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Operator: Welcome to the AutoNation First Quarter 2024 Conference Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Derek Fiebig, Vice President of Investor Relations. You may now begin.

Derek Fiebig: Thank you, Carla, and good morning, everyone. I’d like to welcome you to the first quarter 2024 conference call for AutoNation. Leading our call today will be Mike Manley, our Chief Executive Officer; and Tom Szlosek, our Chief Financial Officer. Following their remarks, we’ll open up the call for questions. Before beginning, I’d like to remind you that certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks that may cause our actual results or performance to differ materially from such forward-looking statements.

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

Michael Manley: Thank you, Derek, and good morning, everybody and thank you for joining us today. I’m going to start on Slide 3 and as usual provide some opening remarks before Tom takes you through our first quarter results in greater detail. Consumer demand for vehicles in the first quarter was robust and in fact this is the first time we have had a quarterly increase in both new and used vehicle sales since the second quarter of 2021. Now specific to new vehicles, you might recall that new unit sales were up 8% in the fourth quarter and now were up 7% in the first quarter. Now as you know, new vehicles are the flywheel of our various revenue streams, [Indiscernible] continued strong trends, but certainly encouraging I think for our future.

Now as expected, the average selling price of new vehicles decreased 5% resulting in a new vehicle revenue increase of 2% for the quarter. New vehicle margins were down $325 on a sequential basis, modestly better than the rate of decline we experienced in the fourth quarter and the rate I previously signaled for the first quarter. New vehicle supply chain is in the final stages of recovery and our inventory is also nearing normalized levels. That does continue to be a wide range of inventory by model make and segments with some approaching historic levels. New vehicle inventory in terms of dollars increased approximately 5% since the beginning of the quarter, compared to a rate of sequential increase approaching 25% for the past eight quarters and you may see that as a signal of a declining rate of increase of new vehicle inventory on the ground.

For used vehicles, same-store unit decreased 2% from the same quarter a year ago, while total units were up 2% reflecting the growth of AN USA stores in the year. Sequentially, used vehicle units were up 6%. Now in the fourth quarter earnings release we discussed the market factors impacting our used vehicle business including tight availability, a return to historical depreciation patterns and lower demand in high priced vehicles. We also discussed our planned actions to align inventory levels and the turn rate with the market and shared our view that used vehicle PVRs would improve late in the first quarter. While the same market factors prevail, I am pleased to know that the team has completed the inventory alignment actions and we have experienced improvement in unit profitability in each month of the first quarter as we had expected.

The first quarter PVR of $1,473 was better than the fourth quarter and we are encouraged with the March PVR exit rate. Customer financial services was again a strong point in the quarter. Our product attachment rates were solid and our team continued to effectively navigate a challenging interest rate environment. After sales delivered another outstanding quarter and congrats to the team, well done. Total store revenue was up 8%, but evenly, well not evenly really, but across all product categories and gross profit as you can see was up 9%. Now I think the greater complexity of vehicles is leading to higher values per repair order. And this coupled with increased number of repair orders from a year ago resulted in an excellent total performance.

The strength of our balance sheet and cash generation continues to give us optionality on capital deployment. CapEx was stable for the quarter. We ended up passing on a number of M&A opportunities that did not meet our return requirements, but make no mistake our appetite and capacity for acquisitions in our cost base is strong. Also we continue to balance share repurchase opportunities with targeted leverage levels and as of yesterday, we have repurchased $250 million of AutoNation shares in 2024, reducing the share count by another 4% since the beginning of the year. Our Board of Directors has also approved an additional $1 billion under our share repurchase program. Now aside from the solid quarter from a financial perspective, there are few other highlights I’d like to touch on.

We continue to focus on developing our offerings that enable us to realize a greater share of our customers’ transportation spend. AutoNation Finance originated over $160 million of loans during the quarter and the portfolio balance now exceeds $560 million. We also continued with the rollout of AN USA footprint with four store openings during the quarter, three were in Florida and one in Nevada adding density to these markets and bringing our store count to 23. Our business model is clearly resilient, working well and we continue to deliver strong financial performance. And this performance is of course made possible by our 24,000 plus dedicated AutoNation Associates to take care of our customers every day. And with that Tom, I’m going to pass the call over to you.

Thomas Szlosek: Thank you, Mike. Turning to Slide 4 to discuss our first quarter P&L. I’ll cover this page in summary fashion and will jump into the individual components on some of the later pages. Total revenue increased 1% with the growth standing out from parts and service at 8%. Our growth in new vehicle revenues was largely offset by similar declines in used vehicle revenues. Gross profit of $1.2 billion was 18.5% of revenues and as expected down in nominal dollars from 2023. The growth in our high margin parts and service business partially offset the impact of declining new and used vehicle unit profits. Adjusted SG&A was relatively stable at $786 million corresponding was flat, offset by higher spending for our expanded store footprint and advertising to aid our growth initiatives, as well as used vehicle acquisition efforts.

This resulted in our adjusted operating income of $348 million for the quarter, which ended at 5.4% of revenue. Below the operating line, our first quarter results were impacted by higher interest expenses, mainly for floorplan debt and benefited from lower income tax expense. First quarter floorplan interest expense of $49 million was up from $27 million a year ago, a reflection of higher rates and inventory levels as expected. Net of OEM incentive which are included in gross margin, new vehicle floorplan expense changed from a benefit of $4 million in 2023 to a cost of $15 million in 2024. Income tax expense for the quarter was $63 million, compared to $93 million in 2023, reflecting lower taxable income and a slightly higher tax rate. All in, this resulted in net income of $190 million, compared to net income of $289 million a year ago.

Our share repurchase activity helped to partially offset the EPS effects of the net income decline. Total shares repurchased over the past year decreased our average shares outstanding by 11% from Q1 2023 to $42.3 million shares at the end of the second quarter – first quarter in 2024. This was about – this of course is a benefit for our EPS which was $4.49 for the quarter and historically return on our share repurchases has been quite attractive. Let me move to Slide 5 for some color on new vehicle performance for the quarter. New vehicle volumes – unit volumes were up 7%, including increases of 19% for imports and a 4% decrease in premium luxury. Domestic unit volumes were flat year-over-year. On average, new vehicle unit revenue decreased 5% in the quarter, while new vehicle unit cost declined around 1.5% resulting in a moderation of new vehicle gross profit PVRs. The $325 sequential decline from the fourth quarter in new vehicle PVRs was largely in line with what we had called for and lower than declines in previous quarters even with the seasonal sequential shift away from premium luxury brands that typically occurs in the first quarter.

New vehicle inventory levels, including vehicles in transit has increased from 21,000 units at the end of March last year to 38,000 units this past quarter. On a days basis, we had total new vehicle inventory levels of 44 days, which increased from 25 days last year and 36 days in the fourth quarter. We had 69 days of domestic inventory, 44 days of luxury and 30 days of imported brand. Slide 6, in used vehicles, we had a volume unit increase of 2% from a year ago or minus 2% on a same-store basis. These rates improved significantly from the negative 4% total store and negative 8% same-store rates we experienced in the fourth quarter. Average used vehicle selling prices moderated year-over-year by 5% reflecting the shift to lower priced used vehicles.

Our same-store unit sales vehicles priced under 20,000 increased 5%. Mike discussed the encouraging outcomes in used vehicle PVRs in the quarter, driven by the teams’ realignment actions. Used vehicle inventory levels decreased from 39 days in the fourth quarter to 31 days in the first quarter which we feel positions us well for the second quarter. Used vehicle sales and profitability continue to be a big area of focus for us as we emphasize effective sourcing, pricing and speed, while optimizing customer satisfaction. Then move to Slide 7 on Customer Financial Services, a great story as Mike mentioned particularly in a high interest rate environment where fixed monthly budgets can hinder customer ability to pursue value at all fronts. We’ve been able to maintain product attachment rates and our gross profit PVRs declined only modestly, the majority of which is related to the shifting economics related to AutoNation Finance lending.

As a reminder, the accounting for customer loans from AutoNation Finance requires that we eliminate the upfront fees from CBS or CFS PVRs. However, over the course of a loan with AutoNation Finance, the profitability for AutoNation is expected to be more than two and a half times that of a non- AutoNation Finance model. Speaking of AutoNation Finance, Mike gave you some of the numbers. I’ll expand on that a little bit here. The business is on track for over $700 million in originations in 2024, all from AutoNation stores and we expect the portfolio to more than double during 2024. It is already the number one lender across the AutoNation enterprise. Its credit profile, fee rates and profitability also continue to improve and we are finding that AutoNation Finance is deepening the relationship we have with our customers.

So far this acquisition is proving out nicely, with a track of cash on cash returns on equity. Back on PVRs, we’ve also seen an increase in leasing, which represented 24% of new sales in the first quarter, compared to 17% in the same quarter of 2023. This is a minor headwind for CBS PVR as leased vehicles historically have lower CFS attachment rates. Let me move to Slide 8, after sales represented 46% of our total gross profit for the quarter, compared to 40% a year ago and continued to grow. Total store revenue increased 8% to nearly $1.2 billion and same-store revenue increased 7%. Warranty and internal pay, both experienced double-digit year-over-year growth. The customer pay is also tracking well gross way. The value per order is improving and our total number of repair orders has also increased.

Total store gross profit grew 9% year-over-year and by 8% on a same-store basis. Our gross profit margins were up more than 50 basis points from 47% reflecting higher value repair orders and the scale benefits from an increase in a number of repair orders. This high margin business is a key part of our continued engagement with our customers and we are focused on capacity utilization and technician development to support the continued growth of the business. Importantly, our total technician workforce increased 5% from a year ago on a same and total store basis. On Slide 9, our adjusted operating income margin was 5.4% for the quarter, down from last year, but flat sequentially and up approximately 150 basis points from pre-pandemic levels.

The decrease from 2023 mostly reflects the moderation in new vehicle gross profit per unit, which was expected and is consistent with the industry, as well as higher SG&A. The growth in SG&A reflects investments for growth including higher spending to support used vehicle acquisitions and the larger AN USA footprint, as well as alternative transportation for after sales customers, increased advertising spend and inflation. Normalized SG&A as a percentage of gross profit is expected to remain lower than pre-pandemic level. Moving to Slide 10, our adjusted free cash flow for the quarter was $257 million, compared to $368 million a year ago. As you can see, conversion relative to our net income improved. During the quarter, we sharpened our focus on our cash cycle times across the business, which helped to achieve these conversion results.

We closely monitor metrics for our key operating cycles and have resources and programs in place to drive efficiency that needs. While we expect new vehicle inventory levels to increase as manufacturer supply chains improve, we are focused on continuing to accelerate the velocity with which we turn our overall vehicle inventory. During the quarter, we reduced our used our vehicle inventory balances and the related non-trade floorplan financing by more than 15%. Consistent with the expansion of AutoNation Finance, our auto loans receivable related to loans originated in our own stores increased by approximately $115 million in the quarter. And as I mentioned, we expect continued growth in this portfolio. CapEx for the quarter was $94 million, level with a year ago.

This resulted in adjusted free cash flow of $250 million and a strong conversion of 135% of our adjusted net income. Being a strong generator of cash provides optionality in terms of capital allocation. Slide 11 shows our capital allocation for the first quarter, compared with the similar period in 2023. You’ll notice a year-over-year increase of almost $400 million in net debt pay down and almost $300 million decrease in share repurchases. Some of this shift is timing and at shortly after quarter end as Mike mentioned, we executed more than $200 million of additional share repurchases. But we are mindful to need to maintain appropriate leverage levels in this dynamic environment, while pursuing maximum shareholder returns through a combination of M&A in our core space and share repurchases.

At quarter end, our leverage was at 2.25 times EBITDA, near the low end of our 2 to 3 times target and we continue to maintain our investment-grade credit rating. As Mike mentioned, our Board approved an additional $1 billion in share repurchase authorization. Now I’ll turn to call back to Mike to provide some commentary on the path forward.

Michael Manley: Yeah, thank you, Tom. As we said, I’m going to give you just a little bit more commentary before we open up for the Q&A this day and add some color in terms of how we’re seeing things and some of the things that we are focused on. So, let’s start on the new side of the business where, as we’ve said, vehicle supply continues to rise. And I think inventory levels will continue to increase over the full course of 2024, but as I kind of indicated in my opening comments, not at the pace over the last two years. We can all see that leasing and retail incentives are picking up, yet both remain below the pre-pandemic levels, which I think gives the OEMs quite a lot of drypowder and optionality as the year develops.

So I see – I see that on a positive basis in terms of new vehicle sales. Obviously, a lot of discussion about bad introductions and customer interest in these. But I think it’s going to be a key dynamic throughout the year. And as we have seen and it’s true in everything – excuse me – it’s all about balance and it does appear that OEMs are adjusting their plans and actions to match demand more closely and from our point of view, this is just going to be well received. Hybrids do continue to do well in the marketplace and if you look at our brand portfolio, that gives us great exposure I think for this portion of the marketplace. And I’m going to briefly touch on new margins, because obviously we’ve said, we expect them to continue to moderate over the course of this year, probably at a similar place really to our experience over the last over the last two quarters.

But I do remain very positive about new vehicle margin. And used vehicle margins remains constrained, used vehicle market remains constrained and as we all know late model used availability remains limited and we will be prepared at the time, but I think the team is being nimble in their approach to the market and very, very focused on the effectiveness of vehicle acquisition, pricing and of course inventory turn. CFS, as Tom and I both mentioned earlier, the strength of the organization and I really expect that to continue to perform well even with continued pressures coming from overall monthly payments, the vehicle meets our tools, as well as OEM actions to support unit sales. After sales has been and is going to remain a significant focus for us for the year.

And you can see some of the results coming through in the efforts of the team in Q1. Obviously, we had some pretty good growth and great growth actually coming at same in 2023. So comps are going to become a little bit difficult as we get through the year, but growth is really what we’re looking at in terms of a dollar sense and I think that business will continue to grow attractively for us. And obviously, as you would expect, we are focused on managing the things that we are more control of and those variables which include cash flow and capital deployment. And so with that, we will dive in directly to the Q&A please.

Derek Fiebig : Yeah, Carla, if you could please remind people how to get in queue for questions?

Operator: [Operator Instructions] Our first question comes from John Murphy from Bank of America. Your line is now open.

John Murphy: Hi, good morning, guys. I guess, two quick or maybe quick one to you. Mike, there is a hyper focus on new GPUs, but I think when you look at sort of the front-end gross, I think of just 5000, I think 4941 for the quarter, the components of that although not additive is sort of a semi inflated new GPU. But it seems like a somewhat depressed used GPU of 1473. And then there’s the F&I PVR of 2,615. It seems like on that 1473 on used GPU, there’s some opportunity in the upside to potentially offset some pressure on your GPUs. I am just wondering if you could talk about that and then potentially the upside in F&I. And then how a general manager manages this because, my understanding is they’re managing the front-end gross and the components of it. So there might be some real focus on offsetting that that pressure on new GPUs through these other components. So, just basically you talk about the opportunities on the other side.

Michael Manley : Yeah, thank you, John. Well, as we said on the fourth quarter call, used -we had quite a lot of discussions on the used margin and our expectation. And I was pleased frankly with the way that it developed throughout the quarter. So in my mind, we still have upside in terms of the actual TIN margin as I call it on the vehicle and I’ll come back to the constituent elements of TIN and CFS and how we manage on the business. I think what’s important is, lot of talk about obviously availability of vehicles and one other things that changed I think talk about the agility of the business model is our percentage sales of vehicles over seven years old in that part of the vehicle [Indiscernible] that’s obviously very healthy and I haven’t seen big reductions in terms of the vehicle availability, has gone up significantly.

So if you looked at our used GPUs as a percentage of margin in those vehicles notwithstanding average selling prices have gone up, you are going to see an impact of those older vehicles, excuse me – even though Derek’s giving me bottles of water all the time I’ve got a frog in my throat. I’ve seen the impact of those kind of older vehicles coming through. But I think that I think we took some good actions in Q1. I think we’re in a good place. I think we see upside in our used vehicle margin. CFS, obviously is a big, big focus for us. What we asked our general managers and our sales managers to do really is to take a very balanced approach in terms of how they view a transaction with a customer. First and foremost is, we would love every single customer to walk out in a car of their dreams from our showroom and what we try to do is structure great value package for them.

Some of that puts emphasis and focus on protection products, some of puts emphasis and focus on the [Indiscernible] exchange their trade vehicle and where they sit if it’s financed. But ultimately, our general managers really are focused on delivering good customer service, good market share and to create a package that enables our customers to feel that they have got value for their transaction can return to us. And that gives you a wide range of margins right between TIN and CFS. And outside of that, I would encourage you to go to one of our dealerships this weekend and buy a vehicle and let me know how it was for you.

John Murphy: I’ll get on that. And just one other quick one on the buybacks. I agree your stock is incredibly inexpensive, but you were not that aggressive in the first quarter. Then as the calendar turns, just post March you got pretty aggressive in buying back. I mean, the share price in the first quarter was $147 roughly on average and post the quarter close it was $157. So the stock went up a bit. I’m just curious how the decisions are getting made on that sort of the speed and sort of raciness of the buyback, it means is there a grid that you guys are using? Because I mean the stock went up a bit and you actually got more aggressive of buying back. Just kind of – it’s a small knit, but I’m just trying to understand what’s going on there.

Michael Manley : No, I think you’ve summed it up in your last comment. It’s a very small knit, I mean if you look, firstly, our job is to run our business on behalf of our shareholders and we take that very, very seriously. I think if you look at our track record in terms of buybacks over a reasonable period of time, you’ll see that indeed we have been fortunately very well positioned with the buybacks as we came as normal towards the end of the quarter when we’re trying to balance potential M&A opportunities on the table, where our share price is at the moment, how we’re thinking about the use of the capital that we are generating in our free cash flow. We obviously, particularly during blackout period build in optionality for us that matches our aspiration in terms of trying to give the best value to our shareholders.

And as the market and we all know what happened in the market towards the end of the quarter and earlier this quarter, have felt some pressure fortunately. We have to had enough foresight to put a plan in place that meant we could use a mechanism to return some capital to our shareholders and that’s our job. Tom, I don’t know if you want to add something?

Thomas Szlosek : Well, the only thing I would add, John, is that the first quarter can be a little lumpy, I mean, we’ve been black at the – just the blackout six weeks long. So, yes we do have 10b5-1 plans in place. Yes, they do have the grids that you referred to and they definitely kicked in. So, my opportunities were [Indiscernible] but it does remain a key part of our [Indiscernible] occasion strategy.

Michael Manley : Thanks, John.

John Murphy: Right. And it’s a very good one. Thank you.

Operator: Our next question comes from Rajat Gupta from JP Morgan.

Rajat Gupta : Great. Thanks for taking the question. I had one on the AutoNation Finance. Any updated thoughts on how we should think about the cadence of the net loss there as you ramp up the portfolio through the course of 2024 and maybe into next year? And relatedly, how much equity are you putting in using your balance through to fund new receivables in the near to medium-term? And I have a follow-up. Thanks.

Thomas Szlosek : Hey, thanks, Rajat, for the question. Yeah, we’ve been quite pleased with how that acquisition has progressed in the quarter. As you know, we financed over $160 million of new originations. The delinquencies are behaving quite nicely. Team’s doing a great job there. The interest margins are quite attractive. And overall, we’re satisfied with the [Indiscernible]. As you know, when you’re building a portfolio, the accounting around the loan loss reserves is pretty punitive. You are basically booking upfront all of those loan loss reserves. So while we’re doubling the size of our portfolio, you’re going to have a lot of upfront charges and until the portfolio kind of stabilizes, you will be experiencing a loss [Indiscernible].

From a net margin perspective we are quite happy with how the business is performing actually ahead our expectations. For the quarter things went well in terms of penetration and they’ve got – they’ve got to compete with the other financing alternatives, but it seems doing a nice job, penetration continues to grow. And so the path forward is, it’s quite encouraging for us. And I think we’ll be at a point of breakeven certainly into early 2025. When I look at the funding, you have to remember that we still have the portfolio that’s comprised of some pre-AutoNation acquisition-related receivable that’s probably 40% to 50% of the portfolio. Those will have a different FICO score and credit profile and so the funding levels on those are probably not as good as what we see on the path forward.

As you look at the portfolio going forward, once it migrates to completely AutoNation originated loans you’ll see the funding rates would be quite attractive. And it really proves itself out when we do our first securitization. I don’t expect anything in 2024 and our portfolio needs some time to squeeze in before the market will be interested. But in 2025, I expect to get pretty attractive funding for the AutoNation-related originations, probably north of 90%, 95%.

Rajat Gupta : Got it. Got it. And just to follow up on you know parts and service, obviously pretty strong trends here for the second quarter in a row versus like your peer group. Could you help us quantify how much was – how much of the year-over-year growth was driven by just to make some price on the orders versus just the traffics at the stores. And how should we think about the growth rate at least on a same-store basis for the remainder of the year? Thanks.

Thomas Szlosek : Honestly, the growth rate didn’t get from kind of where the growth came from and then I’ll give a little bit of commentary on how Christian and the team is thinking about it, yes, no. It was solid performance I mean, I’d characterize it probably as a third related to traffic and volumes across the different revenue streams. I’d say the balance is higher value repair orders, the complexity of the orders that comes through are creating higher revenue and the better profitability. So I’d say it’s probably a third or two-thirds is how I had to think about it.

Michael Manley : And just a little bit of commentary if I may quickly on how on how Christian and the teams are thinking about the year. It was it was a good year last year no doubt. We added about I think from memory something like 300 net technicians across the various certification brands into the business that now excludes mobile service out just purely – technicians really into our dealership. We still have quite a lot of capacity in terms of buys, the investments that AutoNation have made in their dealerships over the years has created that that buying capacity for us which is great because there’s certainly upside in the vehicle parts. And I think what we’ve are working on is to try different things to see how we can penetrate older vehicles, bring them back into that franchise environment and continue to grow and that will require additional technician resources.

So, working hard on the career path toward those guys and girls in the business to keep them because as you know it’s a very limited and heavily sought after resource out there. And we need to make sure we continue to work on those elements, as well as communicate well to the vehicle parties to get them into our showrooms. So, big focus again for Christian and the team who are coming off of what I think was a good quarter for them.

Rajat Gupta : Got it. Got it. Thanks for the color. I’ll get back in queue.

Operator: Our next question comes from Bret Jordan from Jefferies.

Bret Jordan : Hey, good morning, guys. Could you talk about the contribution of the mobile service initiative to parts and service, is that gaining scale?

Michael Manley : Yeah, let me let me cover that. So, as you know, we’ll at the end of last year, we rebranded that business it’s now AutoNation Mobile Services. We have continued to integrate it into our market areas where we have density. We are still working through the technical integration of that business into all of our legacy systems within here. But I would tell you that it is gaining traction in terms of its revenue. It doesn’t breakeven price in this moment in time. We never expected it to for the balance of this year. But what it is doing is it has introduced over 120,000 new customers to AutoNation. They are new, completely new to us, as well as now the programs we’ve put in place in terms of using it to support AN USA are beginning to kick in.

That will take some time, because that’s a slow burn as you could imagine. People invariably are somewhere between 10 and 15 months before they need service. But obviously it can be there to pick up the repairs. And when you think AutoNation USA so far has sold about 75,000 cars even if you think 50% of those cars find their way into one of our franchise business. It’s creating quite a healthy part for our mobile services to go and to go and provide service and warranty for. So, I think we’d probably behind where I’d wanted to do with mobile services at this point. But I do see our traction improving and picking up and I do see how it is now beginning to introduce a lot of customers is exactly what we wanted it to do.

Bret Jordan : Okay. And then can you [Indiscernible] any regional dispersion, I know this is a lot of mixed dispersion, but are you seeing some markets performing better than others just sort of as like a – as an economic indicator?

Michael Manley : Are you talking AN general, or are you talking for mobile service?

Bret Jordan : In general, yeah, from a – and really from a vehicle sales standpoint are some markets particularly stronger than others.

Michael Manley : So, from my point of view, I would tell you that we don’t see some markets particularly stronger than others. We – if you think about where we have the majority of our business is obviously, California Arizona, Texas, Florida. Those states are particularly strong and have been very, very resilient. This time of the year, obviously is, as we come into spring is heavy truck season. So, obviously for us trucks have been a big focus particularly in those domestic franchises that we have. But when I look across our businesses, I think we have further opportunity in Texas, but there’s nothing to do with the market. It’s more opportunity for where we are. Florida continues to be strong for us. Our market President here is one of our key talents in the marketplace and he always looks for improved performance. But, Tom unless I’m missing anything, I think really quite originally balanced performance?

Thomas Szlosek : Yeah, I think that.

Bret Jordan : Okay. Thank you.

Operator: [Operator Instructions] Our next question comes from Douglas Dutton from Evercore.

Douglas Dutton : Hi team. Congrats on the nice quarter here. I just wanted to ask one on SG&A and it remains around that 65% or 66% area, which is understandable given some of the customer-facing initiatives that you’re working on, but in a more normalized state, can you remind us where you’d like to see SG&A as a percentage of growth and maybe what the loose timeline you would aim for there?

Michael Manley : Absolutely, Tom will be asked to do that.

Thomas Szlosek : Yes, no. You are right. I think, short term, I think the performance in the quarter just north of 66%. I see that as sustaining for the next few quarters. We do have a fair amount of moderation in the new and used PVR that’s impacting gross profit. If you look at the SG&A itself, it’s actually close to flat year-over-year from a spending perspective. And it’s set up nicely to have a decent correlation with gross profit when it comes to incentives because compensation is probably the largest element of the SG&A. So, our compensation structures are meant to reward excellent performance and when there’s moderation, it’s going to moderate as well. I’d say the other parts of SG&A have behaved probably very efficiently.

We are seeing good traction in some of the initiatives that we have to reduce costs in areas where we spend indirectly on things like insurance, real estate and other things. So it’s good focus on driving productivity there. And we’re going to continue to have elevated, marketing expenses are growing, marketing expenses as we pursue some of these new initiatives. So on balance, I would say, probably mid-60s is where I would see on a long-term basis SG&A as a percentage of gross profit. But again with a good focus on keeping the fixed elements are the benefits.

Michael Manley : Tom, I could touch there, I’m just going to add a little bit more to Doug, as well just to pick up on that.

Thomas Szlosek : Yes, yes.

Michael Manley : Obviously, that’s side off in terms of some of the investments that we are making. And for example, even though sort of less SG&A on a dollar basis. So, Tom, I think gave you right color on that. What we’ve seen is increased investments in certain areas to drive our business because the example courtesy and loan on the vehicles, we have made progressive investments over the course of last year and continue into this year as we try to grow our service offering and obviously we’ve seen the benefit and after those growth. But we’re also seeing some reduction in terms of the investments we’re making in some of our new initiatives. We spent a reasonable amount of money investing in our micro leads business for example last year, and that’s now at this stage where we’re going to integrate it more into our business, which will reduce the standalone investment in that and we’ve traded that investment for other areas such as that courtesy car and loan are and that’s something really that we’re trying to do internally recognizing we would like to invest in new initiatives and schemes.

But also making sure that the core business gets what it needs as things become more available. And as you know, last few years have been very tight vehicle supply, courtesy cars were under pressure under pressure is that’s easing a bit now. We are now able to get that service to our customers. And then the other area that we invest in is obviously on our people and we are seeing not just inflationary increases in terms of people, but also some of the other things that we’re doing to try and make sure that we reduce turnover and improve engagement in our teams. So it is a balance but within that range that Tom talked about. Hopefully that color that helps as well.

Douglas Dutton : No, excellent. That’s great detail. I appreciate this detailed answer here. Just a quick one on CFS too. You said there’s good attach rates there. About $160 million in new loans this quarter and the portfolio is now at about $560 million. Do you expect a similar cadence going forward on originations and penetration or how should we think about that growth as we progress through the rest of the rest of the year and into next year?

Michael Manley : Yeah, great question, Doug, I don’t think you can expect the portfolio to double every year. I mean, we are dealing with reason is a captive market for us, in that we’re dealing with the $300 million or sorry 300 or so AutoNation stores. The name of the game is to get as much penetration as we can on the financing business, but there is a limit for that. I do think the earlier years of AN Finance you’ll see very, very outsized growth rates. But I think the portfolio doubling this year. That just mathematically can’t happen every year, but it will give us good growth and as I said earlier, I do expect once we get to a normalized portfolio size and we begin to do some securitizations, I think you’ll see some nice accretion from an earnings perspective into the calculus we get to that point to be able to position. So, and we are all entirely supported by our operating teams and it’s really is improving the relationship we have with our customers.

Thomas Szlosek : It’s got massive. I mean that business got massive SG&A leverage. I mean, all the [Indiscernible] there, so it is about now really, really increasing the throughput in a very deliberate and thoughtful way.

Douglas Dutton : Okay. Thank you. Makes sense. Thanks, Tom. Thanks, Mike.

Operator: Our next question comes from Colin Langan from Wells Fargo.

Colin Langan : Oh great. Thanks for taking my questions. Can you just remind us your latest thinking on where new gross profits go? I mean, I think the comments in the past were that you sort of it get back to on a percent basis historic levels. Is that still the thinking in any concern that maybe we kind of overcorrect this thing continue to normalize?

Michael Manley : Yeah, Colin, thanks for the question. I’m going to answer this. So, as I think about new vehicle margins as I said there’s a number that haven’t touched – very briefly touched on your right in terms of our percentage margin. What you’ve seen since, let’s take 2019 as the pre-pandemic year, what you’ve seen since then and now is obviously significant increase in ASPs. And I don’t – even though I see ASPs moderating, as we go forward, as mix comes back in to a more normalized level as OEMs continue to gradually increase their incentives to stimulate demand. I don’t see ASPs returning back to the 2019 level, which inherently if you’re able to hold those in percentage margin means from a dollar perspective on a per unit basis, we should and probably expect high dollar margins than we saw pre-pandemic even if we return to that percentage margin that you mentioned at the beginning.

Obviously, as we transition as an industry into higher levels of electrified vehicles, we know from the impact that we saw in 2023 and still see in terms of TIN margin and TIN margin for me is purely what’s attributable to the vehicle excluding everything out. TIN margin came under pressure particularly in fully electrified vehicles as OEM dealers, all of us were trying to stimulate takeaways. That to some extent as I’ve mentioned, the balance at the beginning of my opening comments I think is why we’re we are being in favorably about that. But that is a dynamic that will until they drive – until OEMs are able to drive the cost low in those vehicles be an impact on our business. But what has changed is if you look at the lease rates of electrified vehicles, that’s doubled in the last 12 months and losing electrified vehicles in my view more balances the contribution to the ASP in the marketplace that the customers are happy or more prepared to accept.

So, quite a lot in my answer, apologies for that, but that’s none of my thinking on new vehicles in total.

Colin Langan : And any – given the – we’ve seen you kind of indicated I think 69 days of domestic supply, how is the profitability – have certain brands already kind of returned to normalized level of profits and is that consistent with the thinking that on a percent basis they’re kind of similar to pre-COVID levels or those kind of getting closer to being fully back?

Michael Manley : I mean, it’s very smooth at this moment in time and for each – so if you look at our portfolio at 31 brands across our portfolio, so we get quite a very broad view of what’s going on in the marketplace. And there are certain manufacturers whose days of supply, they’re not back to where they were in say 2018, 2019 from a days of that supply was faced with, but neither is the overall new vehicle market. So obviously, we have seen different dynamics in terms of margin by OEM. Still some of that driven purely by the supply and demand curve. But as OEMs have been able to fill up their pipeline and we’ve got more mix on the ground, you’ve also seen an incremental increase in terms of their incentive – in terms of the use of the leasing, rather than pure finance and as such, we do see an impact on our margin, which you see in our P&L.

But from my point of view, our net result and what I’ve said suggests that even with those supply that will continue to increase from a dollar perspective per unit even though it’s going to moderate for sure during the balance of this year. And I don’t see anyone quite yet back towards exactly where they were ‘18 ‘19.

Colin Langan : Got it. Alright. Thanks for taking the question.

Operator: And that was our final questions. I will now hand you back over to Mike Manley.

Michael Manley : Yeah, thank you, everybody. And again thank you very much for taking the time to be on the call with us today. As we mentioned, I think AutoNation once again delivered solid operating results in the quarter and our efforts resulted also in strong cash conversion, which as we’ve discussed on this call provided us with the flexibility to deploy capital for attractive returns. Obviously, we’re going to continue to invest in the growth of our business as we look to optimize our operations, build on the fantastic footprint of portfolio of stores that we’ve had. And in closing, I would say, that although I’m certain 2024 will continue to bring its normal mix of headwinds and tailwinds, I think the AutoNation team understands what we would like to deliver very focused on delivering that and ultimately that will result in what I am determined to deliver and that’s great shareholder returns. Thank you.

Operator: And this concludes today’s call. Thank you for joining. You may now disconnect your lines.