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Edited Transcript of AN earnings conference call or presentation 23-Jul-19 3:00pm GMT

Q2 2019 AutoNation Inc Earnings Call

FORT LAUDERDALE Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of AutoNation Inc earnings conference call or presentation Tuesday, July 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cheryl Scully Miller

AutoNation, Inc. - President, CEO & Director

* Michael J. Jackson

AutoNation, Inc. - Executive Chairman

* Robert Quartaro

AutoNation, Inc. - VP of IR

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Conference Call Participants

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* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Bret David Jordan

Jefferies LLC, Research Division - Equity Analyst

* Christopher James Bottiglieri

Wolfe Research, LLC - Research Analyst

* Colin Langan

UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst

* David J. Tamberrino

Goldman Sachs Group Inc., Research Division - Equity Analyst

* David Whiston

Morningstar Inc., Research Division - Strategist

* Derek J. Glynn

Consumer Edge Research, LLC - Analyst

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Michael Patrick Ward

Seaport Global Securities LLC, Research Division - MD

* Nels Richard Nelson

Stephens Inc., Research Division - MD

* Rajat Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Stephanie Benjamin

SunTrust Robinson Humphrey, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the AutoNation Q2 2019 Earnings Conference Call. (Operator Instructions) Thank you.

Robert Quartaro, you may begin your conference.

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Robert Quartaro, AutoNation, Inc. - VP of IR [2]

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Thank you. Good morning and welcome to AutoNation's Second Quarter 2019 Conference Call and Webcast. Leading our call today will be Mike Jackson, our Executive Chairman; and Cheryl Miller, our new Chief Executive Officer and President. Following their remarks, we will open up the call for questions. Chris Cade and 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, including economic conditions and changes in applicable regulations, that may cause our actual results and 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 yesterday 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 Executive Chairman, Mike Jackson.

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Michael J. Jackson, AutoNation, Inc. - Executive Chairman [3]

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Good morning. Thank you, everyone, for joining us today. And it's a delight to be able to report such a strong performance, a record second quarter for the company, earnings per share of $1.12, if you adjust for the impairment it's $1.20. And Cheryl will give you the drivers in a minute.

The reason I'm on the call today is to officially introduce Cheryl Miller as our new CEO and President of AutoNation. It's an honor and a very exciting step for me to be able to do that. She replaces Carl Liebert. I thank Carl for his commitment and his efforts on behalf of AutoNation. We had an open dialogue that there was risk in coming to a completely new company and a new industry, and that we'd have to have a running conversation as to whether this would work, whether it would be a fit. And we came to the mutual conclusion that it simply was not a fit. The story is as simple as that. There's nothing else to report. He'll be with us for the next 30 days to help with transitioning. There's no other shoe to drop. There's no story behind the story. It's as simple as that.

I'm excited to work with Cheryl. She's been with us 10 years. And she's been in the auto industry almost 20 years. I've worked directly with her for the last 4 years, with her having the responsibility of Chief Financial Officer. I've worked hand-in-hand with her on the development of our brand extension strategy and all the planning that goes behind that, all of our strategic initiatives. She is CEO-ready. And I'm very excited to ask Cheryl to talk about the drivers of the results in the second quarter. Cheryl?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [4]

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Thanks, Mike, and good morning, ladies and gentlemen. I'm honored to continue the legacy of AutoNation's great leaders, Mike Jackson and Wayne Huizenga. AutoNation has a history of excellence and an amazing future. Together with my 26,000 colleagues, we will continue to focus on the core business while diversifying our future for our brand extension strategy and strategic alliances.

In addition, today, AutoNation announced that Jim Bender, Executive Vice President of Sales, was named Chief Operating Officer. Jim brings a wealth of knowledge to the position and a proven track record of success. I look forward to our continued partnership.

Turning to our quarterly results for the second quarter. We reported net income from continuing operations of $101 million or $1.12 per share versus $97 million or $1.07 per share during the second quarter of 2018, a 5% increase on a per-share basis. Net income from continuing operations included after-tax noncash franchise rights impairment charges of $7 million or $0.08 per share in the second quarter of 2019, and $6 million or $0.07 per share in the second quarter of 2018.

In the second quarter, we continued to focus on our new vehicle margins. For the quarter, our same-store and new vehicle gross profit per vehicle retailed was up $165 or 10% compared to the same period a year ago. As a part of this strategy, we continue to manage our inventory levels to meet customer demand in the current retail environment. Year-over-year, we have reduced our new vehicle inventory by approximately 9,000 units.

Same-store Customer Financial Services delivered another record-breaking quarter with gross profit per vehicle retailed at $1,926, which was up $134 or 7%. Same-store second quarter 2019 revenue totaled $5.3 billion, which was relatively flat compared to the year-ago period. Same-store gross profit of $879 million increased by 5% compared to the year-ago period. Same-store customer care gross profit was $405 million, an increase of 7% compared to the same period a year ago, driven by growth in customer pay, up 8%, and warranty, up 12%.

I'd like to provide an update on the 5 AutoNation USA stores. The AutoNation USA group broke even in the second quarter for the first time, and several AutoNation USA stores were profitable for the quarter. While we have no plans to build additional stores in 2019, we continue to make steady progress.

SG&A as a percentage of gross profit was 71.5% for the quarter, which represents a 190 basis point improvement compared to the year-ago period. Strong margins and gross profit growth as well as disciplined cost management drove SG&A leverage in the quarter. As we've previously stated, we expect full year 2019 SG&A to gross profit to improve year-over-year compared to 2018. The pace of the year-over-year improvement will depend on gross margin, seasonality and the timing of certain brand extension expenses.

The provision for income tax in the quarter was $37 million or 26.9%. Floorplan interest expense increased to $37 million compared to $32 million in the second quarter of 2018 driven primarily by higher average interest rate, which rose in line with 1-month LIBOR. Nonvehicle interest expense decreased to $28 million compared to $30 million in the second quarter of 2018 primarily due to lower average debt balances as we paid down debt from free cash flow. At the end of June, we had $2.4 billion of nonvehicle debt in line with balances as of March 31, 2019. Other operating income was $3.7 million in the second quarter of 2019 compared to $13.9 million in the prior year, a decrease of $10.2 million.

Second quarter 2019 other operating income was primarily comprised of gains related to store and property divestitures, and second quarter 2018 other operating income was primarily comprised of gains related to store and property divestitures as well as legal settlements. During the second quarter, we repurchased approximately 283,000 shares for $11 million at an average price of $39.54 per share. AutoNation has approximately $219 million of remaining Board authorization for share repurchase. As of June 30, there are approximately 89 million shares outstanding, not including the dilutive impact of certain stock awards.

Capital expenditures were $67 million for the quarter compared to $78 million in the prior year. Capital expenditures are on an accrual basis, excluding operating lease buyouts and related asset sales. Our leverage ratio decreased to 2.8x at the end of the second quarter compared to 2.9x at the end of the first quarter, and our total liquidity was approximately $836 million at the end of June.

I would like to thank Mike and the AutoNation Board of Directors for this opportunity and to congratulate Jim Bender on his appointment to Chief Operating Officer. I would also like to congratulate the 4 honorees who received the Automotive News 40 Under 40 award and our 10 stores that were named to the Automotive News Top 100 Best Dealerships to Work For list. These honors continue to distinguish AutoNation as not only a great place to purchase or service a vehicle but also a great place to work and an employer who continues to attract top talent.

We continue to demonstrate strong performance in the second quarter. AutoNation remains committed to executing the strategy that the executive team is fully aligned with: a focus on new vehicle margins, optimizing the balance between new vehicle pricing and volume and the company's brand extension strategy.

And with that, operator, we'd now like to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of David Tamberrino from Goldman Sachs.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Great. Congratulations, Cheryl, on the new appointment. I think we all probably know the answer to this, but would love to hear it from you. Now that you have taken the top job with the company where you've been at for a while, how do you see the strategy and the playbook changing, if at all? And if not, where do you expect to spend the most of your time improving the initiatives that have been put in place over the past couple of years?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [3]

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So the great thing is we've had 2 great quarters with the strategy that we have in place, a record first quarter, a record second quarter. We're going to continue to focus on the core, and I'm pleased with Jim and -- as COO; and with Scott Arnold, our EVP of Customer Care, that we will continue to do that. Customer care was up 7%. Our core business on the variable side was up strongly as well. So I'll continue to make sure we optimize the core, that we get the leverage that we're expecting in the business from a cost standpoint, and we'll continue to focus on the brand extension strategy. So as I mentioned, the AutoNation USA stores were breakeven. Some of them were profitable, so we've got a good, solid foundation there. And we'll continue to focus on the collision strategy as well as the parts strategy within the business.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [4]

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Okay. But is there any -- what you've seen so far and the progress to date, is there anywhere where you believe you need to add additional focus or spend more time in order to bring results in line with where you want them to track or at least enhance them from high-ROI projects that have been working out so far where there's an opportunity to continue to grow?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [5]

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Yes. On the collision, parts side of the business, that's something we're continuing to focus on. And certainly, we've mentioned customer care as a critical part of our brand extension strategy. So that will be a key area of focus for me.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Okay. And maybe sticking there from a parts and services standpoint, I believe you called out customer care as being a positive for the quarter. How was the growth broken down between warranty work, customer care, the remainder?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [7]

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Yes. The warranty was up 12%, and customer pay was up 8%. So there's really the strong focal point that led the customer care business for the quarter.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Okay. And the underlying continued growth in warranty, is that, I don't know, wave 3, wave 4, but to kind of recall? Or is that something else being driven?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [9]

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It's broader than that. In addition to recall, we've also had improvement in gross margin in that area as well.

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David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [10]

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Okay. And then my last one because it's really interesting. The F&I, you've seen your used penetration continuing to grow relative to where your new is, but F&I has continued to hit record numbers. I think we would have believed that there would have been a mix down, a couple of hundred dollars lower F&I for a used vehicle versus new. What's really been driving that continued strength? Is it the F&I attachment rates? Is it continued education of the AutoNation associates and just ability to upsell? Is there any product to call out where there's been much stronger penetration? Just really curious as to how that's continued to grow and if there's room for that to get maybe above $2,000 per vehicle retailed.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [11]

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First, is best-in-class associates. So we have consistent training and a great process there. And also, if you recall, that was our first brand extension. So if you think about the leveraging of the AutoNation brand, we're seeing that performance pulling through in F&I. We certainly have strong F&I attach rates throughout the business as well. And you're right that as we add additional used, or as we like to call it, nearly new business in, that does blend it down some. But we've been able to outperform the with a talented team of associates combined with having our own products in that area.

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Operator [12]

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Our next question comes from the line of John Murphy from Bank of America Merrill Lynch.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [13]

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Cheryl, congratulations on a very well-deserved promotion. Great to hear.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [14]

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Thanks.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [15]

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A first question on what seems to be a slight change in strategy on the new vehicle side where you're a little bit more focused on GPU as opposed to the volume. And it just seemed like that coincided with Carl showing up. So just curious if that's something you think you'll keep going with? And sort of the skeptic out there is really kind of highlighting this might decrease your UIOs over time and might have an impact on your parts and service in used eventually sort of 2, 3, 4, 5 years down the line. Is this a strategy you're going to stick with? Or is that something that might change?

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Michael J. Jackson, AutoNation, Inc. - Executive Chairman [16]

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This is Mike Jackson. So the strategy was devised last year as far as new vehicles, and we had, had several years of declining front-end growth that really needed to be stabilized, if not turned. We had a national leadership meeting with all our leadership of the company in January and made the pivot to this direction and have been concentrating on executing it ever since, and you can see the results.

Now where we are at the moment is saying, "Okay. Is there a middle ground or an adjustment that we need to make where the balance between price and volume we can find an even better line than what we're on?" But the first important step of stabilization and improvement is that we're in control again. We'll probably do some test markets to see, but I will not expect any significant adjustment in the strategy through the balance of the year, but we will do some pilots and see if there is a tweak that we could do that would give us an even better line.

As far as units in service, we're not particularly concerned about that. Our preowned business is strong, so that's all -- we're bringing units into our marketplace and selling them as preowned. So the overall unit movement is not really that great. So we have the time to find the optimal line on the new vehicle business, and we're working on that.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [17]

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Okay. But it's fair to say you might be somewhere between where you are right now and where you're operating. It's kind of fine-tuning right now?

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Michael J. Jackson, AutoNation, Inc. - Executive Chairman [18]

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Yes. I would say that's a fair statement. And -- but for now, no change. No different instructions have been sent to the store going into the third quarter.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [19]

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Okay. And maybe just a follow-up on this. As you think about new vehicle inventory, you've done a great job of managing this. The industry appears to have fairly balanced inventory as well, yet we're hearing some anecdotal stories about vehicles in transit being some excess inventories floating around that may not be reported on dealer lots. I'm just curious how much pressure you're getting from the automakers. Is it more than the past year or 2 on taking inventory? And are you kind of getting the same kind of impression there might be some excess inventory floating around in the channel?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [20]

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There's always an open dialogue, John, between us and our manufacturer partners. We've obviously continued to manage the inventory level for the current retail environment down 9,000 units year-over-year. And I think, certainly, it always becomes a conversation as you look at where the SAR is headed. But we feel like we have an optimal inventory mix, and we'll continue to monitor that and the industry conditions tightly. But we're not in a position of having excess inventory.

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Michael J. Jackson, AutoNation, Inc. - Executive Chairman [21]

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And where the market is headed, what we're also thinking about that in that if I go back 6 months ago, 9 months ago and I looked at the forward curve, you could -- we could have expected a higher interest rate environment in the second half of 2019 going into 2020. And now from today's perspective, there's a very good chance that we're going to be seeing rate cuts, not rate increases. So that's a huge change in mindset. And it'll have a significant impact on the consumers' willingness to buy because they've been struggling with this combination of a high price point with a higher rate. And if indeed it turns out we're going to have lower rates, we would rethink a bit on our inventory and what the forward market looks like, thinking of it in a more positive direction.

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John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [22]

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Okay. And then just lastly on AutoNation USA used stores, it sounds like you're making some good progress there, maybe more than you have been for the past few quarters. I'm just curious why we're looking at sort of a stalled process or process which seems you're hitting pause. When could you reaccelerate your new store openings? Because it sounds like that has actually turned the corner, it might be a real driver in the future.

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Michael J. Jackson, AutoNation, Inc. - Executive Chairman [23]

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Yes. I would say, John, when we launched the USA stores, we put all our forward thinking in them as far as customer experience. And our conclusion after this journey has been that the customer experience we have in our traditional stores in the preowned business is actually exactly what the customers want. And so we're -- this 1 price and everything that goes around it has now been installed in the USA, stores and it's working quite well.

So now that the stores are stabilized, the next opportunity is to drive higher volume through the stores. We didn't want to drive volume through the stores if the profits within the store haven't been sorted out. But we now have that sorted out, and we'll take a couple of pilot stores in the third quarter and see how we bring the volume to higher levels, which is, right now, about 100 a month through the stores. So that's got us to breakeven with the process we have today. You put some volume through there, stores turn very profitable. But again, we're not going to build new stores until we completely have validated exactly what process works in the store and what's the marketing, stocking plan that leads to higher volume, and Cheryl and Jim will lead that effort during the third quarter. And I think we can give you better outlook from there.

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Operator [24]

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Our next question comes from the line of Rajat Gupta from JPMorgan.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [25]

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Congrats, Cheryl, on the appointment. Great news there.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [26]

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Thank you.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [27]

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Just had a question, just to follow up on the parts and services business. Could you help break out the strength a little bit between parts and services? And then just also between just volumes and transaction prices? If you could just give us a sense of how that's progressing.

And then for the rest of the year, is this something -- is this the kind of growth we should be expecting in the near term? Or are there any components of that, that you think are going to move around during end of the year? And I have a follow-up.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [28]

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Yes, the big drivers were obviously customer pay and warranty within the business. And as you see new unit declines, that does pressure the internal reconditioning within the business. And where you can see the growth pulling through well, particularly from our parts initiatives, is in the percentage of gross profit. So you see a 50 basis point improvement in growth as a percentage of revenue on the customer care line.

In terms of outlook, as you know, we don't give the forward guidance on it, but we feel very optimistic about the second half of the year with the ability to continue to perform strongly in that business. As you know, recalls are a bit unpredictable, so warranty is always a little bit unpredictable. We certainly have some pressure in new units in the industry as a whole, which does affect internal reconditioning. But we feel really good about our customer pay gross profit as we're able to pull through our parts into that part of the business.

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Rajat Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [29]

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Got it. Makes sense. Just changing tracks there. Just can you give us an update on the Vroom investment and how we should expect that partnership to evolve over time? One of your peers made a similar investment, the competitor, and they've obviously expanded their partnership in many different ways. So could we expect to hear something in the near future on that partnership? Just an update there would be helpful.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [30]

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Yes. So I met recently with the Vroom team, with Paul and the strong team that he continues to build out there, and we continue to have discussions. We'll keep everyone updated on any future opportunities or pieces of that. We are doing some work for them in the customer care part of the business.

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Operator [31]

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Our next question comes from the line of Chris Bottiglieri from Wolfe Research.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [32]

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I think it's been kind of brought up a few times now, but I'll take another crack at it. Just wonder if you could give more color on the 12% warranty growth. How much of that's gross margin versus traffic-driven? I would think the gross margin's probably this piece that's more labor-intensive than parts-intensive? Maybe you could comment on that.

And then just big picture though, given like years of flat SAR, what's driving all this increased recall activity? Is it like a number of different campaigns? Is it like one big lumpy one? Like if you can help us think about this perspective, it would be helpful.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [33]

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Yes. So warranty growth did benefit from improved margin performance. So a lot of that was just playing out as shift in the mix towards some of the higher-margin recall and service work and some improved labor and parts rates that we negotiated with certain manufacturers. As you know, based on history, warranty can be a little bit unpredictable within the business in terms of timing. Certainly, there were some large recalls in the past. What we're seeing now, though, is certain recalls that have this higher margin portion of work that was not something that we forecast out into the future. But we do manage our volume with respect to customer pay and trying to drive that customer pay business while making sure that we're taking care of customer issues and safety issues in particular when they come to us for warranty.

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Christopher James Bottiglieri, Wolfe Research, LLC - Research Analyst [34]

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That's helpful. And then your SG&A growth has been pretty impressive for the last couple of quarters. Just wonder if you can maybe comment how much the restructuring is benefiting it.

And then last quarter, you talked about potentially pushing back some of the stepped-up investments later in the year. Just maybe you can give some more color there.

Then just lastly, just big picture, like what's left of the brand extensions? I'm not trying to understand what the initiatives are currently. You accomplished a lot of it over the last 5 to 10 years. Just curious what's like left at the table that you're investing in.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [35]

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Yes. Absolutely. So on the SG&A front, it's 2 things: The first is delivering the growth. So when you deliver 7% in customer care, used units up 5% and all-time record Customer Financial Services, that flows through pretty well. On top of that, we did put in place the $50 million annualized restructuring at the beginning of the year. That's actually been helpful for the flow of our business, consolidating from 3 regions down to 2. And you see the results of that in a very strong bottom line for the quarter. We'll continue to make sure that we run cost in a smart manner. We're going to continue, however, to invest in the business, invest in digital, invest in brand extension.

To your question about what's left, a lot is left on brand extension. So we started off with Customer Financial Services on our first brand extension. We rolled into the parts business. We are improving the performance of AutoNation USA. We've got 4 successful auctions up and running. And our big focus continues to be in parts, and in particular, in collision parts, and pulling that through the base business as well as the collision part of our business.

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Operator [36]

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Our next question comes from the line of Michael Ward from Seaport Global.

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Michael Patrick Ward, Seaport Global Securities LLC, Research Division - MD [37]

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Cheryl, was there restructuring costs included in SG&A in the second quarter?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [38]

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No, we did not have restructuring costs in the second quarter, but we did have the benefit of the restructuring that we put in place flowing through in the second quarter.

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Michael Patrick Ward, Seaport Global Securities LLC, Research Division - MD [39]

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Okay. So how far along are you in the $50 million savings?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [40]

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So we've completed all of the actions. So all of those actions have been completed, and that's what you're seeing now is the flow-through of those initiatives hitting the bottom line. So there's no more action to be taken to effectuate the $50 million. You're just seeing the benefits of that. And when you add some additional gross profit on top of it, you see the very strong SG&A performance improvement.

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Michael Patrick Ward, Seaport Global Securities LLC, Research Division - MD [41]

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Okay. So the costs were completed as of the first quarter. So that's done. So now it's just the savings flow-through?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [42]

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Correct.

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Operator [43]

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Our next question comes from the line of Derek Glynn from Consumer Edge Research.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [44]

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Congratulations, Cheryl.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [45]

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Thank you.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [46]

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It looks like the other income line decreased from prior quarters presumably from smaller gains or less store divestitures. What kind of pace of divestitures can we expect moving forward? And what inning are we in with respect to you optimizing your footprint?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [47]

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So we're in the late innings of that. You'll see some select divestitures going forward, but not at the pace of what you've seen in the prior 2 years. And you're correct, that was part of the change as well as last year's results included a legal settlement, which are not in this year's results. So we'll have select divestitures, but they certainly will have slowed from prior periods.

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Derek J. Glynn, Consumer Edge Research, LLC - Analyst [48]

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Got it. And then in looking across your segment mix between domestic, import and Premium Luxury, it appears Premium Luxury's gained share within your portfolio over time. And just curious if that's a function of any strategic change you're making where you want more exposure to that segment, or if this is just a function of natural market share changes we're seeing in the broader market.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [49]

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That's a function of 2 things. I'd say, first, we love the balance within our portfolio, so we love the fact that we're roughly 1/3 domestic, 1/3 import and 1/3 Premium Luxury. And we like our geographic footprint as well. Premium Luxury did grow based on its organic growth within the actual business performance. But in addition, over the last couple of years, we had a series of add points from different manufacturers where we had built that out. And so you saw us selectively increase our concentration within the Premium Luxury part of the business, which performs extremely well, not only from a sales standpoint, but also certainly from a customer care margin standpoint.

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Operator [50]

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Our next question comes from the line of Rick Nelson from Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [51]

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My congrats to Cheryl as well.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [52]

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Thank you, Rick.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [53]

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Very well deserved. I'd like to follow up on the used car volume, same-store sales really picked up this quarter. 7.6%, strongest we've seen in 4 quarters and against a tough compare. If you could discuss the drivers there. Anything that changed this quarter versus the last few quarters?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [54]

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So we've always be driving the play in used. So we definitely see continued opportunity with an exceptional customer experience. We continue to leverage One Price, no haggle pricing strategy, and we're going to continue to build off the success of We Buy Your Car program. So we're seeing some traction in our We Buy Your Car programs. So all those things combined as well as the good inventory mix helped us drive those used results.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [55]

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And capital allocation, we're seeing more in the way of debt reduction, not much in the way of buybacks activity or acquisitions. If you could discuss to go-forward plan there.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [56]

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Yes. So nothing's really changed with respect to capital allocation, Rick. As you know, we remained very opportunistic on that. From a leverage standpoint, we were getting close to 3x. We certainly value our investment-grade rating. We do keep a focus on that. But we do have the capital from our free cash flow, particularly with the results that we've been generating, to continue to invest. And so we'll look at continued investment in brand extension strategy, including a focus on collision, a focus on our parts initiative. We have not been as active in the dealership M&A space recently. And we will continue to look at pricing with respect to our shares and be opportunistic at the right moments.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [57]

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Okay. And then final one for Mike. It's great to hear you on the calls again. And curious if you're planning to take any different sort of -- or more active role now in the business and on the calls in the future.

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Michael J. Jackson, AutoNation, Inc. - Executive Chairman [58]

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So I remain Executive Chairman. And as far as being on the call in the future, no, I will not. Not that I don't love everybody, but Cheryl is the CEO and President of the company, and perfectly capable of handling the call.

As far as Executive Chairman though, on the big issues, I'm definitely here at the table and know the situation, have a point of view, expresses it, and the team takes it to heart. And certainly, as far as the decision as to who is the Chairman and CEO of this company, there's no question as far as the discussion with the Board and the Board's decision that I was at the table. And I think the right decision was made between Carl and I that it wasn't a fit. And again, I'm thankful for his commitment, his efforts. It just wasn't a good fit to come into the company in automotive retail, it was a bridge too far. And I'm certainly -- I have to say it was Cheryl -- Cheryl was the finalist the last time this decision was made, and it was a close call. I explained all the reasons why we took the risk. We faced up to it that it wasn't working. I don't believe in dragging things out. Once we come to a conclusion that it's not working, let's be decisive. And then that led to a unanimous decision for Cheryl, from the Board. She's supported by our large shareholder, and she has my full support and mentorship as Executive Chairman. And I would absolutely say it's a mentorship. She is -- I think you see it, I think you hear it, I think you feel it, she is CEO-ready day 1, and I have every confidence that she's a winner and we'll be an outstanding CEO of this company.

And by the way, I will remark that I'm very proud that with the Board, I got to participate in the decision that we have a woman leading the largest automotive retail enterprise in America, and it's a first for a company-traded auto retail companies. I'm thrilled that we have a Hispanic leading our company. But first and foremost, she is CEO-ready day 1. She's a winner. She has the confidence. She inspires confidence. She's unflappable, and she's a joy to work with.

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Operator [59]

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Our next question comes from the line of Stephanie Benjamin from SunTrust.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [60]

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Congratulations, Cheryl, again, on the new appointment. Looking forward to working with you in the future. I just wanted to follow up a little bit on, if we could just kind of go through some of the investments on the additional strategies. So maybe just kind of what is in the initial stakes there for it to build out that strategy and kind of what we can look for going forward, that would be helpful.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [61]

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Yes. From a digital perspective, the way we think about that is both the front-end and the back-end. So investments in the customer experience with respect to sales. And as you know, with autonation.com, our upfront ability to reserve the vehicle there, all the way through to how we're thinking about activating in digital within customer care. And I think that's an important component that's sometimes overlooked when people think about digitizing the front. We're also focused on how to continue to invest to digitize the back as well.

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Stephanie Benjamin, SunTrust Robinson Humphrey, Inc., Research Division - Associate [62]

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And then just kind of following up on the questions on SG&A. Is there anything that we need to be aware of in the first or even second quarter in terms of some of those investments in the digital strategy as well as the brand diversification strategy that may not continue or should pick up in the second half that wasn't just kind of different going into the second half?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [63]

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I'd say there is nothing in particular to call out. As you know, SG&A varies. You've got different insurance reserves and other drivers in the background that can move things slightly in each quarter. But I would say there's nothing particularly notable in 1 quarter of this year to point out. I always mention that seasonally, the fourth quarter of the year is typically the strongest from an SG&A perspective, but there's nothing in particular to call out or carve out from SG&A results for this year.

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Operator [64]

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Our next question comes from the line of Bret Jordan from Jefferies.

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Bret David Jordan, Jefferies LLC, Research Division - Equity Analyst [65]

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Quick question, I guess, on the parts strategy, maybe where you are in parts coverage versus your target parts coverage or sort of SKU count. And secondarily, I guess when Carl was brought in, he was talked about sort of a supply chain expert that might help in that parts strategy. And I guess is it something that you're going to need to add additional supply chain expertise given his departure?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [66]

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Yes, so on the first side, I would say there's 2 parts of the parts coverage. One is really the mechanical parts coverage, and we're certainly pulling that through well at our store location today and you see that in the gross profit. On the collision parts side, we still have more work to do to build out our broader coverage there, and I think we will continue to look at the organizational model and how we activate with supply chains. So as we talk about brand extension investment, we're going to continue to be investing heavily in that area.

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Operator [67]

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Our next question comes from the line of Armintas Sinkevicius from Morgan Stanley.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [68]

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My first question is, first, congratulations to Cheryl and also Jim. When I look at the press release, Jim was credited with some successful initiatives with regards to the first and the second quarter. Just curious what those initiatives were and how we should think about them going forward.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [69]

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So Jim is a terrific executor, and if you think about the new vehicle profitability -- so as Mike noted, we had new vehicle profits under pressure for the better part of the 1.5 to 2 years. Jim drove that execution in the field to make sure that we were balancing the equation with respect to new vehicle PVR and volume. We Buy Your Car as well is another initiative that Jim helped drive in addition to improving the profitability of the AutoNation USA stores. So Jim is a tremendous executive with fantastic experience, and he is a very hands-on executor and was able to drive those initiatives, and you see the pull-through of those results with a record first quarter and a record second quarter.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [70]

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Great. And then the investment in Vroom, I understand it's financial in nature at the moment, and there's constant dialogue. But you've had it for a little while here, and I'm just curious how lessons learned from the investment are impacting your thought process with regards to your own digital initiatives.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [71]

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I'd say it's an ongoing dialogue, and any time you have a strategic partnership or investment, whether that's Vroom or whether that's the relationship we have with Waymo, you're always learning a lot in a way. And as I mentioned, we are doing some customer care work with them. So we're testing and learning and understanding where they are in their journey as well. So I would say it's a very iterative process.

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Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [72]

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Okay. And Cheryl, Mike's been very forward thinking in how he approached the company, and you've been credited with building and cultivating that partnership with Waymo. How are you thinking about sort of unique areas to position AutoNation strategically with partners and otherwise going forward?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [73]

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Yes, I think the great thing about having been in the automotive business for 20 years is I get a lot of inbound. And I think that between Mike and I, a strong Board and a great management team, we continue to operate in the present while focusing on the future, and I think strategic partnerships are a great way to do that. And so we're going to continue to cultivate those opportunities as we think about our growth initiatives for the future, in particular our brand extension strategy. So as we think about collision, as we think about parts, as we think about the AutoNation USA stores, we're going to continue to be broad in our discussions.

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Operator [74]

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Our next question comes from the line of David Whiston from Morningstar.

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David Whiston, Morningstar Inc., Research Division - Strategist [75]

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Cheryl, congratulations. I guess a similar question, but going beyond strategic partnerships. Is there -- are there some things, whether it's on people, the structure of the balance sheet, operations, any aspects of the company that, over the years, you've perhaps given a nudge to Mike and to Carl to, and it never got done and you wanted to see it get done. And now that you're the boss, you have the opportunity to make some changes. I don't -- I'm not saying you need to go in a radically different direction or anything, but is there just some aspect that you guys haven't done that you'd like to see more attention to?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [76]

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Well, the great news is when I nudge Mike he listens. Sometimes, he says, "I heard you the first time." But I tell him the second and third time. So I think the great thing is we've been a great operating team together. I'm extremely proud of our balance sheet. It positions us well to do the things we want to do and to be very opportunistic. And certainly, I've had a front row seat to the capital markets crisis. I know how to manage balance sheets in concert with a very strong Board, very effectively. We've got great people. I'm extremely proud of our field leadership teams in particular and our associates, 26,000 associates, that sell and service cars every day. And I think a lot of it is just broad strategy. Look, automotive retail continues to change. I started my career at Circuit City's corporate headquarters when CarMax was in its infancy. And if you think about the model, it evolved. And so I think you need to be out there with a broad lens thinking through, but understanding that every hour that we're open, people are waiting there with vehicle needs, and we need to be meeting that today while investing for the future. And I think that balance is critical. Mike and I over the years have had great dialogue, and think we've struck the right balance there. But that's a continued evolution. And I love the fact that we have some see into the future and continue to learn in that area.

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David Whiston, Morningstar Inc., Research Division - Strategist [77]

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Okay. That's helpful. And is there any change you guys are seeing perhaps in terms of waning enthusiasm amongst your customers for light trucks, especially in Texas, California and Florida?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [78]

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No. They love them. They love the command seating position.

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Operator [79]

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Our final question today comes from the line of Colin Langan from UBS.

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Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [80]

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Most of my questions are answered, but just to clarify. I mean when we look at the rest of the year, same-store unit sales were down. That was part of your strategy to focus on more profitable units. So we should expect that to kind of continue through the rest of the year and then stabilize in the next year, is that the right trend we should be thinking about?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [81]

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We'll continue to strike the right balance, but I do expect to continue to deliver solid new PVRs.

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Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [82]

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Got it. And then just lastly, CapEx is down in the first half by $75 million. A little surprising with the growth strategy. Should that pick up through the rest of the year? How should we think about it? Or is that just a high comp last year?

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [83]

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It was a little bit of a higher comp last year as we talked about. From a dealership acquisition standpoint, we have not been as active in that space. And if you think about some of our collision center buildouts, they don't have the same costs necessarily as a dealership acquisition does. So there'll be some blending of that over time. We're still committed to making sure we have fantastic facilities so we'll make sure we commit the right amount of capital as we go forward. But given our strong balance sheet, we feel very good about the relative CapEx position, but we are making sure that we spend that money wisely.

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Colin Langan, UBS Investment Bank, Research Division - Director in the General Industrials Group and Analyst [84]

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Okay. All right. And like everyone else, congratulations and well-deserved.

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Cheryl Scully Miller, AutoNation, Inc. - President, CEO & Director [85]

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Great. Thanks, Colin. Great. And with that, we officially end the call today, and I thank everyone so much for their questions.

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Operator [86]

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And this concludes today's conference call. You may now disconnect.