AutoNation, Inc. (AN) Earnings Call Transcript & Summary

Good morning, and welcome to the AutoNation Incorporated First Quarter 2025 Earnings Call. My name is Harry, and I will be your operator today. [Operator Instructions] I would now like to hand the conference over to Derek Fiebig, Vice President of Investor Relations. Thank you. The floor is yours.

Okay. Thank you, Harry, and good morning, everyone. Welcome to AutoNation's First Quarter 2025 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 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 located at investors.autonation.com. With that, I'll turn the call over to Mike.

Thank you, Derek, and good morning, everyone, and thank you for joining us today. I'm going to start on the third slide. So our results for the first quarter were strong across the board. We delivered outstanding new unit growth, expanded unit profitability both in used vehicles and customer financial services and achieved record after-sales profits. Our operating cash generation was solid, allowing us to deploy capital for both share repurchases and accretive acquisitions. Prior to the formal announcement of tariffs, new vehicle sales were performing well, tracking approximately 5% up year-over-year, and the strong pace accelerated following the tariff announcement in late March, adding to our pace, resulting in same-store new vehicle unit sales increase of 7% for the quarter from prior year. Premium Luxury increased 14%, Domestic 6% and Import increased 2%. Now I'm pleased to say that during the quarter, we increased our share both year-over-year and month-over-month in the markets we served. Used vehicles continue to perform well as unit profitability increased 13% to $1,662, reflecting our focus on margin, costs, inventory levels and mix. Our total gross profit including wholesale increased 12% from the first quarter of 2024. Customer financial services continued to deliver strong results. Per unit profitability increased from a year ago on a sequential basis for the second consecutive quarter. The sequential performance is noteworthy considering the seasonal shift to used vehicles. Another highlight of the quarter was the performance of after-sales, which once again delivered record gross profit and expanded margin by 140 basis points from the previous year. We continue to grow our technician workforce while promoting and developing them internally. AN Finance also continued to develop and perform. Originations were $460 million during the quarter, and the business crossed over to profitability well ahead of when expected. And I would like to thank and congratulate the entire ANF team, as well as all of the dealerships that have helped them deliver that result. And in addition, the credit quality of our portfolio continues to track favorably and, as discussed on our year-end call, the sale of the last substantial portion of third-party legacy originations significantly reduced our credit risk exposure, which has resulted in a meaningful reduction in delinquencies. Cash flow generation for the quarter was strong, allowing us to deploy capital for both share repurchases and attractive acquisitions. During the quarter, we repurchased $225 million of shares at an average price of $165 per share. And as of yesterday's close, we have repurchased more than $250 million worth of shares, reducing our share count by 4% from January 1. Our Q1 performance, combined with our share repurchases, helped us to grow our adjusted EPS by 4% from a year ago. This was the first year-over-year increase in adjusted EPS in 8 quarters as the post-COVID normalization trend has significantly moderated. On March 31, we acquired 2 stores in the Greater Denver, Colorado area: Ford Arapahoe and Mazda Arapahoe, which together sold nearly 5,000 new and used vehicles in 2024 and generated approximately $220 million of revenue. These acquisitions reflect our strategy to add store density into markets where we have a presence. It allows us to rapidly bring significant scale synergies to the acquired dealerships, expanding on the current success of these stores and delivering strong returns to our shareholders. The acquisitions marked the first Automation Mazda and second Automation Ford in the state, bringing our footprint in Colorado to 13 Domestic, 6 Import and 3 AN USA dealerships concentrated in the Greater Denver area. Now before turning the call over to Tom to take you through the quarter in greater detail, I wanted to provide some color on some of our actions at AutoNation. Clearly, in the quarter, we benefited in March from a pull-in effect as buyers accelerated their planned vehicle purchases to avoid the coming tariffs. This trend continued into April, albeit at an increasingly moderating pace. And as you can see from our current data supply, we have a level of ground inventory at pre-tariff rates that will, for certain models, sustain this momentum into May. This provides time for the auto tariff structures to be more clearly defined, modified and negotiated between our OEM partners and the U.S. administration. It also enables each OEM to fully evaluate their supply chain footprint and understand what actions they can take to optimize the tariff efficiency and to establish their forward pricing structures. As these actions progress towards finalization, the impact on new unit availability and pricing will become clearer as well as the effects on customer demand patterns. These factors combined will establish changes, if any, to the size of the new vehicle market. In March, the light vehicle side risen to north of 17 million units, we had estimates that this would come down to somewhere between 15 million and 16 million units for the year. We expect some of these predictive declines will be cushioned by a cross-shopping effect, whereby demand for lesser impacted brands and models will supplant that for those more affected counterparts. In this situation, we often hold both sides of the trade, not always equally weighted, but our broad portfolio of brands and models gives us an advantage here. We're also confident that our OEM partners will be keen to protect their market share regardless of total size of market. There are a number of areas in our business that are less impacted by tariffs, including used cars, customer financial services, parts and service, and we continue to focus and drive our performance in these areas. For example, we have made a concerted effort to increase our used car inventory and are now carrying the highest level of vehicles since December 2023. We are also continuing to drive service lane traffic, and our momentum continues to improve as we get further into the year. We remain focused on controlling costs within the company, generating cash flow and deploying capital to generate shareholders' return. And now with that, Tom, if you wouldn't mind taking the call over and going through our results.

Yes. Thank you, Mike. I'm turning to Slide 4 to discuss our first quarter P&L. Our total revenue for the quarter was $6.7 billion, an increase of 3% from a year ago. That's 4% on a same-store basis. This was driven by a 10% increase in same-store new vehicle revenue as we increased new unit volumes across all 3 segments. Same-store gross profit of $1.2 billion increased by 3% from a year ago. This year-over-year performance included same-store used vehicles growth of 12%, CFS growth of 6% and after-sales growth of 4%. The gross profit margin of 18.2% of revenue was down slightly from a year ago, reflecting improvements in margins for after-sales, which was up 100 basis points or 140 on a same-store basis, and used vehicles, including wholesale, which was up 90 basis points. Those were offset by the moderation of new vehicle unit profitability. Adjusted SG&A of 67.5% of gross profit was in line with our first quarter expectations. Year-over-year, the rate was adversely impacted by some timing and nonrecurring items. And going forward, we continue to expect SG&A as a percentage of gross profit to be between the 66% to 67% range for the full year, reflecting our focus on driving operational efficiency. Adjusted operating margin was flat from the fourth quarter at 5% of revenue. Below the operating line, the floor plan interest expense decreased by $3 million from a year ago as average rates were down approximately 100 basis points, more than offsetting the higher average outstanding borrowings. Non-vehicle interest expense decreased $2 million from a year ago, reflecting lower average outstanding balances. As a reminder, we reflect floor plan assistance received from OEMs in gross margin. This assistance totaled $31 million compared to $32 million a year ago. And net of these OEM incentives, new vehicle floor plan expense totaled $13 million, down from $15 million last year. All in all, this resulted in adjusted net income of $184 million compared to $190 million a year ago. This 3% year-over-year decrease itself is the smallest year-over-year decline in 3 years, again, demonstrating that the post-COVID profit normalization trend has significantly moderated. Total shares repurchased over the past 12 months decreased our average shares outstanding for the quarter by 7% to 39.4 million shares, benefiting our adjusted earnings per share which was $4.68 for the quarter, an increase of $0.19 or 4% from the first quarter of 2024. Slide 5 provides some color -- more color for new vehicle performance. New vehicle unit volumes were a strong point for the quarter, increasing more than 6% from a year ago on a total store basis and 7% on a same-store basis. Total store unit sales were up across our 3 segments, with Import units up 2%, Premium Luxury up 14% and Domestic up 6%, reflecting strong supply, better incentives and good performance by our commercial teams. By powertrain, hybrid vehicle unit sales were up approximately 50% from the first quarter of a year ago and represented approximately 20% of our unit sales and 10% of our ending inventory. BEV vehicle sales were also up nearly 50% from a year ago, reflecting OEM actions with incentives and uncertainty regarding the longevity of government incentives for BEVs. BEVs represented about 8% of our sales for the quarter and 8% of our ending inventory. Internal combustion engine unit sales were down 4% for the quarter. Our new vehicle unit profitability averaged $2,803 for the quarter, down seasonally from the fourth quarter, which is, as you know, is a normal trend, reflecting higher Premium Luxury weighting in the fourth quarter. Unit profitability was flat with the third quarter of last year. New vehicle inventory ended the quarter at 39,000 units, up by about 1,000 units from a year ago. This represented 38 days of supply, down 6 days from the first quarter of last year, reflecting the strong new vehicle sales for the quarter. Looking ahead, as Mike indicated, the momentum we have seen in March has continued into April, albeit at a moderating pace. Turning to Slide 6. The used vehicle unit profitability was up 13% from a year ago and 8% from the fourth quarter. We are executing much better on vehicle acquisition, reconditioning, inventory velocity and pricing. Total used gross profit was up 12%, reflecting this unit -- this retail unit profitability as well as better wholesale results. Lower-priced vehicles continue to perform well with unit volume increasing in that band 10% from the fourth quarter, in the sub-$20,000 band. Supply availability remains a challenge, particularly for the mid- and higher-priced tiers, consistent with the past few quarters, driven by lower new vehicle production during COVID. We continue to be competitive in securing trade-ins from new vehicle buyers and to source more than 90% of our vehicles internally, including through our We'll Buy Your Car program. During the quarter, we opened 2 AN USA stores in Texas, adding density to the Houston and Dallas markets and bringing our AN USA store count to 26. Moving to Slide 7, customer financial services. The momentum in CFS performance continued during the quarter. Apart from the overall strength in vehicle sales, our product attachment rate was strong, remaining above 2 products per vehicle sold. More than 70% of our CFS income comes from product attachment. Also, our finance penetration rate through the first quarter continued north of 70%. Our CFS PBR of $2,703 for the quarter was up 3% from $2,615 a year ago due to increased profit per contracts sold and higher average amount financed. The unit profitability growth in CFS is even more impressive considering the growth of AN Finance, which, while superior in long-term profitability, dilutes our CFS PBR margins. Slide 8 provides an update on AN Finance, our captive finance company. The business' attractive offerings are driving strong customer take up, and we continue to expect strong ROEs in the business. During the first quarter, we originated $460 million in loans, up approximately $100 million from the fourth quarter and $300 million from the first quarter of 2024. We had approximately $100 million in customer repayments in the quarter. The quality of the portfolio continues to improve. Our credit and performance metrics are improving with average FICO scores on origination of 695 for the first quarter compared to 659 in the first quarter of 2024 and 684 in the fourth quarter of 2024. Delinquency rates at 2% are solid, reflecting the shift in our targeted borrower base as well as the fourth quarter sale of the substantive remainder of the legacy subprime portfolio inherited with the CIG acquisition. AN Finance generated operating profitability in the first quarter and is our expectation that it will be profitable for the full year. From a funding perspective, 74% of our portfolio balance is funded with nonrecourse debt. This is up from 61% a year ago and screening up capital for us to reinvest. We are getting great support from our warehouse lenders. And as we begin to establish a regular ABS funding cadence, we expect 74% funding level to continue increasing. We're actively preparing for our inaugural ABS funding program, which we expect to close in the next couple of quarters. Moving to Slide 9, after-sales, representing nearly 1/2 of our gross profit, continued their revenue and margin momentum and gross profit was once again a record for AutoNation. Same-store gross profit increased by 4% from a year ago with gross profit per day up 5% from a year ago. The increase was driven by an increase in gross per repair order and a modest increase in total repair orders. For the first quarter, our margin rate was 48.8%, up 140 basis points on a same-store basis from a year ago, reflecting improved parts and labor rates, higher tech efficiency, scale benefits and higher value orders. We continue to develop and promote our technician workforce. The quarter-end technician head count was up 3% and our technician efficiency continues to improve. Looking ahead, we expect our after-sales business will grow roughly mid-single digits each year. To Slide 10. We continue to see a consistent and attractive conversion of income into cash. Adjusted free cash flow for the quarter totaled $237 million, compared to $257 million a year ago. And our cash flow conversion remained robust at 129% of net income -- adjusted net income. We're focused on sustaining this performance through the cycle time enhancement initiatives as well as on prudent allocation of capital to CapEx. For the first quarter, our capital expenditures to depreciation ratio was 1.2x compared to 1.6x a year ago. And as a reminder, our second quarter cash flow is typically the lowest of the year, reflecting seasonal tax payments and other timing items. We continue to expect healthy free cash flow conversion for the full year. Slide 11, capital allocation. As we've discussed in the past, we consider capital allocation opportunity to either reinvest in the business in the form of CapEx or M&A, or to return capital to our shareholders via share repurchase. CapEx is mostly maintenance-related, compulsory spending, totaled $75 million for the first quarter and was 20% lower than the first quarter of 2024. We continue to actively explore M&A opportunities, and as Mike mentioned, we acquired 2 stores in Colorado during the quarter for $70 million. These Mazda and Ford stores are located adjacent to our existing stores and increase our density within the market. As previously discussed, we are competitive buyers where we are confident in achieving year 3 returns greater than our weighted average cost of capital for core franchise opportunities. This hurdle is higher for non-franchise acquisitions. Share repurchases have been and will continue to be an important part of our playbook. During the first quarter, we repurchased $225 million worth of shares at an average price of $165 per share. During April, we have made additional repurchases, bringing our year-to-date repurchases to the $254 million or 4% of shares outstanding at the end of -- of shares outstanding at the end of 2024. In our capital allocation decisioning, we also continue to consider our investment-grade balance sheet and associated leverage levels. At quarter-end, our leverage was 2.56x EBITDA in the middle of our 2 to 3x EBITDA long-term target. Now let me turn the call back to Mike before we address your questions.

Yes. Thank you, Tom. Obviously, tariffs and their impacts are going to continue to dominate the discussion in the coming weeks. And clearly, getting to a workable resolution is paramount. And we know all of our OEMs are working on that. But beyond the fact of tariffs, AutoNation delivered a great start in 2025 with robust performance across all business lines, which I think shows progress in key areas of our operation. And many of these areas are going to continue to deliver benefits to our company regardless of the resolution on tariffs. And as a result, these initiatives, combined with our day-by-day job of running our business well, is going to continue to positively contribute to our cash generation. Tom took you through that. And through that, enables us to focus on how we can use that cash for the benefit of our shareholders. And that's what we're going to continue to do going forward. So with that, let's open the lines for questions, if there are any.

Okay. Thanks, Mike. Harry, if you could please remind the people how to ask questions.

[Operator Instructions] And for our first question today, we will be going to the line of John Murphy with Bank of America.

Just wanted to stay on the controllable side of things for a second here. Obviously, F&I PBR was a real good guy, I think, one of the highest levels we've ever seen, except maybe some real peaks in '22 and '23. Just curious, in that context, and maybe Tom, you can give us some details on this, how much of a weight was the AutoNation Finance ramp to that number? Because I mean I know that's a little bit of a drag to the F&I PBR number at the moment as the book is building? And as you think about that inaugural ABS, how much room and flexibility you have in the warehouse facility if market conditions remain a little bit wonky? Over time, I'm sure they'll be fine, you get something out there. But just curious how much flexibility you have when you launch that inaugural ABS.

John, good to hear from you. In terms of the PBR for CFS, you're right, the 3% growth was impressive. As I pointed out in my commentary, we are overcoming the shifts of some of our financing to our AN Finance portfolio, which as we've talked about gives us a superior long-term return. But it does have a short-term impact on CFS. It was roughly, say, $150 for the quarter. So you can think of adding that to the 3% and get a real appreciation for the growth that we had there. In terms of the funding of the portfolio, until we have ABS, we're very comfortable with the capacity and availability of warehousing. And in fact, we increased our capacity in the quarter for the warehousing facilities, and we'll continue to do so, not an issue at all. And in terms of ABS, it's exciting for us to be pursuing that. We're working diligently right now on that transaction. There's a lot that goes into it, as you know, a lot of modeling, a lot of work with your rating agencies and your banks. We're at the pace where we thought we'd be. Markets seem to be cooperating reasonably well in the last few days, and so we're looking forward to being successful in that. We are hoping to get something north of $500 million, but we'll see how that plays out. Hopefully, that helps answer your question.

Yes, that's great. Mike, I just had one follow-up question on your commentary of what appears to be some pull-forward demand at the end of March and into April and maybe in May. There's more than $10 million of pent-up demand, at least by our estimates out there. So I mean although we may have a little bit of "pull forward" in these kind of 2 to 3 months here as we get resolution on the tariffs, do you think there's going to be significant payback in the months after that? Or could we continue to ride at sort of the 16 to 16.5 we saw sort of the pre-tariff dust-up and this could be a pretty solid year? I mean there's a lot of opinions on this. A lot of people taking their numbers down significantly. But I think you made a very, very good point on there being some substitutions that might occur and keep sales going. So I'm just curious on sort of your thoughts on is it -- are we staring down the barrel of a big payback, or maybe not just because there's so much pent-up demand.

So the way that I think about it is, I think that we saw -- well, I believe we saw momentum in the marketplace January through February, which we expected. So if I -- just the tariff to one side at this moment, I think, that the market was headed for a significant improvement year-over-year. And to your point, therefore, what we saw, and we call it a pull forward, but wouldn't necessarily have delivered a full payback in the balance of the year absent of tariffs anyway because I think that there is pent-up demand in the marketplace and I think that there was that momentum coming into it. I have, obviously, I have a very strong but personal opinion on what I think the impact of tariffs may well be. And yes, I do believe that because of the nature and the dynamics of the market and how tariffs will impact everybody in a different fashion, that there is going to be significant cushioning to the full impact on the total volume in the marketplace. I do think you're going to see a lot of market share swapping and moving. But just to summarize my answer, not everything that we saw come into the quarter was indeed pull forward. And it's, for sure, in my view, absent of tariffs, will not be all given back in the back half of the year. We will never know, of course, because no one will be able to get a perfect science, but that's my view.

The next question today will be from the line of Rajat Gupta with JPMorgan.

Great. I just wanted to follow up on John's question earlier around some of the comments you made, Mike, earlier that you expect the OEMs to remain competitive on pricing, competitive on market share. I was curious like how do you think that manifests in terms of front-end grosses for the dealers, would the OEMs expect dealers to absorb some of this inflation, maybe in the form of higher invoice pricing versus MSRP or maybe more dealer discounting versus incentives? Just curious how you see that might play out. And I have a quick follow-up on AN Finance.

Thanks for the question, and it's great to have you on the call. So I'll state the obvious. And by the way, I've read a number of the commentary from a lot of people on this call who I think have a very good perspective on this, but forgive me if what I say is just repetitive to certain things. As we know, the tariffs are not going to be -- they're not going to have a uniform impact across OEMs and they're not going to have a uniform impact within OEMs' model ranges. And I think because of that, the key question is what is going to be the resulting competitive position of a vehicle in a segment against its competitive. So relevant competitive position becomes primary for all of the OEMs, and that's an obvious statement. But because that's true, and no OEM wants to give up market share, and every single vehicle sold has a cross-shop counterpart, that alone is going to mean that, in my view, the last lever that's pulled is net transaction price appreciation. And because of that, I think, clearly, the impact on the market from some of the projections that I've seen is probably overstated. Notwithstanding what I said, what that's going to mean is there are some OEMs that are in a very difficult position compared to others. And there are some vehicles within OEMs ranges that are in difficult positions compared to others. So you are, I think, going to see quite a degree of cross shopping activity, which is going to be supported through the full value chain. So OEMs are going to look for support from their dealers during this period of time and dealers quite rightly are going to give their OEM support because it's in their interest as well. And I am expecting that. We are prepared for that. We are looking at what we need to do to support our OEMs in that. And I think that's natural and what's going to happen. It's a relationship and it's a partnership. So they are going to be clear -- regardless of the total industry, I think, there are going to be clear segment-by-segment, vehicle-by-vehicle winners and losers based upon that relevant competitive position. As I mentioned at the beginning, obviously, because of the broad portfolio that we have got, to some extent, we hold both sides of that trade, not in a fully balanced weighted way, of course. But when I look individually across our relative positions, the stronger positions that we've had, and I look at the OEMs, and we discuss with them what their plans are, I think, if I was in their shoes, I would be doing exactly what most of them are doing. So in answer to your question, I'm hoping I'm answering your question, if not, feel free to reiterate, I think dealers will step into it as well. I think they should step into it as well. I think it will be proportionate. And I think the payback will come in protection of their market share in their markets as well. Not all dealers are in this position that we are in. And because of that, as I've said, you're going to see, I think, net transaction price increase as the last lever that's pulled, but it will have to be pulled in certain circumstances to different degrees by different OEMs.

Understood. That's great color and very clear. Thanks for the comments there. And just one follow-up on AN Finance. You hit the breakeven much sooner than expected. Curious, Tom, on like what drove that? Was it just better loan performance? It seems like you're still -- your net interest margins are still pretty high relative to the new book that you're rolling on. Curious as that -- some of the legacy loans still roll off, how might that play into the quarterly trajectory here given you already like achieved profitability in the first quarter.

Tom, before you answer that question, I'm just going to dive in here for a second. I'll tell you what delivered it, was a great team of people doing a great job for us, being fully supported by our dealerships. If you look at -- and congratulations to them. Thank you for delivering that. And by the way, as I said to Jeff Butler, who runs that business for us, basically, what he's done is just reset his budget for the rest of the year upwards. So congratulations, Jeff. But on a serious note, if you look at what's happened in that business, we all know that business relies heavily on SG&A leverage, and that relies on building a book with the lowest risk possible. And that's what they've been able to do, and they've done it, I think, very well and very prudently. And because of that, they've maintained what I think is good interest margin, and we're now beginning to see 2 effects. One is strong SG&A leverage flow-through, and secondly, combined with much lower delinquency rates. And some of that delinquency -- a large portion of that delinquency is because of the significant reduction in the proportion of third-party originations that we have, which has now dropped to a very, very low number in terms of the overall book. And secondly, because, obviously, what we're focused on, as you can imagine, is making sure our processes and the discipline we have in place to service our customers and to service the collection of their payments continues to improve and continues to be a daily focus, and I think it's a combination of those things that pulled forward their breakeven. And my expectation is that it continues, but continues again in a disciplined way because we're very focused on the buy box we have. We don't want to go outside of that buy box because we're clear on the return on equity. We think that will deliver. That return on equity will be improved as we get into the ABS market and more volume. And we think that we're going to continue that way. We have an overall portfolio growth pace that I think is right for us, it's right for the capital we have to deploy for, and we're going to continue on that pace. And we will adjust and flex depending on what happens in the marketplace with tariffs. So Tom, do you want to answer the...

Yes. I think, Mike, you hit on it all. And also my congratulations to the team. But yes, you had mentioned that the net income -- sorry, the interest margin seems high and you're asking whether it was related to legacy portfolio. Pretty much the portfolio we have now is completely clean of the portfolio -- or the book that we acquired back in 2022. I think it's probably $25 million left or so or less than that. So really, the margin is being driven by all of the business that we've written as AN Finance with AutoNation. And it's 100% AutoNation captive dealership book. We no longer do any of the third-party stuff. And as you've seen, the credit profile has continued to improve. So I'd attribute all of the performance on interest margin to what we've done and what we've underwritten since we acquired the company.

Understood. So I mean it feels like you should -- I mean, it's hard to imagine it goes below breakeven, and you're probably going to only improve profitability from these levels if these are the right level of net interest margins, irrespective of the fact that you're going to still like have new originations to increase. Is that a fair statement or do you disagree?

Absolutely. Absolutely. I would agree with that.

The next question today will be from the line of Michael Ward with Citi Research.

On the -- it sounds like 2Q, one way or another, you have a demand pull forward to some extent, strong underlying demand, whatever it is, that should have positive implications on the cash flow side and take out some of that seasonality. Am I reading that rightly?

Yes, I would agree with that, Mike. As you know, we have -- well, first of all, the first quarter cash was very strong, as we mentioned, close to 130% conversion. But it was reflective of our net income and our net income, obviously, was reflective of the pull-forward impact that we talked about. There's not a lot of timing differential in terms of cash flow. Probably the last week of the quarter was probably more robust than any of our more recent quarters. So timing-wise, there could be a little bit of cash pent-up that comes in the second quarter. But as you know, and as I reminded everybody, the second quarter is when we make our tax payments and some other things. So the benefit that we get from any first quarter residual will be netted into our normal second quarter cadence.

Sorry. Carry on. I didn't mean to interrupt you.

No, no. Go ahead, please.

The only thing I was going to mention on the pull forward is, obviously, you can look at the total number of days of supply that we finished the quarter with, and that will decrease. But you're also -- what's in there as you think about how that continues, I talked about the fact that it obviously is going to moderate as you go forward as the mix changes in your residual ground stock. So when we think about cash generation, I agree with everything that Tom said, including the seasonal 2Q tax payments, but clearly, you need to just factor in mix for that ground stock that we closed the second quarter with.

Yes. But one way or another, you're in a demand pull environment, and that's positive for pricing, right?

Yes. For sure, usually, a demand pull environment is positive for pricing. I would agree entirely with that. But it is not -- it doesn't have the same pricing dynamics that you saw in a COVID situation, for example.

Right. The supply should be okay.

Exactly. Yes, exactly.

Okay. So just tying the pieces together on the cash side, so the other missing link is as you get your ABS completed, that frees up some of your cash that we see on the operating side instead of that being a drain last year of almost $900 million, offset by the debt, right? So if that starts to turn positive, so on the operating cash flow side, you see a positive delta, call it, $500 million from the ABS, right?

Yes, of course. I would consider it, Mike, to be replacement of warehouse finance with ABS -- but the point is that if -- and I'm just making up the numbers here, but if I had a loan that was 80% funded under the warehouse, that might be 95%...

Right. So it does free up -- okay. And just one last thing, give us a direction on...

Mike, this is Derek. Just -- we have a reconciliation in the deck which shows what the change in auto loans receivable net is. So you can see that. We adjust our operating cash flow for that. So that's how we look at it internally because that's the cash that's available to us.

Thank you for that, Derek. One thing that I think is important on this is, again, it frees up cash on a static book. Your net cash position has to take into account your growing book, obvious statement, just to close off that conversation.

And just lastly, on the floor plan interest, it sounds like it goes down again in 2Q year-over-year, right?

Mike, I think modeling it at a pace that's similar to Q1 is probably in order for now until we kind of see the impacts of whatever happens, yes.

The next question today will be from the line of Daniela Haigian with Morgan Stanley.

So what does your age mix in used look like? With the newer used vehicle supply still tight, even with mitigating factors, like you mentioned, in-house sourcing and also a consumer pressure by affordability, do you see opportunity moving into older used vehicles to meet demand?

I think Tom talked about the fact that lower price, sometimes older, sometimes higher margin, vehicles continues to be strong demand. And I think that, for sure, is going to continue. The teams that look after our mix, are modeling demand as far up the demand funnel that they can to try and make sure that they still maintain a balance. As we mentioned in the opening comments, we deliberately increased our used vehicle stock at mix as best you can in this period because we think that it's an opportunity for us going forward and we can build on our Q1 results. So yes, we think that will continue to be in demand, sub-$20,000 vehicles. And it is a focus for us, both in terms of self-sourced and other sourcing activities that we have.

And then just on aftersales, you spoke to increased tax, increased productivity. What does capacity -- excess capacity look like today? And how much room is there left? I know you guided to moderate growth over the next few years. But how much, on top of that, can you get to with the capacity that you have?

So I can tell you in terms of physical installed capacity, on average, every dealership is slightly different. On average, we have plenty of capacity in terms of installed ramps, and we have added to that capacity in various fashions where it has been in acute position. We continue to be out at 4%. I think it was increased in technicians in Q1. That is a big focus for us because there are still productivity that we can unlock through training and development of our technicians, but we want to add physical labor resource into our net. Because one of the big areas for us -- if you -- if I just break down our vehicle parks into 0 to 3, 3 to 7, we continue to make progress in penetration of those aged vehicles in the vehicle park. The area that is traditionally more difficult to unlock is obviously 7-year-plus vehicles. There is plenty of opportunity for us to progressively unlock that. And to do that, we need to think about pricing, we need to think about convenience, we need to think about a whole host of things, one of which means we'll continue to need technicians. So installed capacity, we have a lot of physical ramps, et cetera. We have the headroom we require. We constantly are growing our technicians. And in terms of work that's available, with different degrees of addressability, there's opportunity to grow in the park.

The next question will be from the line of Colin Langan with Wells Fargo.

I just want to clarify, I mean, so I think in your earlier Q&A, you mentioned that you think the SAAR kind of falls to 15, 16 pace. Is that your view for the full year, or is that after April, and we have the pull forward, that's where you think it settles in at? And then I wasn't also sure on your comments on pricing. You think -- I guess the numbers out there, 9%, 10% would be needed to fully pass that on. You don't think that will be seen in the industry and that both automakers would have to raise price a little and you guys would take some on the GPU. Is that the right way to interpret all those comments?

It's the right way to interpret some of the comments. Firstly, what I said was that I think some of the forecast in terms of impact on the SAAR were probably overstated because of the fact that different models in different segments will have different net transaction impacts. And therefore, cross-shopping, to some extent, would soften the full impact on the total industry. That was my first point. I didn't give you a total industry forecast for the year, and I will not give you a total industry forecast for the year. And then secondly, what I said was I believe the last lever of our OEMs will pull will be one the affects net transaction price. And therefore, they're going to be looking at suppliers, their own cost base, their own infrastructure, including their dealers, to develop a best strategy they can based upon the individual circumstances, to, I think, really balance the impact on dealers, the impact on themselves and, of course, their market share. And in that instance, there is no doubt in my mind that dealers will be asked to participate in that, but I think it will be in a balanced way. And I think the end-result will be, as I said, that cushioning effect on the total industry. I do think the total SAAR will drop, but I think some of the numbers out there are overstated.

Got it. Okay. And then just on the buyback pace, it seemed to sort of jump up a bit. I mean how should we think about it with all the tariff uncertainty? Are you going to continue at this kind of pace? How is the M&A market? Is that maybe where you want to pivot more? Or are you kind of on pause given there is so much uncertainty out there?

Colin, a couple of thoughts there. First of all, all of our capital allocation is based on where we think we can develop the greatest returns. As it happened in the quarter, we identified some good acquisition opportunities. We also see our shares as the intrinsic value is higher than where we're trading. And so we think that has continued to be a buying opportunity for us. And so we're deploying capital to the extent we think prudent while managing our balance sheet leverage. And so those are the 3 factors. I don't see a material change in things that hit our normal run rate. We'll see how the tariffs play out. But we've done stress tests of our P&L and of our cash flows under different scenarios and feel pretty confident that we'll be able to continue to generate good cash flow and be able to have the opportunity to make those decisions on where to deploy the capital.

Your next question today will be from the line of Bret Jordan with Jefferies.

In after-sales, could we get some color as price versus car count? And did the mobile service initiative contribute to the after-sales growth in the quarter?

There was volume increase, which was I -- and Tom, just correct me, we have volume increase and a price increase, about 1/3 volume, 2/3 price increase. Some of that was mix shift, by the way. It wasn't pure hour sold or parts sold pricing. There was quite a bit of mix shifting, which helped us as well in that piece. Mobile service did contribute to the total hours sold. They did not contribute to our net income because it is still a business that we're investing in for growth, but it contributes at a gross level.

Okay. And then a question, and this sort of gets back to tariffs. When you think about the after-sales business, the percentage of parts that you were selling either into a repair order or out the door in wholesale that are imported, obviously, a few years back, you guys went with a private label parts around the AutoNation USA strategy, do you have a feeling for what percentage of your parts mix might see tariff exposure?

Yes, with the analysis that we've done is to look at the distinction between a captive part and a competitive part. It doesn't mean to say that competitive parts will not get price increases. I think -- because it isn't just OEM parts that are going to be affected. The vast majority of non-OEM parts have an income -- an import situation as well -- have an import situation as well with them. So there is -- in terms of, by the way, of that analysis between captive and noncaptive, of our part sales, roughly 40% you can think of what OEMs consider to be captive and 60% are noncaptive. And therefore, they will have different situations in terms of the competitive nature of the marketplace. And again, you see a very similar lever on parts that you will see on new vehicle sales. What I would tell you on captive parts is it's not automatic that part increases or costs flow through to the customer because there are consequential benefits of that. They may well be captive, but for example, we have seen pretty strong mitigation in collision business throughout the bulk of 2024 and coming into 2025, where we are seeing more total losses than repaired vehicles. And part of that is because of increases in captive parts and obviously changes in residual value. So even though it is a captive part, it isn't just a, hey, this is a captive part, let's pass it on. That's not how it happens in my opinion. And other considerations are in there. But that's how we think about it. And I think OEMs are probably thinking about it similar way.

Our last question today will be from the line of David Whiston with Morningstar.

First, sticking with tariffs. As you know, some German [ 3 ] production isn't USMCA compliant. And I'm just curious, do you think your customers at those stores have willingness to incur larger price increases than, say, a GM customer or a Toyota customer does?

So let me just soak on that question for a second to try and give you a balanced answer to it. So obviously -- the best answer I can give you is, it goes back to what I said. At the end of the day, there is always an alternative to what you want to buy. And it's going to be a decision of -- an individual customer-by-customer decision of whether they want to switch to an alternative in the marketplace that is to them a lesser price. And I think they're going to have that option. Typically, as you know, a model line or a brand that has a premium is more able to -- is more able to gain pricing in the marketplace than, let me say, a much more competitive segment. That's always been the case and will be the case going forward. That's the best I can give you off the top of my head.

Appreciate it. Just one question on buybacks. It's a very long-term outlook question here. But I'm just curious how low are you guys willing to take the share count 5, 10 years from now? And if there is a floor, would a regular dividend at that point gets serious consideration?

Excellent question, David. I think our management team and the Board continue to want to drive returns through balanced capital allocation. I mean it just so happens that the more -- the better opportunities have been in share repurchases. But we're confident that the M&A market itself will present opportunities for us, particularly to take advantage of the footprint that we have and to drive synergies and to drive scale. I'd be hesitant to give you like what we think the golden number of shares is. Does it go down to 1? Yes, I couldn't tell you. But the -- when we look at our shareholder base, we have very liquid set of shares, and we'll continue to pursue it. I don't think it's critical that we have an end target in mind in terms of shares outstanding. It will always be there as an opportunity for us given the liquidity.

The end-target we've got in mind this is absolutely the best shareholder return we can deliver.

Thank you.

This concludes Q&A, and I will now hand the call back to CEO, Mike Manley, for closing remarks.

Yes. Thanks, Harry. As I mentioned and as we finish the segment, obviously, during this period of time, it's completely natural, a lot of discussions on -- a lot of the discussions on tariffs and the potential impact. The next weeks are really going to be very helpful in terms of seeing what will actually transpire in the marketplace. But I do think, and I'll repeat some of the things that I said during my opening comments, if you look at our quarter and you look at the way our business is developing, there are plenty of areas within our business that are less impacted by tariffs that continue to develop in a positive way. And many of those areas still have a lot of opportunity for us and the team to further develop, whether it's in after sales, for example, or the continued growth and development of AN Finance. And there are areas that clearly, regardless of the tariff situation of things, the team is focused on and we'll remain focused on those things. And as Tom said, clearly, and naturally, we look at different potential scenarios going forward to make sure that we are taking the appropriate steps in our view, to position AutoNation in the best possible way we can despite the environment. And one thing that is true about this organization is this business was the first of this type of business, and they have proven in virtually every economic cycle that they've been in to have a robust business model that has consistently delivered and consistently grown. And with that, we'll end the call, I'd like to thank you all for your time and your questions today. Thank you.

This concludes the AutoNation Incorporated First Quarter 2025 Earnings Call. Thank you to everyone who was able to join us today. You may now disconnect your lines.