AutoNation 2026 Q2 Earnings Call

Derek, please go ahead. Thanks, Kenneth, and good morning, everyone.

Welcome to AutoNation's second quarter 2026 conference call. 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 the call to 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 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 located at investor.autonation.com. With that, I'll turn the call over to Mike.

Yes. Thank you, Derek, and good morning, everybody. Thank you for joining us today. As usual, we're going to provide a detailed discussion of our second quarter results, after which we'll take your calls on Q&A. Once we've finished the Q&A session, I'm going to share with you some thoughts on our performance over time and our expectations going forward. Please don't disconnect after the Q&A. Slide three is a quick summary of our main messages. We think the industry and consumers are in good shape. The June SAAR is the highest June in four years. Consumer sentiment is improving every month. Our banking partners are reporting a 20% increases in applications and originations, and their delinquencies continue to improve. After sales was once again solid. In our workshops, internal pay was moderately down, broadly in line with our unit volumes.

In our workshops, internal pay was moderately down, but broadly in line with our unit volumes. However, customer pay, which for us is the more relevant indication of after sales performance in our market, was up, delivering a gross profit that increased by 7% in total and 4% on a same store basis. Our strategy to grow and develop our parts wholesale is also gaining traction and starting to pay off. Our wholesale businesses saw revenues increase by 16% during the quarter.

Moving to vehicle sales, you will see that unit profitability in both new and used has remained within a tight band over the last four quarters, and our Customer Financial Services team once again had an industry-leading quarter. We're looking forward to the second half when the volume comparison headwinds from 2025 relating to tariff and EV credits lapse. As always, SG&A management is front and center, and you will see meaningful progress in Q2 and a path to our 66%-67% expectation range by year end. AutoNation Finance continues its growth, generating $11 million profit for the quarter. Free cash flow, frankly, has been excellent. We're up 11% year-to-date and continue to deploy our cash in a consistent shareholder-focused way, investing $317 million on attractive M&A and $457 million on share repurchases. With that opening, let me get into the details by business.

Moving to slide four. For the quarter, we reported adjusted EPS of $5.56, which was up from $5.46 a year ago, marking our sixth consecutive quarter of year-over-year growth. Results were again led by after sales, which drives half of our profits and delivered record gross profit of $607 million, increasing both sequentially from the first quarter and year-over-year from a very tough comparison. This revenue and income stream is durable, has a recurring nature, and is high margin. It's also an important driver of customer engagement and retention. Our repair order volume was strong, and customer pay fueled our revenue growth, increasing 7% from a year ago. As I previously mentioned, we had 16% growth in wholesale parts.

Overall, after-sales performance reflects disciplined execution as we continue to grow this portion of the business while offsetting lower internal reconditioning activity tied to our used vehicle stocking mix and volume. In Customer Financial Services, the team delivered strong second quarter results with CFS per vehicle profitability of $2,800. This represents a 3% increase from a year ago, even after accounting for increased loan originations from AutoNation Finance, which, as we've discussed before, bring a headwind to CFS profit in the quarter, but a significantly improved profit per unit over the term of the loan to AutoNation Finance. Tom, I know you'll give everyone on the call more details on that.

Yeah, of course. Our CFS team continues to run a value-driven customer-focused process that provides our customers with critical products and services.

Once again, customers purchased on average two products per vehicle, with extended service contracts again leading the mix, clearly supporting future after-sales revenue and customer retention. Finance penetration also continues to grow from a year ago, with roughly three-quarters of units sold with a finance contract. We continue to see sequential stability in our profit per unit for both new and used vehicles. New vehicle per unit profitability of nearly $2,400 represents the fourth consecutive quarter of stability. As expected, new unit sales were lower versus a year ago, which benefited from tariff-related pull-forward activity and higher BEV sales. BEV sales were down by more than 30% year-over-year. Importantly, our market share remained relatively consistent with the first quarter in the markets we serve.

In used vehicle sales, we continue to see strength in unit sales for vehicles priced above $40,000. Our volume was slightly impacted by a lower mix of vehicles priced below $20,000 than we would like, and we continue to work to improve our accessibility to vehicles priced in this range. Used vehicle profitability remained stable at approximately $1,600 per unit. Total gross margin was just under 18% of revenue for the quarter, which represents consistent top-tier performance for the sector. Turning to slide five. Adjusted free cash flow continues to stand out, including more than $180 million generated in the quarter and $439 million for the first half of the year. The year-to-date conversion rate was 125%. We continued to deploy capital in a disciplined manner.

During the first half, we reinvested $443 million in the business through CapEx and acquisitions, and we returned $457 million to shareholders through share repurchases. The acquisitions we made were Toyota of Newnan, Georgia in the Atlanta area and three premium luxury stores in the San Francisco Bay Area. These will add additional scale to markets where we already have a meaningful presence. These acquisitions bring approximately $600 million in annual revenue and around 9,700 in new and used unit sales. AutoNation Finance continued to scale, with the portfolio growing to $2.67 billion from $1.76 billion a year ago. Funding also continued to improve, with debt-funded status increasing to 91% from 83% a year ago. Overall, it was a solid quarter, and as I mentioned, it was the sixth consecutive quarter where we have delivered year-over-year increases in adjusted EPS.

With that introduction, I'm going to turn you over to Tom for a closer look at the quarter's financial results.