quarter. And if you kind of drew a linear sort of math on that, that'd be the equivalent of you acquiring 18.3 franchises or 1.4 billion in revenue in the quarter. Obviously, it's a similar PE about five times to where your stock is trading right now. You know, I mean, it just seems like buying back your stock all day long makes so much more sense than making any acquisitions. You know, and you bought it back at roughly $109 on average through the quarter. You're below that now. Do you just stay very aggressive? I mean, not aggressive. I mean, it's a balance, right? It's the right thing to do on buying back your stock and not making new vehicle acquisitions and then pressing, you know, the used growth. I just... It just seems like the exact right strategy and you're executing on it. And if you comp it versus what these splashy announcements are made on the acquisition side by some other competitors with smaller networks, it just seems like you're having a much bigger impact and immediate return on your earnings per share structurally over time.

Yeah, I think as we've seen over the last 24 months and we'll continue to see the way that people are valuing companies is changing and will continue to change. But the math that you did broadly was right with the exception of one thing. And that is that some of the acquisitions that we're looking at and frankly are pursuing will give us, I think, a multiple higher than the historical businesses has been able to generate because our industry is going to change. And with that change is going to come opportunities that frankly, will be more under our control as a retailer than we've been in the past and bring more incremental benefits to our shareholder in terms of value. But one of the things that AutoNation has done is I think there has been a strategy to try and maximise the benefit to the shareholder of where capital has been and certainly in the first quarter with everything that was going on and the fact that we reviewing and have reviewed some of our strategic priorities, it was best for us to maintain that activity, and you've seen the results come through. But that doesn't mean to say there aren't attractive acquisition opportunities for us. There are, and as the year goes through, you'll hopefully see some.

And then just lastly, on the All Nation USA stores, 130 by 2026. I mean, you're making good progress there. It seems like the business is working well. Why is 130 the right number? Could it be significantly higher?

Yeah, I think when the 130 was done, it was really looking at two things. One was, which are the most attractive markets that we are not necessarily in with our existing footprint? And by that, I'm talking about franchise business as well. And then the second thing was, as the group was thinking about its capital allocation, what would be a reasonable allocation of capital over that period? I can tell you that our thoughts on that have continued to mature, partly because As they were putting, and we now obviously were putting in Automation USA stores, the model was being tweaked and made more efficient. And so today's Automation USA store is slightly different from the past. And secondly, I also think about these stores not just purely as a place where used cars are sold. These stores in the future can do many other things for us. So that 130 is our baseline today. It may well grow, and we may get more aggressive for other reasons.

Okay, very helpful. Thank you so much.

Thank you. Our next question comes from Brett Jordan of Jefferies. Brett, your line is now open.

Hey, good morning. This is Ethan Huntley on for Brett. Thanks for taking our questions. Maybe just going back here to supply and maybe the cadence of supply. You know, I know new inventory sort of came down to eight days from nine and

used uh to 30 from 40 but can you maybe just provide a little bit of color on sort of the cadence of supply and whether things might have improved at all or are we just sort of bouncing along the bottom here um frankly i think what we are doing is bouncing along the bottom but i don't think it's as as you said one of the things that i wanted to do with our team is to increase our turn rate um it it's um And we've been able to do that. And I think that's why you've seen our days of supply really level out. What's been interesting for me is as we've come into this year, obviously none of us could really foresee the ongoing impacts of things that are happening around the world. And they are going to have impact on people's original plans in terms of their production levels. But what I do know is Given this market, it's a key market for the OEMs, and I do know that the intent is there to improve it as soon as possible. From my point of view, you're not really going to see anything until the third or fourth quarter, but I know you're asking individual OEMs. So our focus is let's sell more aggressively at the pipeline, which is a new skill for the industry in the U.S., and let's make sure we're turning the inventory as fast as possible when it lands. And they're the two key things that are in our control, and they're the things we're focused on.

Okay, great. That's helpful. Thank you. And then maybe just here on the floor plan, did floor plan subsidies exceed expenses for the quarter?

I can give you my gut reaction, but Joe's just double-checking to make sure we don't give you the wrong data point. It did slightly. It did slightly. Did you hear me? I mean, obviously now floor plan is relatively low from an expense perspective.

Because obviously you can see by the day's turn that our actual expense is relatively modest. But the incentives also come down marginally for the same reasons.

Thanks, Jim. Okay, thank you. And then just sort of lastly here on the service category, you know, a 15.5 comp was, you know, solid there. Can you just sort of help break out the difference in traffic versus average ticket?

Yeah, could you just be a bit more specific with your question, please, Ethan? Sorry?

Could you be more specific with your question? Are you asking me through our service department how is that changing and growing? What is it specifically you're looking for?

Yeah, just in the service category, did you see the comp of 15.5, was that primarily driven through inflationary pricing and increased prices, or is it? a pickup in sort of, you know, traffic?

Well, we're seeing two dynamics there. Firstly, we're seeing an improvement in traffic from a customer perspective and an improvement in internal work, slightly offset by a decrease in warranty because obviously the new vehicle warranty park is dropping, but it's been more than offset by an increase in consumer both volume and a slight increase in per ticket. and internal work as our use volume increases.

Okay, great. Thank you very much.

Thank you. Our next question comes from Stephanie Moore of Truist. Stephanie, your line is now open.

Hi, good morning. I wanted to touch on the new vehicle side of your business, and maybe you can speak to if you're seeing any change in the consumer profile of your new vehicle buyer. either from a credit quality standpoint or median average income, and kind of thinking forward as we go through what could be a potential recessionary environment, certainly a rising interest rate environment, how you think your new vehicle business is positioned now versus prior cycles. Thank you.

No, I'm not seeing any perceivable change in terms of the profile of customers coming through new vehicles. In fact, if you look at our If you look at the traffic coming through all of our web pages as well as walking into our stores, it is in fact up and continues to grow year over year. Our conversion rates, obviously with the level of inventory and the demand that we've got are remaining strong. So outside of that, it's difficult because of the environment that we're in to really pinpoint if there is something underlying that's happening. In terms of where I think they'll have new vehicles going forward, If you look at the SAR in the first three months of this year, it's bouncing around 13 million, 14 million, and typically those numbers would have been associated with a recessionary period, obviously. So even if you see us, because of economic conditions, consumer confidence, whatever, see a reduction in that demand. I think the levels that we're at now would still be maintained going forward because, as I said, they're historically more associated with periods of recession than where we sit right at this moment in time.

Got it. So I guess maybe said another way, you know, given the rise we've seen in just new vehicle MSRPs, are you seeing just an affordability issue with the average consumer? or do you find that they're trading up for the benefits of the vehicle, or do you think it's more of a shift to the used market? I guess is the angle I'm looking for.

Okay, well, I'll try and give you an angle on the answer then. If you look at the increase in used vehicle wholesale prices and the increase in new vehicle prices, the gap between them actually narrows over the period of last year. So that's a theoretical cost to change in my mind. So if you were trading in a vehicle, then your position really has been not materially impacted by rising prices because you've got it on both sides. That obviously doesn't apply to people that are buying a vehicle for the first time in the marketplace. Outside of that, I can't really give you much color because our turn rates are so high, it's difficult to perceive what may be a slight movement in terms of affordability because we, frankly, have customers for basically everything that's coming.

Got it. No, that makes sense. I appreciate it. Thank you.

Thank you. Our next question comes from Collin Langen from Wells Fargo. Collin, your line is now open.

Oh, great. Thanks for taking my questions. I just wanted to follow up on the FinCo. I saw in your comments you said something, you're in no rush to purchase. I mean, is the plan to acquire a FinCo or is this something about, or are there thoughts to really more do it organically?

From my perspective, if there is the right target in the marketplace, that would be by far my preferred route to do it. By far my preferred route to do it.

Got it. Okay. And then you also, in your intro comments, talking about costs and SG&A was quite low in the quarter. Are there any notable actions that we should be aware of that are going to drive that structural cost? I mean, what really are some of the key drivers that you're kind of getting at in terms of structural costs coming down, coming out of this crisis?

Yeah, I'll address that. It's really the same we've talked about in the past. It starts with really starting to leverage the digital capabilities we have both in the sales and stores operations, as well as the back office. So you go back to the beginning of 2020, I mean, we're 13% down on headcount on a same-store basis, right? That has continued to kind of drive through the operations. Our digital tools have allowed us to be more efficient in advertising. And so, you know, these are, in my perspective, structural changes we've made that have reduced, if you will, the fixed cost structure of the business, which we're maintaining the discipline going forward. We expect that we will continue to have a much more favorable SG&A as percentage of growth going forward by maintaining that discipline and ensuring that, you know, we continue to leverage the tools most effectively and we continue to invest in those tools to make sure that they're state of the art.

Great. All right. Thanks for taking my questions.

Thank you. As a reminder, if you'd like to ask a question at star 1 on your telephone keypad, Our next question comes from David Weston of Morningstar. David, your line is now open.

Thanks. Good morning. First, on the USA Stores, as you go into new metro areas, from a marketing perspective, how are you introducing the stores and the brand to consumers? Is it mostly Internet or radio, TV?

Frankly, it's a combination of all of the above. I think what Joe didn't touch on is one of the efficiencies that Mark Cannon and his team have been able to generate is the way that they are communicating and the use of different media channels. And I think that typically what we would do is really use the data that's available to see how the demographic that we're targeting in that particular area is consuming information. And then he just basically builds an optimum plan to try and make sure that we hit communication goals and marketing goals in the timeframe that we need to launch it. And he does that individually by each and every market, even though there's obviously a lot of commonality. And then effectively he rolls it out.

And on SG&A, if we were to have a recession later, Obviously, a lot was already cut in 2020. Other than reducing advertising in a downturn, are you guys already close to the bone, or do you think there's more cuts you could come up with if you had to?

We are continually evaluating the cost structure, and we have a number of initiatives underway to continue to operate the stores more efficiently. So we today have a large shared service center in Dallas. We continue to look at ways to optimize that. and make our stores more and more efficient, and that is an ongoing journey that will have ongoing benefits. So the answer is I don't like to think of cutting to the bone. I like to think about optimizing the organization, and that's clearly something we see additional opportunity going forward.

Okay, and finally, with inflation perhaps sticking around short-term or even long-term, if it were to be a longer-term problem, would that change your M&A strategy at all in terms Would you want to be more towards volume brands due to their lower prices or focus more on the premium side because those customers perhaps aren't as bothered by inflation?

I mean, frankly, we're in a cyclical business, right? So obviously, for me, I like the blend that we have in terms of brands. I think it's a really good blend. particularly when I think through the plans that the individual OEMs have put in place, because ultimately the product that they're working on today really is going to dictate the success on the new car side of the business going forward. And having reviewed now across many of our OEMs, their product plans, firstly, I'm encouraged by the level of investment that's been made, and secondly, it doesn't really change my view on the balance that we have in our portfolio today. I think it just reinforces we have a good balance.

Okay, thank you.

Thank you. There are no further questions at this time. Mr Manley, I turn the call back over to you.

Thank you. Again, thanks for being on the call today. As I said before, I think it's good that the momentum that we had finishing off last year continued into the first quarter. I'm really going to just end by saying, and we touched on it in some of the questions as well, I think that there are a number of changes that have been structurally made to the group that will continue to be in place. That, for me, will make us more efficient. I think a focus on cost that we discussed with Joe and his answer to the question will continue going forward. And I look forward to seeing how Q2 ends for us, and hopefully you'll all be on a call in a few months' time. So thank you for your time this morning.

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