Autonation (NYSE:AN) Q1 2026 Earnings Call

0:00 Hello, and welcome to the AutoNation, Inc. First Quarter twenty twenty six Earnings Call. My name is Rob, and I'll be your operator today. All lines are currently in listen only mode, and there will be an opportunity for Q and A after management's prepared remarks. I will now hand the conference over to Derek Fiebig, VP of Investor Relations. Please go ahead. Thanks, Rob, and good morning, everyone. Welcome to AutoNation's first quarter twenty twenty six conference call. Leading our call today will be Mike Manley, our Chief Executive Officer and Tom Slozic, our Chief Financial Officer. Following their remarks, we'll open up the call to questions.

0:45 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 our website located at investors.autonation.com.

1:31 With that, I'll turn the call over to Mike. Yes. Thanks, Derek. Good morning, everyone. Thank you for joining us today. Now as usual, we're going to provide a fulsome discussion of our results. And in our materials, I think you're going to notice some updates that we hope you will find useful. Obviously, we're very pleased to report that despite a challenging Q1 for the industry, particularly with year over year comps, AutoNation delivered its fifth consecutive quarter of year over year growth in adjusted earnings per share. This represents a solid first quarter for AutoNation. Now we continue to deliver strong operating performance coupled with excellent consistent cash conversion, which enables us to maintain our strategy of deploying capital in a disciplined way to deliver results to our shareholders on a consistent basis.

2:20 For the quarter, we reported adjusted EPS of $4.69 up from a year ago. And as I mentioned, our fifth consecutive quarter of year over year adjusted EPS growth. Operating cash flow was also strong. We generated $256,000,000 of adjusted free cash flow, which represents substantial cash flow conversion of adjusted earnings. Now starting on Page three, where we cover gross profit for each of our businesses. Results were led by after sales, which once again delivered solid mid single digit growth despite some year over year impact from adverse weather. Same store gross profit increased 3% and total store gross profit increased 5% to $593,000,000 which was a first quarter record for the company.

3:10 The story underneath this solid total growth in gross gets even more interesting as you tease out the dynamics of the different sources of growth. Underneath that total growth of 5%, internal pay actually declined by 6%, somewhat expected I think due to lower industry volumes. This contraction in internal pay was more than offset from two important segments, customer pay, which grew 8% and warranty related gross profit, grew at 7%. Now as always, there's still more for us to do in after sales, where we believe there is more growth to come, but clearly this revenue and net income stream is durable, has a recurring nature and is high margin. It's also an important driver of customer engagement and retention.

3:56 Now moving on, I want to turn to Customer Financial Services. The team delivered another outstanding quarter, posting a first quarter record per unit profit, up 6% from a year ago. The team continues to run a value driven customer focused process that provides our customers with valuable products and services. Customers purchased on average more than 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 with roughly three quarters of units sold with a finance contract. Now this performance should be read with the added context of the growth in our own finance company originations, which as you know deliver a superior return over time, but in the short term represent a headwind to the record per unit value we just delivered.

4:51 And Tom, I know you're going to give everyone on the call more details of this dynamic So let's look at new vehicle industry and our results. New vehicle unit sales were down in line with the market. As you'll remember, last year there was a significant acceleration in demand following tariff related announcements, which clearly set up a very challenging year over year comp. As in the fourth quarter, following the elimination of the BEV incentives, sales declined BEV sales declined more than 50% year over year and the largest reduction of that was in our premium luxury segment. Now the partial offset to industry volumes we just discussed, new vehicle unit profitability improved sequentially, up 5% from the fourth quarter, driven by higher per unit profit in both our import and premium luxury segments.

5:43 Now moving on to used vehicles, I feel we delivered a solid performance in the quarter. We actually achieved our highest used to new ratio in two years. Our margins were much more stable, delivering a per unit profitability sequentially higher. Our wholesale performance was also strong. I would say that coming into the quarter, we had a couple of challenges that were hangovers from 2025, inventory levels that were lower than I would prefer and aging that was slightly elevated. I think the team has made good progress with these challenges and we now enter Q2 with improved inventory position at a younger average age. Now turning to Slide four, I briefly touched on our customer financial services performance earlier, but let's turn to our own finance company. AutoNation Finance performed well generating $9,000,000 of profit in the quarter, which by the way nearly equaled the entire profit for 2025.

6:38 AM Finance generated over $20,000,000 of cash for the quarter and the portfolio continues to scale and ended the quarter at $2,400,000,000 up $1,000,000,000 year over year. Our funding profile also improved following our second ABS transaction, which closed in January. The operating momentum of AutoNation Finance is obviously delivering attractive returns and we are also benefiting from the ongoing customer engagement and valuable consumer insights that come from the business. Now moving on to cash, adjusted free cash flow was strong again at $256,000,000 This reflects excellent cash conversion, which Tom will talk through in more detail. Now during the quarter, we deployed approximately $350,000,000 of capital, including $300,000,000 in share repurchases.

7:27 While we did not acquire any franchises in the first quarter, we do remain active in evaluating opportunities that can add scale and density in our existing markets. Our balance sheet remains strong. Our leverage ratio was in line with the first quarter of last year and remains comfortably within our targeted two to three times range as we maintain our investment grade rating. The strength of our balance sheet and robust cash flow generation give us significant flexibility to deploy capital, drive shareholder returns and grow earnings per share. Overall, was a good quarter, strong results and as I mentioned, the fifth consecutive quarter where we have delivered year over year increases in EPS. And now with that, Tom, I'm going to hand it over to you.

8:14 Okay. Thanks, Mike. Turning to Slide five, I'll walk through our quarterly P and L. Total revenue for the quarter was $6,600,000,000 compared with $6,700,000,000 in the first quarter last year, which benefited from the tariff related volumes, particularly in premium luxuries, we'll talk later. First quarter gross profit of $1,200,000,000 was essentially flat year over year and gross margin improved 30 basis points to 18.5 of revenue. That was driven by continued mid single digit growth in our after sales business and strong performance in customer financial services. Adjusted SG and A as a percentage of gross profit was 69.8% for the quarter, a bit higher than our targeted range of 66% to 67%. The increase reflects investments in marketing including upper funnel spending to generate higher quality growth opportunities and build AutoNation brand awareness.

9:08 We are also making structural investments targeting our customer experience. Lastly, we had unfavorable self insurance experience in the quarter including damage related to weather events. We expect SG and A to moderate in subsequent quarters as a percentage of gross profit, but remain above our targeted range reflecting continued investment as I mentioned earlier of the aforementioned strategic initiatives. Adjusted operating income was $312,000,000 for the quarter and was down 7% from a year ago. At 4.8% of revenue, it remains nearly 100 basis points above pre pandemic levels. Below the operating line, floor plan interest expense decreased $5,000,000 or 10% year over year as borrowing rates moderated and we remain disciplined in our inventory management.

9:55 Non vehicle interest expense increased $6,000,000 year over year reflecting higher average balances and a slightly higher blended borrowing rate reflecting maturities of lower cost debt. Excluded from our adjusted results, our net after tax gain of approximately $40,000,000 related to our valuable strategic equity investments in Waymo and TrueCar. Weighted average shares outstanding decreased 11% year over year reflecting 1,100,000,000 of share repurchases since the end of twenty twenty four. Adjusted earnings per share was $4.69 for the quarter. Through strong operating execution and disciplined capital allocation, we've now delivered five consecutive quarters of year over year growth in adjusted earnings per share as Mike mentioned.

10:43 Moving to Slide six, after sales representing nearly half of our gross profit continued its impressive momentum. Gross profit was $593,000,000 and AutoNation's first quarter record. And as Mike mentioned, we saw modest impact from adverse weather, but still delivered mid single digit growth. Our results reflect higher repair order count, higher value per repair order and improved labor productivity. Same store revenue increased 4% and same store gross profit increased 3%, while total store revenue and gross profit both increased 5%. Growth was led by customer pay gross profit up 8% and warranty gross profit up 7%. Internal reconditioning gross profit declined 6% due to lower used vehicle volume.

11:31 Wholesale and retail parts increased 10%. After sales gross margin was 48.6% for the quarter roughly in line with the first quarter of twenty twenty five. We remain focused on deploying technology to drive additional volume and productivity and on hiring, developing and retaining technicians. These efforts increased same store franchise technician headcount by more than 3% year over year reflecting improved retention. Growing our technician workforce is a key to consistently delivering mid single digit growth in after sales gross profit. I'm now on Slide seven, Customer Financial Services. The momentum in CFS continues. After growing 6% for the full year last year, per unit profitability increased another 6% in the first quarter driven by improved vehicle service contract margins, consistent product attachment and higher finance product penetration.

12:25 This per unit growth offset the year over year decline in unit volumes. This performance is even more impressive considering the growth of AutoNation Finance. While AutoNation Finance is attractive in long term profitability, it diluted CFS per unit results in the first quarter by approximately $160,000,000 or $160 per unit, which is a little over 5 percent. Slide eight provides an update on AutoNation Finance, our captive finance company and its continued strong performance. As expected, profitability is gaining meaningful traction as the portfolio matures and as we leverage our fixed cost structure across a much larger book. First quarter profit improved to $9,000,000 up from $100,000 in the first quarter of twenty twenty five and up sequentially from $6,000,000 in the fourth quarter of twenty twenty five. During the quarter, we originated approximately $460,000,000 in loans and received approximately $213,000,000 in customer repayments.

13:26 Our penetration continues to improve. AutoNation finance originations were approximately 17% of all deals financed in the first quarter, up from 14% in the fourth quarter. The AutoNation portfolio ended the quarter at $2,450,000,000 up about $1,000,000,000 year over year. The portfolio quality continues to improve. Credit performance metrics strengthened and average FICO scores on originations were 700 in first quarter. Delinquency rates, thirty day delinquency rates were 2.1% at quarter end, stable as a percentage of the portfolio and in line with our expectations. As we've discussed, we do expect delinquencies to continue to normalize as the portfolio matures migrating towards the 3% range over time and our loss reserving methodology incorporates this expectation.

14:18 Non recourse debt funding also improved reflecting better advance rates in our warehouse facilities and the benefits of our second ABS issuance for approximately $750,000,000 completed in January. Debt funding as a percentage of the total portfolio at quarter end was 90%, now that's up from 74% a year ago reflecting lender and market confidence in our portfolio. To close on AutoNation Finance, our compelling offerings are driving strong customer take up and we continue to expect attractive returns on equity as profitability grows and equity investment requirements moderate. Slide nine provides some color for new vehicle performance. Our unit sales declines were in line with the industry down 9% on a same store basis and down 8% on a total store basis.

15:07 Battery electric vehicle unit sales declined more than 50% year over year and when combined with tariff related pull ins in the first quarter of last year created a disproportionate impact on our premium luxury unit sales which decreased 16% from a year ago. Domestic and import sales were down mid single digits. New vehicle profitability again increased sequentially in the first quarter averaging more than $2,500 per unit, up more than $100 or about 5% versus the fourth quarter. The improvement was driven by higher per unit profits in our import and premium luxury segments. New vehicle inventory amounted to forty six days of supply, up eight days from the first quarter of last year and one day from the end of December.

15:54 Turning to Slide 10, as Mike mentioned, used vehicle supply remains constrained and the team did a great job balancing sourcing, unit volumes and overall profitability. Our used to new ratio increased to 1.15 times in the first quarter, the highest in two years. Used retail unit sales decreased 5% on a same store basis and 3% on a total store basis. Now unit sales in the sub $20,000 category declined 9%, while vehicles priced above $40,000 increased 7%. This mix shift contributed to a 5% increase in average selling prices year over year. Our used vehicle unit profitability increased by more than $150 sequentially to just under $1,600 per unit reflecting more optimal vehicle acquisition and reconditioning, inventory velocity and usage of enhanced technologies.

16:49 We had over 25,000 units ready for sale and 32,600 total units in our used inventory at month end and the aging is in terrific shape. To Slide 11, adjusted free cash flow for the quarter was $256,000,000 or 155% of adjusted net income. Both of those metrics were improved from the first quarter last year as we continue to demonstrate stronger operational performance, a relentless focus on working capital and cycle times and CapEx discipline and prioritization. Our capital expenditures to depreciation ratio was 0.9 times compared to 1.2 times a year ago. CapEx was a little light in the quarter mostly due to timing and we expect full year spending to be $300,000,000 to $325,000,000 We continue to focus on driving free cash flow to improve maximum capital deployment capacity.

17:41 On slide 12, our strong cash conversion gives us flexibility to invest in growth and drive shareholder value. In the quarter, we deployed more than $350,000,000 of capital including $300,000,000 of share repurchases. The remaining was spent on CapEx, which is largely maintenance and compulsory spending. Since the end of March, we have made additional share repurchases bringing our year to date deployment to approximately $400,000,000 or around $100,000,000 per month. We have repurchased nearly 2,000,000 shares or 6% of the shares outstanding at the beginning of the year. In our capital allocation decisioning, we also consider our investment grade balance sheet and the associated leverage level. At quarter end, leverage was 2.57 times EBITDA, almost identical with a 2.56 times EBITDA at the end of the first quarter last year and well within our two or three times EBITDA long term target giving us additional dry powder for capital allocation going forward.

18:38 Now I'll turn the call back to Mike before we open the line for questions. Yes. Thank you, Tom. Just a quick closing for me. Reflecting on a strong quarter and what I expect moving forward, I am very pleased about our EPS growth. I think that's something that the team and I were very, very focused on and I was pleased we were able to deliver notwithstanding some of the dynamics in the industry that we've just discussed. Our after sales business is well positioned and I think that the market will facilitate growth in that. And we're obviously going to stay focused on our technician recruitment, retention and development. Customer Financial Services continues to deliver strongly for us, very consistent performance. Its profitability is also very consistent.

19:23 And we know that particularly with AM Finance, it builds strong relationships with our customers for us. And their portfolio continues to scale, improving productivity and profitability and funding. I do expect improvements in our used business over the course of the year, as lease returns increase and the execution continues to improve. New vehicle sales continue to track in line with the broader retail market. And as you've seen, unit profitability continues to show signs of stabilization. And during the Q and A, we may get into discussions about forecast for margin. That's fine. We can take questions on that. But I think all of the factors that we've talked about position us from particularly from a cash flow perspective to continue to generate strong cash flow, which will enable us to deploy meaningful levels of capital always with our shareholders in mind. So with that, Tom, if you're ready, let's open up for questions. That'd be great. Rob, if you could please remind participants how to get in queue for the question and answer period.

20:25 Certainly. Your first question comes from the line of Rajat Gupta from JPMorgan. Your line is open. Great. Thanks for taking the questions. The first one was just that, you know, you removed your previous 2026 outlook slide. I'm curious, is that something to do with just, you know, what's going on geopolitically, you know, and just creating more uncertainty? Just trying to understand, the reason behind it. And maybe, as you offered, any guardrails around new vehicle GPU, used vehicle GPU trajectory, from your own? I have a quick follow-up.

21:16 Rajat, it's Mike. I'll start the answer and then Tom, you jump in. So when we came into 2026, I think we all would agree that we knew that the structural demand, particularly in new and used was certainly there. All of the inputs to demand, I think, continue scrappage rates, household formation have continued. But I think we knew that there would be some affordability headwinds coming into the year based upon the developments of last year. And we were forecasting at that time maybe a 5% up to a 5% impact on new vehicle industry. And obviously, that has been compounded from a headwind perspective with the ongoing inflation that we've seen as well as, the fuel price movements that we've seen of late. And I think that is going to continue for the foreseeable future. So the way I'm thinking about the industry now is notwithstanding the fact that we're going to see quarter over quarter comparisons that are maybe uneven this year because of the industry shocks we saw last year.

22:30 I think the industry will be below that 5% forecast that we originally had coming in until some of those impacts get dissipated. Now whether that is the Iran war is over, fuel prices begin to return, whether that is transaction price movements that may happen or change over the years, interest rate movements, regardless of what causes it, I think we need to see some movements in those areas for that unmet demand now in the marketplace to start to get released. But sitting underneath that, I think the industry is still large. As we saw the volumes that we delivered in Q1, albeit down year over year, was still very, very credible.

23:15 And any deferred demand usually ends up relatively quickly in the vehicle parker. And we managed to capture that with our aftersales business as well. And that's why aftersales is typically anti cyclical because I expect our aftersales business to benefit now because there's certainly some deferred purchases in new. There's certainly some segment shifting from new to used and there's deferred purchases in used as well and that will find its way into aftersales. And then finally, because your question was quite detailed along and you have to tell me if I've actually answered it. When I think about margins for the year, you may see some margin compression. From our point of view, what's important is that drives an improvement in volume, because some margin compression as long as it feeds its way through into average transaction price should stimulate volume.

24:07 And I'll be very comfortable with that balance by the way, because I think driving new car volume is important for us over the long term. Tom, do want to add something? Yes, quickly. Rajat, just relative to that the original thought process, I think Mike said it well in terms of we're facing a different macro and environment for very obvious reasons, won't get into those. But if you look at you know, the the the main tenants in our in our outlook, I mean, apart from, you know, the market, I think all of all of them are intact in terms of what, you know, we're committing to deliver, whether it's, customer financial services, sustained performance, the AutoNation portfolio growth, after sales continued mid single digit growth, good conversion on cash and just shareholder focus capital allocation. I mean, all those things are still intact and we're committed to.

25:03 Got it. That's helpful color. And just on the investments, the strategic investments, could you double click on that a little bit? What areas are you looking to go into? How should we think about just the return on that for the business? Any specific areas those are targeted would be helpful. Thanks. I'll start and then Tom can finish up. I think there's probably two main areas that I would call out as part of this call. When I look back at, I think one of the benefits that AutoNation has is that we have a national brand. And I think the benefit of that is not truly unlocked yet. And what that means is that we continue to invest with high quality, but good third party partners to generate opportunities for us.

25:48 We're very focused on changing that dynamic. And to change that dynamic, we need to make some more upper funnel investments to be able to grow our brand recognition, higher in certain areas than it is today because we will reap the benefits of that over time. Now they will not be immediate. So what you get is you get a dislocation between our investment and our return and that's what you're seeing to some extent in our financial performance. Obviously, the investments being made, our expectation is over time, you will progressively see that return. Now what you won't immediately see is a reversal of that because upper funnel investment is obviously going to continue, but it is measured, it is well thought through, and I think it has a very, very clear end in mind. The second area that we're investing in is obviously in technology.

26:37 It is an ongoing daily topic of conversation across every business. I think we've made some good investments in technology. Some of it is in an exploratory, way at this moment in time. So what we're trying to do is understand do we truly get a long term sustainable return on investment from those investments. That means you have to make some speculative investments and some of which will pay off handsomely and some of which will not. So you're seeing some elevated cost from that. And again, that will continue throughout the year. But we're very cognizant of the fact that we want to maintain our forecast in terms of our underlying SG and A. And I think the finance teams and our operators really do have that in mind. And in fact, there's an increased emphasis on that because it frees up some headroom for us to make some of these exploratory investments that we're making.

27:27 But overall, I think and you should see it in our Q1, we're creating still a very, very credible balance of SG and A to gross. Tom, do you want to add anything? No, you hit it well. Awesome. Great. Thanks for the color and good luck. Your next question comes from the line of Mike Ward from Citigroup. Your line is open. Good morning, everyone. Thanks for taking the question. It seems like there's a I don't know if it's a concerted effort or just a shift towards the more profitable parts of the businesses, F and I, after sales financing. And it's almost like the new and used retail is just a feeder to enhance those businesses. Is that the way you're strategically thinking about it? Or how do you view that trend?

28:15 I think you answered your own question there, Mike. I like that answer very much. I've got nothing to add to it. Okay. So it is a concerted effort. Mike, when you look at the industry, it seems to me when we came out of COVID, everybody was set that inventory going forward to be about 20% lower than it had been in the past. It seems to me the industry has gotten even more efficient. How much does that contribute? We've kind of seen a stabilization of the new and used variable grosses. And how much does inventory discipline contribute to that? And do you expect that to continue? Well, it's a bit of a I'm going to give you a bit of a broader answer. So apologies upfront for this, because if I want to lean into this kind of discussion on affordability a little bit more because I think that it is what is going to shape the overall industry volume for the foreseeable quarters that are coming at us.

29:17 We know that if I just take new, for example, average transaction prices are up roughly 40% on new since 2019. But the dynamics in that are quite interesting when you tease it apart. The vast majority of that was covered off by real wage inflation. And in fact, the pass on effects of average transaction prices have been speculated between 810%. And I think that that was what was creating some of that affordability headwind when we came into this year. Obviously, it was compounded by tariffs, some of that pricing in some form or another being passed on. But we no longer had supply constraint on new vehicles driving up ATPs. That is largely, with the exception maybe of one or two manufacturers, completely dissipated now. But you're left with that affordability headwind, which initially was driven by transaction prices and then more recently a combination of rate and transaction prices. And that's what stays in the market today and it really has been compounded by what I'm hoping is a relatively short term shock, to the economic environment that we're in at the moment. But notwithstanding that, the industry level, as I mentioned, I think is still relatively large.

30:31 So as we go forward, I think that for us to release as an industry that pent up demand, some of those dynamics has got to change. And I think part of that will be this affordability question, whether it's content or whether it is supply chain changes or whether it is some margin mitigation with the OEMs or us. I'm comfortable with margin mitigation because I think it will translate into volume, because I do think that there is a large amount of pent up demand now in new, It's also translated into used to some extent. I think used will supply will still be constrained, for a period to come as that hole that was created in COVID works its way through the system.

31:17 But I do think that when some of those input dynamics begin to get relieved, which some of them hopefully will be happening sooner rather than later, you'll progressively see a release of volume and may see some accompanying margin compression as a result. But as I said, that's a trade we'd be comfortable to make so long as it's done in a disciplined way and we actually see the volume growth. Does that answer your question? Yes, it does. And it just seems like the industry becomes more profitable if we stay in this 15,500,000 $16,500,000 range instead of like getting these big peaks and valleys, so lower highs and higher lows. And it seems like it feeds into the more profitable part of the business for AutoNation. Yes, absolutely. I mean, we'd like very, very much, our after sales capacity because as you said, it is anti cyclical to some extent, but it's stable, it's durable and it's much, much more predictable. Because the other thing that's happening, of course, is the vehicle park is still continuing to age.

32:20 And an aging vehicle park, particularly when new and used vehicle volumes deferred, an aging vehicle park just represents an opportunity for us that we are constantly looking to try and unlock. So that dynamic is one of the great things about our balanced business that we run. Really appreciate your time. Thank you. Your next question comes from the line of Alex Perry from Bank of America. Your line is open. Hi. Thanks for taking my questions here and congrats on the progress. I wanted to drill in a bit more on the used vehicle side. How should we be thinking about sort of used vehicle comps and GPUs as we move forward? Inventory seems pretty lean.

33:10 Should we think about your ability to sort of drive an improvement in GPUs and same store sales on the used side? Thanks. I think we got upside on our volume side. I was pleased with our GPUs for Q1. I talked in the past that I think and our internal view is that we should be moving towards $2,000 a unit. That to me is something that we've set as a goal for our teams and to understand the different drivers of achieving that. The very first driver is obviously how you source your vehicles. So we're very focused on trying to make sure we source obviously from our lower cost channels first, but to build up an inventory volume that is sufficient to drive incremental sales for us.

34:00 As Tom mentioned, we made some progress in Q1. The real forecast for us the real initiative for us is to keep that progress moving and we think that will translate into higher volumes. I do not want that to come with a compression necessarily on the margin, because I still think there's some inefficiencies in the used car business that will enable us even if we reduce ATPs to maintain the margin, whether that is through cycle times, whether that is through a much, much more focused reconditioning, or whether that is through hold times. So even if you do see some mitigation in ATPs, I think some of that can be offset and mitigated by improved productivity as part of that value chain. Really helpful. And then just my second one, I wanted to, go back to sort of the State of the Union right now and how you're sort of thinking about things with all the uncertainty.

34:56 Are you seeing any sort of change in trend line, any impact through April on consumer confidence related to the war? Just talk to us about how you're sort of seeing the demand, trend as we move forward here? Thanks. Yes. Well, there's no doubt that we're seeing an impact on it. I mentioned before that affordability was a key industry issue for us right now. But I said that wage growth to a large extent had offset most of the well, a large portion really of the increases that we've seen. But there are other effects that sit underneath that. The first one is total cost of ownership is also being impacted by increased insurance costs, which are up roughly 50%, after sales maintenance costs are up as well.

35:48 But that the issue that I think we're going to face in the short term that really is driving my outlook of the industry over the, say, coming, one or two quarters is the fact that, that wage inflation that partially offset, increases in transaction prices wasn't distributed evenly. I mean, you were at the top and at the bottom, real wage increases. If you were sat in the middle, you were largely stagnant treading water. And that middle cohort of the population really is the engine for us. So the impact that we're seeing in the short term in terms of their household income and the dynamics there in terms of the needs, the must haves, the staples actually taking a higher level of their disposable income, It will impact our industry and give us some headwind. We've seen that in Q1. It will continue in my view into Q2. But those deferred purchases will feed into our after sales. But that's the dynamic really that we're seeing where the impact is, in my view, to be felt. I do think that, some of this I'm hoping that some of this obviously is short term and can get relieved quickly. But I'm still optimistic that when we look back on this year, the industry is still going to be a healthy one.

37:08 Incredibly helpful. Best of luck going forward. Your next question comes from the line of Jeff Licht from Stephens Inc. Your line is open. Good morning, Mike. Good morning, Tom. Thanks for taking my question. I was wondering if you maybe drill down a little deeper on the used and Alex earlier question, Mike, just in terms of your guys' strategy, maybe looking at late model versus six to eight year old plus, your cluster strategy, use of internal auctions. Obviously, one of the largest competitors is going through a little bit of a change and Carvana continues to ramp up. Just curious how you see the used car your used car business playing out, especially as it relates to sourcing and whatnot?

37:56 Yes. Well, you saw in our results that are above $40,000 used car business improved. I think it was up over 7%. Tom will correct me if I'm wrong, but it was up over 7% and then our 20,000 to 40,000 and below 20,000 had dropped. Some of that was inventory related. There's no doubt about that. But I do think that some of the drivers of that above 40,000 was maybe those marginal new car buyers that from affordability did in fact drop into the used car scene. So sourcing vehicles across all of those price bands is important for us. And by the way, even if those marginal new car buyers dropped into the used car industry, you can tell from the total used car industry even more deferred their purchases from used cars anyway.

38:42 So the way that we think about sourcing is it is everyone talks about how competitive it is. I think it's been competitive really for the last five years and will continue to be competitive. But you've got to be focused on every single channel. The very first channel that we're very focused on is clearly those vehicles that come to us in trade, new or used trades that we can with the right and appropriate amount of reconditioning generate a really excellent used car inventory piece. And that's what our focus is. I mentioned before brand. Brand is super important when you're sourcing vehicles directly from the marketplace. It helps cut through all of the noise out there. We have done well in many of our markets with our sourcing through our We Buy Your Car activities. I think we can do better, but I do think we need to continue to reposition our brand to more of a top of mind perspective rather than a searched outcome. And that's some of the investment that we're making.

39:39 But very comfortable also to dip into the auction market. They come at some people think an inflated price, but the reality is if you price them right, you can still get a good turn. So fundamentally, you've got to have the inventory because you can't sell fresh air. You've got to be able to buy it competitively, hopefully with a mix that suits the business that you're trying to achieve. But the industry is so broad, we want a balanced portfolio of vehicles between all of those three price bands. But as you've seen and I'll end with this, which is a repetition of how I started, our plus $40,000 sales benefited in the quarter probably from some of that migration from new. That's great. I appreciate the color and best of luck in Q2. Thank you. Thanks Jeff.

40:25 Your next question comes from the line of John Sager from Evercore. Your line is open. Hey guys, thanks for taking my call. On your annualizing ANF at $36,000,000 a year, the penetration increased from 14% to 17%. FICO scores are in a good place. Can you just reframe sort of the steady state and where you think that heads? If we look out to 2027, do you think that we can continue improving that penetration to higher and higher levels? And is it something like 50,000,000 an achievable goal? Yes. Thanks, John. Great question. When you look at where we have been on penetrations sorry, when you look at overall originations for AutoNation Finance, you know, going back to 2024, we're we underwrote about a million a billion dollars in sort of our first full year, 1,100,000,000, and that went up to 1,800,000,000 in 2025.

41:32 You know, we're on a run rate that we think is, you know, gonna get us north of two, you know, two to two point one billion in '26, which would be, you know, close to 20% growth. So we keep the key is the originations. That would, right now, as you said, penetration 17%, that's of all units that are financed. If we get to the numbers I mentioned for 2026, I think we'll be pushing 20%. And I don't think we're really calling a limit on what the penetration can be. I mean, it's been a steady climb following the originations. But at some point there's some elasticity there. Right now I think it's slow and steady growth for us on both penetration and originations.

42:26 Okay, great. And then on the SG and A efficiency, can you just quantify the impact of stock based comp in the quarter? Over year, probably less than $1,000,000 of incremental expense. Okay. Thank you. Your next question comes from the line of John Babcock from Barclays. Your line is open. Hi, good morning. Thanks for taking my questions. Just first of all, you guys quantify the impact of the weather on the quarter? Apologies if I missed. We both can answer this one. I don't really entertain discussions about the impact of weather on the business in the business.

43:15 I think it's something that tends to happen relatively frequently. So from a I know that Tom will have a much more well thought through answer. I tend to believe that much of it may be just deferred for a short period of time. Some of it you lose as people say. But no doubt Tom will be able to give you a better flavor than that. I try and focus on doing as much business as possible regardless of whether it's raining or windy. I think Mike is saying that he doesn't allow us to make any excuses for our SG and A performance. When you look at the one time events that we referred to, were self insured type claims activity, more than half of which was weather related.

44:04 I'd say the total including those weather related impact was roughly $5,000,000 year over year, John. Yes. Okay. Thanks. That's perfectly fine. And then just on the SG and A side, obviously there's been a fair bit of discussion on the call so far about uncertainty in the market, affordability challenges, the other broader macro headwinds. In light of all that, how are you thinking about your SG and A spending levels? And part of the reason I ask is because over time, the dealers have generally tended to be pretty good about adjusting spending up and down based on how the market is looking. So I want to get your thoughts on that and whether you're comfortable with current spending levels or if you think there might be a time at which maybe you decide to pull back in certain areas? Yes. Great question. Thanks, John. I'll start it out and then let Mike jump in.

44:56 The thing that's hidden inside those SG and A numbers that we talked about is some of the productivity that we are generating either through AI or other technology. And if you look for example at our compensation for sales personnel, We were up at close to 10 sales per associate in the first quarter of twenty twenty six. That number was probably nine or so a year earlier. And we're doing that with better training, better technology, emphasis on performance based incentives. So and there are a number of other initiatives when it comes to AI and productivity that we think will continue to allow us to drive down our SG and A.

45:56 We're deploying AI at scale in our servicing contact centers and in our back office. We've generated meaningful savings in 2025, close to $5,000,000 and I expect that to continue into 2026 through digital applications and AI type applications. So I don't want you to think that we're not focused on it. We do have to make some investments, some incremental investments. I do think those start to generate additional growth over time. I also think those investments, some of them dissipate as we get through 2026, particularly the investments on some of the digital enhancements that Mike referred to.

46:42 I don't at this point, we feel like we're on a good trajectory to bring our SG and A at a run rate that starts to approximate our targeted range towards the first quarter of next year. I think in second quarter through the fourth quarter, you should probably expect us to bring it down 100 basis 150 basis points from what we saw in the first quarter. If we can avoid some of the calamities that we don't necessarily control. So that's the way I would look at it. John, just want to add a piece as well. Obviously, we see a much more detailed breakdown of our SG and A performance than others on the outside of the company are. So if we look at the underlying core SG and A performance of our dealerships, our collision centers and our auctions, and we take out or we give an allowance for the investments that we see as being incremental that will benefit us, that's that dislocation between the investment and the revenue that you get that I discussed earlier.

47:44 I'm comfortable with our SG and A levels and I see a trajectory that I'm actually pleased with. It's not so apparent from the outside. So the question is, are the investments that we are making that are incremental truly going to give us a revenue stream in a reasonable time frame to have made them worth the trip? That's something that we are very, very careful to look at that we're really looking to see what benefits we see as a result of those investments. And if we believe they are, we continue to do it. And if we believe that they're not for whatever reason, we're quick to shut them off. So I think underneath the headline number that you're looking at, there is a good trend in our SG and A in line with discussions that Tom's had with all of you in recent quarters.

48:30 And I do think that there is a mechanism for us to make sure that we're looking very closely at any incremental investment that we make that it will yield a benefit for the company at some point in the future. All right. Thanks. That's very useful. And your final question comes from the line of David Whiston from Morningstar. Your line is open. Good morning. Just curious if you could give any update on, the status of mobile repair adoption and what are the challenges in getting more, consumers to use that service? Yes. Actually, what we've now done is we have been able to integrate our mobile repair service into our big markets. So we've now we moved their bases into our existing AN USA businesses, which give them a base, which you need a hub. We found out that having a hub actually helps with our productivity quite significantly because it gives us a start and return point that's much, much more consistent.

49:34 We slimmed down the number of technicians that we had in that area because the levels of productivity were very, very low because you have to build a quite a large consistent base. The integration of those into that business have helped tremendously with that because there is a residual amount of business that enables us to layer in those more variable trips, those more unexpected trips, in a good way unexpected, to customers outside of the physical locations. We have learned a huge amount about dynamic booking and still learning about dynamic booking. And now that I think we have a much more solid base, our productivity has increased, I think well. We're now beginning to build layers of business on top of that so that we can extend the products and services that are remote in a way that doesn't bring our utilization and productivity down to such a level that we're actually not covering our costs. So it is a much more complex business than we anticipated a few years ago when we acquired the business and began building it. I think our skill set has improved tremendously.

50:40 And I think it now begins to add value not just to customers who want remote work, but also add values to a number of our business partners as well. Still a lot of work to do in that area, but I'm pleased with what I've seen so far. And we have reached the end of our question and answer session. I will now turn the call back over to management for closing remarks. Yes. Thank you everybody. Thanks very much for your time on this call and we look forward to talking to you more about the quarter and also next quarter Q2. Thank you very much. This concludes today's conference call. Thank you for your participation. You may now disconnect.