AutoNation, Inc.

Good morning. My name is Ellen and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the AutoNation second quarter 2023 earnings conference call. All lines must be placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two on your telephone keypad. I'll now like to turn the call over to Derek Fiebig, Vice President of Investor Relations. You may begin your conference.

Thank you, Ellen, and good morning, everyone. Welcome to AutoNation's second quarter 2023 conference call. Leading our call today will be Mike Manley, our CEO, and Joe Lauer, our CFO. Following their remarks, we'll open up the call for questions. 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 SEC. Certain non-GAAP financial measures as defined under SEC rules will be assessed 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.

Yeah, thanks, Derek. And good morning, everyone. Thanks for joining us today. As normal, Joe's going to take you through the results in much more detail than I will, but what I'd like to do is talk about the business, give you a perspective from my side, touch on what we see as industry dynamics, and then give another update on where we're heading and the channels that we're putting in place for growth for the business. So as we know, there obviously continues to be mixed economic signals in the overall economy, but From our point of view, the supply and demand equation, even though it is moderating, we think, does remain favorable for the business. And last quarter, I said that we thought the consumer had in no way tapped out, and we still feel that's the case for sure. Now, notwithstanding the fact that higher interest rates are impacting affordability, lower unit sales over the past few years have contributed to pent-up demand, which, as we see inventory levels improve and some mitigation on that transaction price, continue to convert to sales in the marketplace. And the aging vehicle part, which is now about 12 and a half years, as well as positive household formation, I think are additional favorable dynamics for the business. And these factors, I think, will continue to be a benefit for new and used vehicle sales going forward. Now, as in the first quarter, 2Q light industry vehicle sales increased from a year ago, both driven in this instance by an increase in fleet, but also a notable rise in retail units, which increased by about 10%. And even with these increases, like vehicle sale remains below what most of us who've been in the business a long time would consider trend. You know, where industry incentives and lease penetration, even though they've both been increasing as late, they're still significantly below pre-pandemic levels, which I think just give you an indication that OEMs still have a lot of additional tools to help spur demand if it's needed in the marketplace. And talking about incentives, as you know, Q2 incentives were around $1,700, which was up $700 year over year, but well below the $4,000 pre-pandemic high. And leasing continues to recover, but still only reached about 20% of volume versus 30% pre-pandemic. And I think this channel will further grow, particularly with EVs. And as we close out the year, I think we'll see that come through. Now, for the second quarter, new vehicle sales were in line with the overall growth in retail units for the brands we represent, and gross PBRs, as expected, continued to mitigate, yet remained robust, I think, at around $4,600 for the quarter. Now, clearly, front-end margins have been more resilient than most of us were expecting heading into the year. Now, I expect margins will continue to moderate, partly to maintain current demand in this higher monthly payment environment, and partly as inventory levels continue to increase and fewer vehicles are being sold at MSRP. However, I do not expect margins to return to pre-pandemic levels for the foreseeable future based on higher average selling prices of vehicles and continued lower industry inventory levels. So let me just move to used vehicles. And remaining consistent with the discussions we've had in this area, our focus on enhancing economics through effective self-sourcing efficient reconditioning and agile market pricing, I think has helped us in the quarter in what has been a bit of a choppy market. On our Q1 call, I discussed how the lower new unit sales over the past years led to scarcity of supply of late model used vehicles, and this continues, obviously. But in addition, the velocity of sales is also lower than normal as fewer vehicles were sold to fleet and daily rental over the past few years, and consumers are clearly holding onto their vehicles for longer. Now, our focus on automation has been on internal sourcing, asset turnover, and avoiding purchasing vehicles, which required substantial reconditioning to get them up to the automation quality standards. But as we look back on our first quarter results, we recognize that our lower level of used inventory, whilst bringing a number of benefits, such as lower depreciation and funding benefits, we felt was probably constraining volumes more than it should. So we spent a lot of effort in the second quarter really redoubling our sourcing efforts particularly in those categories that we think deliver quality inventory so that we could progressively through the quarter regrow our injury inventory to get us ready for the third quarter and beyond and we did that i think in a very disciplined deliberate way and that means we exited the second quarter and now go into the third quarter with increased availability which we expect will enable us to drive elevated unit cells and joe will touch on that but obviously that work came with an investment particularly around the development of those channels that we thought were the best places for us to increase our used inventory. But as I said, Joe, I'll touch on that a bit more. Now, the expansion of our Alternation USA footprint obviously remains a core tenet of our growth and densification efforts. I think densification is an important word. And we added our 16th store in Colorado Springs during the quarter. Now, as you know, we've been intensely focused on expanding the range of products and services we offer and sell to our customers. Now, this focus for us is twofold. The first is to increase automation share of our customer spend on transportation and mobility. And the second is to continually develop and grow revenue from what we term as higher recurring revenue sources. Now, one key component of this approach is obviously our financial services performance. And I have been very encouraged with the continued performance the teams have delivered. So I know a lot of our guys and girls are on the call listening to this. Thank you for that. That's your shout out. Let's please... keep that going up because our CFS PVRs structurally higher despite many expecting this valuable source of margin to come under significant pressure, particularly given prevailing interest rates. And I think it's because our team have always taken a balanced approach, driving both finance penetration levels, but really importantly, increasing per unit product sales. And as such, we've increased our per unit performance. And as a result, the team delivered a record PVR of more than $2,800 for the quarter. Well done. Now, talking of higher recurring revenue streams, let me touch on after sales. As you know, we've constantly talked about this, and we've been very deliberate in consistently growing this high-margin, higher-frequency business. And we recorded a gross profit record of more than $540 million, which is up 13% from a year ago. Now, notwithstanding the degrees in late-model vehicle park, which, as you know, is where all franchise dealerships have the high penetration and obviously lower new unit sales over the past year, I think that we have successfully been able to combat that headwind. Still work in progress, but a good result in a quarter, no doubt. And a big part of that is our focus on expanding our technician workforce and serving more customers. So I'm expecting to be able to talk about further growth in the future on these calls. Now, business continues to generate significant cash flow, which, when you combine it with the strength of our balance sheet, allows us to continue to invest to change our business for the long term. obviously make investments in our core operations, but also return capital to our shareholders, and we do that through share repurchases. And during the second quarter, we invested more than $200 million to repurchase over 1.5 million shares at a price of about $132 per share. And years to date, we've reduced our shares outstanding by more than 8%. Now, as we previously said, the structural changes we have made to WaterNation during a time when the supply and demand economics have been a tailwind for our operations will have a lasting and meaningful impact on a go-forward basis and help to continue to drive shareholder value and returns. So before I hand the call over to Joe, let me provide some updates on where we're heading and talk a little bit more about those channels for growth. Now, as I've previously discussed, we've been very intentional, I think, at looking at areas where we can expand and grow to meet the transportation needs of our 11 million-plus customers and their households. And there is a very significant opportunity set of customers who really only transact with AutoNation once or twice or have become active over the years. And we are commencing a much more targeted effort to engage with this customer base. I think it's an asset that we don't talk enough about, certainly externally, but very focused on internally. When you've had a business that over many years has not only built up some phenomenal franchise assets in great locations with what I think is great density in our operations, those 11 million plus households and customers that we've interacted with represent increasingly with technology a very, very valuable source for the company. And Rich Lennox, our CMO who joined us from Macy's, as you know, brings substantial non-automotive retail experience. So he is already looking at both lifetime value and customer loyalty with his team. And I'm really excited about what I expect to come from that area. Because if we can extend our core business and increase the depth and breadth of our product and services offer, that will deepen and lengthen our relationship with our customers, as well as continuing to provide a convenient, trusted, and transparent customer experience, which I think is vital to be successful in the marketplace. And we've put a lot of time and effort, obviously, as an organization, as a group of people, on those customer-centric actions, and I'm very pleased to see that it hasn't been lost on some industry observers. And this May, 143 of our stores were certified as 2023 Dealers of Excellence by J.D. Power. So shout out to those stores. Well done, guys. And that recognizes dealers for exceptional customer service. Now, 143 stores this year. That's up from 129 last year and 78 in 2021. So great progress. I'm also very pleased with the performance of AM Finance as the group continues to expand. As Joe's often said, we're taking a metered approach and pace to make sure that we can progressively increase the penetration of this business with the vehicles sold at ARA and USA stores, and they are doing that, and they're also navigating, as you can imagine, quite an interesting and sometimes challenging environment with all the rate rises. RepairSmith, I think, has extended the reach and the brand of our after-sales business, and we've begun to integrate this mobile service and repair business into automation ecosystem. And one of the things that I think will become increasingly obvious is as we continue to grow ANUSA, it's the only standalone used car dedicated business that has one of the most convenient service and warranty provision in the entire marketplace. Imagine that. And I mean, you have phenomenal selection of used vehicles, great transparent pricing, Great preparation, good quality vehicles, but then you also get the best convenience out of your vehicle serviced and repaired by a mobile, well-qualified technician. So really pleased about how that business is coming together. A lot of work to do, obviously, but I think it's going to be a complement to the other things that we're doing. And talking about used car business, it's obviously grown substantially from our pre-pandemic levels, both at our franchise stores and through ANUSA, now 16 locations with the addition of Colorado Springs, increases our footprint density in that area, which is another important strategy that we're focused on to drive market efficiency and economics. Now over time we expect our actions and initiatives will garner a larger share of wallet from consumers, which will reduce our relative exposure to the more cyclical parts of the business, and that approach is really centered onto that customer base I mentioned and talked a little bit about earlier, and the 11 million households that we serve. Now, during the second quarter, we built on more customers. Thank you, one has now added more than 400,000 new customers for the year. And we're focused on enhancing our relationship with active customers. But as I mentioned, really going back in, reactivating lapsed customers, adding products and services to our base so that we can really be that comprehensive provider to all of those customers that either are part of our active customer base or hopefully will be reactivated through the work and the products and services that were added. And we think that these actions will add to the structural changes that we've brought to the business over the past few years. Now, that said, I have to say we are very focused on the franchise business and supporting our vehicle manufacturers partners. And we are in a privileged position to have a lot of great relationships with some of the best automotive brands in the world. And I'm pleased to say in June we added to our franchise density in Southern California with the purchase of Bob Baker Auto Group in Carlsbad. Welcome, everybody. Really pleased to have you on board. Now, you guys are going to bring at least $300 million, hopefully more, of annual revenue and five great stores that obviously help us with building our customer base, as I said. And with that, Joe, I'm going to hand it over to you to take us through the details. Thank you.