AutoNation, Inc. (AN) Q2 2016 Earnings Report, Transcript and Summary

Welcome to AutoNation's Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, we'll turn the call over to Andrew Wamser, Treasurer and Vice President of Finance for AutoNation. Sir, you may begin. Andrew Wamser - Treasurer & Vice President-Investor Relations: Thank you, operator, and good morning, everyone. And welcome to AutoNation's second quarter 2016 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, CEO and President; Cheryl Miller, our Chief Financial Officer; Bill Berman, our Chief Operating Officer; and Jon Ferrando, our EVP responsible for M&A. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call may constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most-recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors.autonation.com. And now, I'll turn the call over to AutoNation's Chairman, CEO and President, Mike Jackson. Michael J. Jackson - Chairman, President & Chief Executive Officer: Good morning and thank you for joining us. Today, we reported an all-time record earnings per share from continuing operations of $1.08, an 8% increase as compared to EPS from continuing operations of $1 for the same period in the prior year. We achieved record EPS from continuing operations as we began to see the results of adjusting our cost structure and inventory levels to a plateauing industry sales environment. We also saw a benefit from our opportunistic capital allocation strategy, which included acquisitions and share repurchase. Revenue for the quarter totaled $5.4 billion compared to $5.2 billion in the same period a year ago, an increase of 4%. AutoNation's total retail new vehicle unit sales for the quarter were flat and on same-store basis, retail new vehicle unit sales were down 5%. During the quarter, we continued to see disruption from the Takata airbag recall, which impacted our used vehicle business. Approximately 20% of our used vehicle inventory is currently on hold due to open recall, and approximately 75% of those vehicles are related to Takata airbags. Second quarter was a transitional quarter for certain brands as replacement parts for the Takata airbags became available. We anticipate that our used vehicle inventory on hold will peak towards the end of 2016. Also in the second half of the year, once the vehicles that have been on hold are repaired and sold, we will recognize compensation related to certain brands paid by the manufacturer which will partially offset our costs for having carried these vehicles. Despite the very disruptive Takata airbag recall on our business, our industry leading recall policy is unchanged. Our customer safety still remains a top priority. And we will not retail any vehicle that has an open recall. I'll now turn the call over to our Chief Financial Officer, Cheryl Miller.

Thank you, Mike, and good morning, ladies and gentlemen. For the second quarter, we reported net income from continuing operations of $112 million or $1.08 per share versus net income of $115 million or $1 per share during the second quarter of 2015, an 8% increase on a per share basis. There were no adjustments to net income in either period. In the second quarter, revenue increased $217 million or 4% compared to the prior year, and gross profit improved to $23 million or 3%. SG&A as a percentage of gross profit was 69.5% for the quarter, which was relatively flat compared to the year-ago period. We continue to focus on expense discipline and have aligned our cost structure to the plateauing industry environment. The provision for income tax in the quarter was $71 million or 38.8%. Net new vehicle floorplan was a benefit of $13.2 million, a decrease of $2.8 million from the second quarter of 2015. The decrease was primarily due to increased floorplan balances and higher interest rates, partially offset by higher floorplan assistance per unit. Floorplan debt decreased sequentially, approximately $237 million during the second quarter to $3.8 billion at quarter-end, primarily due to lower inventory balances, partially offset by increased borrowings on our used vehicle floorplan facilities. Non-vehicle interest expense increased to $28.7 million compared to $21.6 million in the second quarter of 2015. The $7.1 million increase in interest expense was driven by higher average debt balances, resulting primarily from share repurchase and acquisition. At the end of June, we had $2.7 billion of non-vehicle debt, an increase of $28 million compared to March 31st, 2016. Non-vehicle debt includes $958 million of outstanding commercial paper borrowings. At the end of June, we had no amounts drawn under our revolving credit facility. As a consequence, our non-vehicle debt fixed to floating mix was approximately 65% fixed and 35% floating. During the second quarter, we repurchased 1 million shares for $50 million at an average price of $48.51 per share. AutoNation has approximately $116 million of remaining board authorization for share repurchase. As of July 28, there were approximately 102 million shares outstanding, and again, this does not include the dilutive impact of stock options. Our leverage ratio increased slightly to 2.7 times at the end of Q2 as compared to 2.6 times at the end of Q1. The leverage ratio was 2.6 times on a net debt basis, including used floorplan availability. And our covenant limit, as a reminder, is 3.75 times. Capital expenditures were $62 million for the quarter. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. Our quarter-end cash balance was $55 million, which combined with our additional borrowing capacity, resulted in total liquidity of $853 million at the end of June. We remain committed to disciplined expense management while also opportunistically deploying capital to drive long-term shareholder value. Now, let me turn you over to our Chief Operating Officer, Bill Berman. William R. Berman - Chief Operating Officer & Executive Vice President: Thanks, Cheryl, and good morning. Before discussing our results, I'd like to comment on the new vehicle industry selling environment for the quarter. Industry retail sales were down 2% while incentives were up 13%, and new vehicle leasing penetration, again, was over 30%. Turning to our results, my comments will be on a same-store basis as compared to the prior year, unless noted otherwise. Gross profit for variable operations was $442 million, down 5%. Variable gross was $3,376 on a per-vehicle retail basis, a decrease of $18 million or 1%. New and used same-store unit volume was down 5% compared to the second quarter last year. As we stated in the first quarter, we took steps to reduce our inventory levels, and we made progress in the second quarter. We decreased our same-store new unit day supply from 76 days to 70 days, or 6,000 units on a sequential basis. Our DSO target is in the low to mid-60s. And we expect our inventory levels to normalize by the end of the third quarter. New vehicle revenue for the quarter was $2.9 billion, a decrease of $49 million or 2%. We retailed 79,400 units, a decrease of 5%. New vehicle gross profit was $1,923 on a per-vehicle retail basis, down 2%. Manufacturer volume-based incentive programs with high sales' target should continue to create irrational behavior in the marketplace. Despite industry retail sales being down in the second quarter, certain manufacturers – in particular, Ford, Chrysler, and Nissan – set double-digit growth targets that were unattainable. Where we felt these targets were unreasonable, we did not pursue them. For the quarter, used vehicle retail revenue was $1 billion, a decrease of $38 million or 3%. Used vehicle retail were $52,300, down 6%. Used vehicle gross profit was $1,548 on a per retail basis, a decrease of $150 or 9%. As of June 30, 6,900 units, or roughly 20% of our total used vehicle inventory, was on hold. 4,300 units, or 60% of those units, were eligible for manufacturer compensation. We anticipate over $3 million of manufacturer compensation, which will partially offset our cost. We will be able to recognize this compensation as each of these vehicles are sold. Also, at the end of the second quarter, approximately 75%, or 5,200, of our used units on hold were related to Takata airbag recall. We started to receive limited Takata airbag replacement parts for certain brands and we expect our used vehicle inventory on hold to peak towards the end of 2016, assuming parts become more readily available and no additional major recalls are issued. Customer financial services total gross profit was $211 million. Customer financial services gross profit on a per vehicle retail basis was $1,602, an increase of $66 or 4%. We set an all-time record in customer care gross profit of $337 million, an increase of $9 million or 3%. Also in the quarter, customer care revenue was $773 million, an increase of $17 million or 2%. Customer pay gross was $140 million, up 6% year-over-year. Warranty gross was $58 million, up 9%. Collision gross was $30 million, up 1%. We're continuing to work on adding additional capacity for our collision business to meet the higher demand. Finally, I'd like to welcome our new Denver, Colorado and Westchester, New York associates to AutoNation and I would like to thank AutoNation's 25,000-plus associates for their hard work and dedication. I'll now turn the call over to Jon Ferrando, Executive Vice President responsible for M&A.

Thank you, Bill, and good morning, everyone. In July, we completed the previously announced acquisition of Centennial Chrysler Jeep in Denver, Colorado, a great brand fit for that market. Including this acquisition, we have 17 stores in the Denver market area. Also in July, we completed the previously announced acquisition of four premium luxury stores in Westchester County, New York. These stores consist of the BMW, Land Rover, and Jaguar brands and collectively represent approximately $100 million in annual revenue. As part of the acquisition, we will be awarded a Land Rover franchise in White Plains and a Jaguar franchise in Mount Kisco. Once our facility plan is complete, we will have three Jaguar and Land Rover stores and new state-of-the-art facilities in Westchester County: one in White Plains, one in Mount Kisco and one in Larchmont/New Rochelle. We expect to generate an additional $100 million in revenue from these facilities once fully operational. We are excited about entering Westchester County, New York, an excellent premium luxury market with an outstanding platform of luxury franchises and attractive growth prospects. The business will be supported by our existing market team based in the Baltimore-Washington D.C. area and provides an opportunity to further leverage our existing management infrastructure. In 2016, we've closed on the acquisition of 18 stores, generating $1.1 billion in annual revenue. As of today, our store portfolio numbers 373 franchises and 263 stores in 16 states, representing 35 manufacturer brands. Looking forward, we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our existing markets and markets that can be supported by our existing management infrastructure. We will continue to be selective and prudent with our capital, with a focus on investing to produce strong returns and long-term shareholder value. I will now turn it back to Mike Jackson. Michael J. Jackson - Chairman, President & Chief Executive Officer: Thank you, John. We continue to expect the total industry vehicle sales, including fleet, could be above 17 million units. In this current selling environment, we remain committed to managing costs and appropriate inventory levels as well as take advantage of capital allocation opportunities. We'd now be delighted to take any of your questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Mr. Mike Montani of Evercore ISI. Sir, your line is open.

Hey, guys. Good morning and thanks for taking the question. First thing I wanted to ask about, Mike, was if you could provide any updates on potential partnership activities with TrueCar following up on the pilot that you all had begun a few months back. Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes, Mike. Thank you. I recently met with Chip Perry sometime in the last couple weeks to do a review of the pilot that we had kicked off in the middle of the second quarter and benchmark all the results against our hopes and expectations. And it was a complete success. TrueCar has transformed itself into being really a win-win partner and all the commitments and promises they had made to us were kept 100%. We also discussed the learnings from the pilot and further steps we could make and Chip agreed to go forward with that. And we will expand the pilot during the third quarter, do another review meeting, which I'm very optimistic about. And my expectation now is, by the end of the year, TrueCar will have been implemented in all AutoNation stores.

Okay. Great. And I guess on a related note, maybe, Mike, can you just touch a little bit on the digital initiative with AutoNation Express omni-channel selling work you guys are doing and also third-party lead providers versus internally sourced lead at this stage? Michael J. Jackson - Chairman, President & Chief Executive Officer: Well, AutoNation Express and the enhancement of the digital capabilities and marketing communication to take traffic to AutoNation-branded sites all has gone extremely well. We now generate I think it's somewhere in the high 20s our business from AutoNation sites. So it's really been a complete success and we have greatly enhanced our mobile capabilities. So, all that is going extremely well. And third parties, we've really achieved our objectives that they are in balance with where we are with our own investment in AutoNation Express and they are compatible in how they do business and that the AutoNation Express is the best price. The price on our sites is the best price you can have. It can be the same somewhere else, but it can't be less. And that it has to be about the brand, AutoNation. So compared to where the fork in the road we were at a year-and-a-half ago, I couldn't be more pleased and delighted with where we are.

That's great. And just last, if I could squeeze one more in was, in light of Ford's recent commentary, and I heard some remarks from you earlier on GM, can you just update us, Mike, on what you're hearing from the OEMs in terms of production and how you guys are thinking strategically moving ahead in terms of balanced production versus demand? Michael J. Jackson - Chairman, President & Chief Executive Officer: Yeah, if I go back to my keynote speech at the Automotive World Congress in early January, I said this mark has plateaued at the auto industries in three phases, and the most misunderstood and mismanaged phase is plateau. Running at high 16 million, 17 million units, this industry can, if it runs it rationally, you can still be quite successful and very profitable. So if I look at how the first half of the year is developed, well, from a market point of view, that's exactly where it is, with retail in the second quarter down, let's say, 2% at retail. But it took considerably higher incentives for that to happen. There is a diversion in manufacturer behavior. I would give a – for instance, I would compliment General Motors, and you certainly look at their results, and you see if you find the right balance between supply and demand with a good disciplined approach and really marketing that's focused on the long-term, you can be quite successful. And on the margin business, that's going to be very expensive from an incentive point of view. You don't take. On the other hand, we have other manufacturers who are still very aggressive in their plans, and if you want to – Bill already mentioned that if you want to look at Ford Motor Company where we have targets for the third quarter, that a significant number of our stores have targets that are 15%, 20%, 25%, up to 40% higher than prior year. Well, that's just not going to happen, it's totally unrealistic and we're not going to chase it, but it is disruptive in the marketplace and causes irrational behavior, and there's a price tag for that. And if you look at Ford's total incentives being up 28% in the second quarter, I don't think they got a return on that approach. So, there's a good contrast, as to what I was talking about and how it can be managed differently. Now, we'll see what happens from this point. But the headline is, progress is being made in principle and maybe we'll make even more progress in the second half of the year.

Got it. Thank you.

Thank you. Our next question comes from Pat Archambault of Goldman Sachs. Sir, line is open. Patrick Archambault - Goldman Sachs & Co.: Thanks for taking my question. Yes. I guess, just building on that last point, I'm sure you saw the details of the Ford results. But one of the things that they did is announce a pretty meaningful production cut for the third quarter. And I was just wondering if your commentary is sort of reflective more of what was going on up to kind of the end of the second quarter and if there's evidence that the tone has changed, because certainly one would – at least given some of their actions, one would expect that that would have an impact. Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes, that's a fair point. So, the programs that are out there right now that I just referred to, maybe you may have in the third quarter a transition quarter where they still have these very aggressive targets to try to clear inventory. But on the other hand, they're cutting production so as to be in a better place in the fourth quarter. That could be. I still think where you take a significant percentage of your retail muscle and put it on the sidelines by putting out unrealistic targets is not the best way to get there. So, your point is very fair. We could be at better place three months from now. Patrick Archambault - Goldman Sachs & Co.: Got it. And just on the stop sale inventory, I guess you said that it would peak towards the end of the year, and I guess just so I better understand why that is because have they – are they still in the process of identifying the numbers and you don't have all of those, so that's why you're repairing some, but you're kind of identifying more inventory faster? Is that kind of the way it's working? Michael J. Jackson - Chairman, President & Chief Executive Officer: That's a very insightful again, exactly what's happening. So let's do the good news first, is that devices are beginning to arrive, and we're at the point with certain manufacturers where we can batch order devices and not go VIN-by-VIN. And we'll begin to repair those vehicles, we'll begin to sell those vehicles, and we'll begin to recognize the compensation that is due on those vehicles and the manufacturer. So that's a good news. That would tend to say the worse is over. On the other hand, in the second quarter they announced another, I don't know, $10 million to $20 million of Takata airbag recall for which we don't have the VIN numbers yet. But those VIN numbers will come in the second half of the year, and those parts will not come until the first half of next year because they're on the passenger side and they got to go through a whole design certification process to get replacement parts to it. So, it's a little difficult and a little risky to say we're out of the woods yet on Takata. If I look at all the moving factors, so that's why we have good news, but I have responsibility to tell you we still got a lot of VIN numbers that we are due, that for which there are not parts. Patrick Archambault - Goldman Sachs & Co.: Got it. Okay. Well, thanks for talking us through that. That's very helpful. Michael J. Jackson - Chairman, President & Chief Executive Officer: Next question?

Our next question comes from Mr. Rick Nelson of Stephens. Sir, your line is open. Excuse me, Mr. Nelson. Your line is now open.

Sorry about that. Thanks. I'd like to follow up on M&A opportunities. The conversations, given the retail market pulling back a bit, if those are changing from maybe six months ago. Michael J. Jackson - Chairman, President & Chief Executive Officer: Jon, could you take that for me, please?

Yes. Sure, Mike. Rick, we continue to see good opportunities out in the marketplace. I think the auto stock sector revaluation is working its way through. We have a number of conversations ongoing. That being said given our position, we do get a look at a lot of opportunities and pass on the vast majority. We can be very selective in what we do and you'll see us continuing to operate that way and looking for great brands, good cultural fit, excellent locations in markets where we have management infrastructure. So, we're pleased with what we've done year-to-date. And I think over the next few years, there will be a lot of opportunities that we'll be able to take advantage of.

Thank you for that color. So, I'm interested about your strategy to not chase some of these volume base incentives, what are the risks there in terms of allocations and the implications for market share and maybe acquisition approvals? Michael J. Jackson - Chairman, President & Chief Executive Officer: This is Mike Jackson. Yeah, I think it is a major source of irritation and friction between our retailers and manufacturers. In one way though it's not a difficult decision because the targets are so irrational or so unreasonable that you have no choice but to pull back volume and try to manage the growth. The capriciousness and arbitrary – and how arbitrary the targets are is a problem because you'll have neighboring stores of competitors that got a completely different target, that's very reachable and, therefore, they're on a different price basis. And then, you have others who think they can just make it that when they get closed and are not going to make it, they do extremely irrational things. So, it really – it's a difficult situation to manage, but you're right, it will be a source of friction. But the extreme practitioners of volume-based incentives are really, at this point, Nissan, Chrysler and Ford, I would say, the intensity of the discussion between dealers, retailers and those companies is going up. Some are even questioning the legality of how those programs are run and the fairness of those programs. So, it's – I think we're approaching a moment where I would hope that these extreme stair steps which again, I called out in my keynote speech in January, would be the issue in 2016 because we take away our growing marketplace and these stair steps really don't work because they're entirely based on growth. Hopefully, the industry over the second half of the year will come to a better place on understanding how these programs can work and can't work. But at the moment, it's a source of real friction.

And, Mike, do you see some of your peers also backing away from chasing those incentives? Michael J. Jackson - Chairman, President & Chief Executive Officer: It's just because of where the calendar I would observe everybody else has reported. And I see certain similarities. So all the public trading groups are behaving in a very rational way. They've all said, hey, this market's plateaued. We need to adjust costs and we need to bring inventories into life. I think that's very beneficial to the industry to see the big companies behave in a rational way. And then to call out one, if you look at Group 1, they did a fantastic job of saying, you know what, these targets are irrational, not obtainable. We're going to manage for gross because we can't get the volume numbers. And they actually increased their new vehicle front-end gross and gave up the volume. So finding that line is difficult and ongoing, but it is a point of contention. I don't, in principle, have a problem with volume targets if they're realistic and attainable. But when you've misjudged the market and you put out targets that are just not attainable and then you'd sprinkle it out there in a capricious arbitrary way, it really is disruptive in the marketplace and very difficult to manage and you're going to have a lot of controversy with dealers. Yeah, you can go out and find dealers who say they like it. Well, I can tell you something. They got an easy target. If you get an easy target, you love it. But for all those – and since we have such a big footprint in so many stores, we see that without rhyme and reason you end up with stores that get huge targets, plus 25%. We have other stores that get lower targets than prior year. Go figure. So, that's about much color as I can give you.

That's very helpful. Thanks a lot and good luck. Michael J. Jackson - Chairman, President & Chief Executive Officer: Thank you, Rick.

Our next question comes from Paresh Jain of Morgan Stanley. Sir, your line is open. Paresh B. Jain - Morgan Stanley & Co. LLC: Good morning, everyone. Mike, you talked about the industry plateauing at a higher level now. But in a scenario where sharp declines, 10% to 15%, do you see yourself getting more aggressive with acquisitions or wait for signs of another upturn after such a decline? Michael J. Jackson - Chairman, President & Chief Executive Officer: So, I think a decline of 10% to 15% in auto sales would require a significant recession and a significant increase in interest rates above normal. So, let's do interest rates first. They are so far from even being normal let alone above normal. We're not going to have a decline in sales because there's been some dramatic significant increase in interest rates. I think we're looking at an environment where we have very low or reasonable interest rates and very low and reasonable gas prices, thereby keeping the mix towards trucks for years. Now, can something else happen in the world that hammers the US with recession? I suppose that can happen. But I don't see that – a significant recession that would decline sales by 10% to 15%. So, my outlook is high industry sales, high $16 million, just over $17 million for the next several years. Paresh B. Jain - Morgan Stanley & Co. LLC: Understood. So then a broader question on the future of parts and services business here, which is more defensible, of course. Obviously, there's this rise of active safety and over the year update which is a potential headwind for this business. But are there any other offsets to it, like are there any new revenue streams dealers can capture especially related to fleet management? Michael J. Jackson - Chairman, President & Chief Executive Officer: Well, I think if you look at the safety devices that are coming around autonomy, and we are all for them, but if you really look at their realistic ability to become a significant percentage of the 250 million vehicles that are out there operating on the road and how long it takes to turn over, it's a very, very gradual process. At the same time, the cost of these systems and devices in the vehicles is going up exponentially, and the expertise to be able to deal with it is consolidating into fewer and fewer hands. So I think they offset each other for the next decade-plus. And ask me in 10 years for an update. I think we can really grow our customer care business open-ended, including collision. Paresh B. Jain - Morgan Stanley & Co. LLC: Understood. Thanks for the color, Mike. Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes.

Our next question comes from Mr. John Murphy of Bank of America. Sir, your line is open.

Good morning, guys. Mike, maybe just to stay on the parts and service for the first question. I mean, 2.2% on same-store sales base was a little bit on the light side. But it sounds like your customer and warranty were up I think 6% and 9%, respectively, and the slight weakness came in collision which was up only 1%. And the way you discussed it, it sounded like you are alluding to sort of some capacity constraints there and the need to maybe add capacity for collision. So, I'm just curious what the story is there and what you have in the plans to really increase capacity there. Michael J. Jackson - Chairman, President & Chief Executive Officer: Now, the good news – and Bill will give you the exact figures in a second – is that our customer pay business is up exactly where we want it to be, solid mid-single digits. And what really has slowed is our internal business. Now here's the way to think about internal. That's volume related to our new and used business. So, as we have this backlog of vehicles on hold, we are not repairing them until we get the parts from the manufacturer for the recall so that we can do the vehicle all at one time, make it frontline ready and then sell it. And all-time sale will (36:28) recognize all that internal work that we did. So, that has impacted our internal number. And, Bill, why don't talk about what internal was in the second quarter and talk about our hopes to add capacity on collision? William R. Berman - Chief Operating Officer & Executive Vice President: Okay. Thanks, Mike. John. So, like you said, we're up 6% in our CP, which is strong and steady performance that we continue to see that kind of growth available in the future. Warranty was up 9%. But to Mike's point, we still have some pent-up demand there with cars that we have on hold that are waiting for warranty repairs from Takata airbag. On Collision, you call that out right. We have record production levels and we definitely have capacity issues, not so necessarily with people. It's more of a facility. And then, on the internal piece, quarter-over-quarter, year-over-year were down about 5%, but to Mike's point, that is 100% related to the number of new cars coming into inventory and the number of used cars that we're able to put to our system and put front line. So as less cars on recall hold, we'll be able to see here an increase in our internal gross. Michael J. Jackson - Chairman, President & Chief Executive Officer: And, John, we will lack capacity on the collision side. We like that business. As I said, when an accident happens, there is a lot more work to do.

How fast can that capacity be added? Is that the kind of thing that – a couple of months or is that a year or two? Michael J. Jackson - Chairman, President & Chief Executive Officer: Well, it takes quite some time, but it's already under way. So, Bill, when would you say the capacity comes online that'll be able to be reflected in our numbers? William R. Berman - Chief Operating Officer & Executive Vice President: We'll see a little bit of an increase in capacity in the third quarter, and then it'll ramp up significantly in the fourth quarter through all of 2017.

Great. That's incredibly helpful. And then just to also follow up on the stop sale, I mean, I understand there sounds like there's a little bit of a surge in parts and service on the warranty side and used vehicle sales that'll kind of clear here. Just curious when you think that will happen. It sounds like it's probably first half of next year. And really, in the interim, how much of a weight is that on results? I mean, is it really just the cost of carry – of inventory that you won't get reimbursed for until you sell them, or just really what's kind of the – if you quantify or even just give us some kind of magnitude of the weight that's creating on results? Michael J. Jackson - Chairman, President & Chief Executive Officer: The disruption, John, is significant. Literally, where do you put all these cars? And we've rented – we've had to go out and rent storage lots, but still it's disruptive to frontline-ready inventory to go. I think for the vehicles that we have right this moment, I think the majority of the parts will come between now and year-end and we'll be able to sell – we'll be able to retail them, recognize the compensation we're due and do the internal work and recognize that also. However, for this, the additional Takata airbags announced in the first half of 2016, there are no parts. And we will begin to get the VIN numbers very soon which means we're going to repeat this whole movie over again for this next wait. And that wave then takes us into 2017 before we get parts. Bill, anything you'd like to add there, anything on this? William R. Berman - Chief Operating Officer & Executive Vice President: So, Mike. I think you said it perfectly. We'll be able to clear out of our existing inventory in Q3 and Q4. The real unknown is how extent the recalls in the future will be. There's more Takata airbags that will hit the – recalled over the coming months but we have a plan and a process to deal with it. We're executing upon it at a high level.

Okay. And then just lastly, Mike, you alluded to and we've seen this data where leasing has been surging as a percent of sales and it looks like in the first half of the year, it was north of 30% which is well above normal levels of 20%. Just curious how that's impacting sales and profit here in the near term and if you see that creating any disruption of how you might deal with it that we see this very large wave of vehicles coming back off lease in 2018, 2019 and 2020? Michael J. Jackson - Chairman, President & Chief Executive Officer: Yeah. I think that's one of the distortions that I'm concerned about. So when I look at right out in the centers, from the manufacturer, I really think they shouldn't break into the double-digit as a percent of their average MSRP. I think you hit a wall of the diminishing return where the incentive is now at such a level that is already depressing the retail value. So, you haven't really delivered a net – reduced this net difference in the cost of the vehicle, does that make sense, where your next dollar of incentive doesn't have – at 10%, doesn't have the same impact when you went from 5% to 6%. But there is a point of diminishing return that's dramatic. Second, I agree with you, leasing is the same thing. You're selling the seeds of a day of reckoning that you really don't want, namely, that you have so many vehicles coming back that are based on a residual value that's going to be higher than what the marketplace can handle. Now, that – all those risks are at the OEM level not at the retail level, but we all know if you're basically pulling business forward now, that means that when the day of reckoning comes, the disruption is great. And I'd just rather see the business manage more rationally with stability now so that this plateau period is more sustainable. That's what I'm advocating.

That's very helpful. And please, keep speaking up. Thanks, Mike.

Thank you. Our next question comes from Mr. Bret Jordan of Jefferies. Sir, your line is open.

Hi. Good morning, guys. Michael J. Jackson - Chairman, President & Chief Executive Officer: Good morning, Bret.

Regionally, could you talk if you've seen any directional trends? I mean, obviously between the three big states, Q1 to Q2, any improvement in Texas or any shifts in the Florida or Southeastern markets? Michael J. Jackson - Chairman, President & Chief Executive Officer: Taxes remains very difficult. Bill, why don't you give a regional report, please? William R. Berman - Chief Operating Officer & Executive Vice President: Absolutely, Mike. So, we're seeing strong growth in Florida, especially in the southern part of the state. California is also improving and continuing to grow. Texas faces – and Colorado energy markets are facing extreme headwinds. Operationally, we've been able to sit here and adjust our business model and our cost structures to be able to combat that to the best of our abilities. But as you see today, with oil in the $40 to $42 a barrel, it definitely poses some headwinds for the Southern part of Texas. Michael J. Jackson - Chairman, President & Chief Executive Officer: Bill, are we looking at double-digit declines in unit volume in the energy space? William R. Berman - Chief Operating Officer & Executive Vice President: Yes. We're almost 20%. Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes. It's significant.

Okay. Great. Thank you. And a question on collision. As you expand that business, is that something that you could get involved in direct repair programs with the insurance companies and really drive outside volume to that business, sort of like the Caliber or Service King's are doing, or do you really sort of keep that as a more in-house boutique business? Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes. We see it the way you described it the first time. Again, it's part of our investment in the brand AutoNation why we did it. So we've extended the brand into our customer care products and protection products and have had amazing acceptance, satisfaction, and improved results for us. So that moves, and we intend to extend the AutoNation brand to the collision business. All our collision centers will be branded AutoNation, and the ones we expand will be branded AutoNation. And so brand extension, so one of the reasons we made a significant effort into the AutoNation brand and digital is for brand extension. So the heavy-lifting runs in the sense that the risk and the investment that it took to establish the brand AutoNation is accomplished. And the risk and cost to build the digital muscle has been accomplished and the obvious benefit for the existing business is there, that's fine. But the brand extension and possibility that exist from having those two pillars are what we intend to realize over the next several years.

If you look out three to five years maybe as you invest in capacity, how many collision sites do you think you might get to? Michael J. Jackson - Chairman, President & Chief Executive Officer: Well, I'm not prepared to give you a number on that today but that is actively being worked on. And I think certainly by the next earnings call, I can give you an answer on that.

Okay. Great. Thank you.

Thank you. Our next question comes from Mr. James Albertine of Consumer Edge. Sir, your line is open.

Thank you and good morning.

Good morning, Jamie.

I wanted to ask and I know, Mike, you've alluded to this in your prepared remarks in various times in the Q&A but just sort of wanting to be very clear because it's a concern that's been voiced I think numerous times over the course of the last few months, at least to us among investor conversations. Do you believe that SAR having grown to the point in which it was a record last year has effectively pulled forward demand from the used vehicle market? And if not, where do you think or what indications are you seeing to give you confidence that when supply does ramp there will be demand for those used vehicles? Michael J. Jackson - Chairman, President & Chief Executive Officer: So, I think I've been very outspoken on that and you're exactly on point that this is one of the reasons why I feel my stance at the beginning of the year was so important because ultimately, and I sort of alluded to it earlier, is the only ends overdo it and push incentives too far, overproduce, push leasing too far. You are absolutely taking customers from the used vehicle market and converting them into the new vehicle market. And at the same time, you're increasing the supply of used vehicle coming back to the market on a faster turn. Well, you can see that that is unsustainable and there'll be a day of reckoning. So, I've been very clear that there is a risk there. I don't think we've gone over the cliffs yet. I think it's still – there is still plenty of time to manage this rationally and disciplined, and don't forget the retail markets for used vehicles is 40 million units. So, if you put it all together, we're looking at a market that's 55 million to 60 million units between new and used. It's very manageable. But can you screw it up? Yes, you can. And that's why we're speaking up. And by the way, I have to say if I look at all of the other publically traded groups that have reported, they have all talked about taking a disciplined approach on the cost side and on the inventory side. I haven't checked everybody's numbers, but I have the sense that everybody's day supply has come down sequentially during the second quarter. So, everybody said they were doing and they're out there doing that. And that's a very strong, single back to the manufacturers which they don't like but I think is healthy. That we can have a very profitable sustainable rational plateau period until we have very high interest rates or major recession. And then volumes will fall. Is that helpful?

It's extremely helpful. Thank you so much for that color, and I'll get back in queue. Thank you. Michael J. Jackson - Chairman, President & Chief Executive Officer: Thank you.

Thank you. Our next question comes from Mr. David Lim of Wells Fargo. Sir, your line is open.

Great. Good morning, everyone. Mike, just curious, are you guys pushing back on orders? I don't know if you've talked about that. And then I have several follow-ups. Michael J. Jackson - Chairman, President & Chief Executive Officer: We're absolutely pushing back on orders, but that is a daily fight.

Yes. Michael J. Jackson - Chairman, President & Chief Executive Officer: Sometimes I feel like a Thanksgiving turkey just being stuffed, it's a daily – Bill, you want to – you're the one on the firing line. Do you want to talk about it? William R. Berman - Chief Operating Officer & Executive Vice President: Yes. It's a – I think you said it right, Mike. It's a day-to-day fight. We've reduced our day supply by six days from the end of Q1 to the end of Q2. We'll be to our target area in the mid-60s by the end of the Q3. But it is a store-by-store, model-by-model, brand-by-brand fight. We're down 6,000 units sequentially, and we're going to continue to get that down. But there is tremendous amount of pressure coming from the OEMs to accept unneeded and unwanted inventory.

Got you. Michael J. Jackson - Chairman, President & Chief Executive Officer: By the way, just to make an observation, I ignore the day supply numbers in automotive news because they include fleet sales and the selling rate, which is ridiculous. It should be tell me what retail sales were versus retail inventory. That's the real world on what's going on with day supply.

Yes. Michael J. Jackson - Chairman, President & Chief Executive Officer: To add in the fleet sales into the selling rate, to divide it into retail inventory gives you an unrecognizable number as to what's happening in the real world, in my humble opinion.

Absolutely. On a philosophical side, what is the rationale behind the irrational behavior by some of these OEMs? The industry can't grow at $18 million, $19 million, $20 million. Maybe it could, but it doesn't seem that way. And you've cited several OEMs that are irrational. Do you have any examples of OEMs that are more rational in this environment currently? Michael J. Jackson - Chairman, President & Chief Executive Officer: Sure. I already called out General Motors. Honda has always been very rational, disciplined. Same with Toyota. By large, the Germans have been. They have a little diversion from their usual discipline with carrying far too much inventory into 2016, which we're still trying to work our way through. But that's sort of like an aberration and optimistic and hopeful that would come into line. And as far as what the issue is, there seems to be agreement within the industry now on plateau. But then I get the speech for the next 20 minutes as to why their company is going to be different. And not everybody can walk on water. So that's an issue. And as far as the pressure, I can tell you, as having been at the table, you still have relatively high fixed costs for some costs where the marginal cost to produce another unit, the pressure is absolutely there and they recognize revenue on shipment to us.

Yes. Michael J. Jackson - Chairman, President & Chief Executive Officer: They stuff us as a Thanksgiving turkey. They recognize their revenue and there it is. That's the third rail for the industry and why this is a struggle. We're speaking up and I think we're making progress. We're not where we need to be, but I'm hopeful we're making progress.

My last question is on your aim to fix the cost structure or to adjust the cost structure. Can you dimensionalize what are the major buckets of where you could take out costs going forward? And where have you already taken out costs, if you look at the last quarter or so? Thank you so much. Michael J. Jackson - Chairman, President & Chief Executive Officer: Bill, could you take that, please? William R. Berman - Chief Operating Officer & Executive Vice President: Yeah, Mike. Obviously, the opportunities come in compensation, making sure we have our store staffed right, we have the proper head count and the proper compensation plans to drive behavior. In addition to that, rightsizing our inventories, making sure our day supply is in line to lower our interest charge our floorplan and cost that goes along with that. And then day-to-day operational charges that come into it, whether it's service loaners or other SG&A items and going store-by-store to right-size those and make sure we're aligned to the volumes and to be able to service the customers the best way we can.

Great. Thank you.

Thank you. Our next question comes from Irina Hodakovsky of KeyBanc. Ma'am, your line is open.

Thank you. Good morning, everyone. Thank you for taking my question. My main question was about your acquisitions. You seem to be a lot more active than your competitors in the market on the public side. Wondering what allows you to continue to acquire versus some of your competitors? The commentary overall seems to be that the blue scale (54:28) multiples are still high, yet you seem to be finding deals. What's helping you and what is the outlook? Michael J. Jackson - Chairman, President & Chief Executive Officer: Jon, could you take that, please?

Yeah. Sure, Irina. The last three or four years, we have been very active in our effort on the acquisition side. We think we bring a lot of advantages to the table, including being able to execute with the manufacturers to close transactions, which is very important to sellers, how we take care of employees going forward with our world-class training and development programs. That resonates with a lot of sellers. And our ability on the real estate and facility side to navigate potentially complex facility parts of a transaction. So we think we bring a lot to the table, and we've been able to execute in the core markets that we've been in. So we're very pleased with that, and you'll see us continuing to work hard at it.

Can you comment a little bit in terms of what you are seeing in the market in terms of sequential trend in multiples, availability of stores, seller expectations?

I would say in terms of the multiples and the revaluation in the auto sector earlier this year, that's working its way through. It's hard to generalize because there are so many different sellers and so many different circumstances. So every deal is different, but we're seeing less completely unrealistic sellers out there than we probably saw last year. So from that standpoint, it's getting a little easier and there's still a good flow of potential sellers that'll be ready to divest their business over the next few years. And we're in dialogue with a lot of those folks.

And the last follow-up on to that, in terms of preference, share buybacks versus acquisitions, where does your preference lie?

Do you want to take that, Mike? Michael J. Jackson - Chairman, President & Chief Executive Officer: It's our classic answer that just look at our 15-year track record. Look at where our stock is trading, and if it's attractive, we move aggressively. We usually have the balance sheet to do both, so really haven't had to make that trade-off. Existing business comes first on capital. We've always invested in our stores, we've invested in the brand, we've invested in our digital capability. That's first call. And then when we look at the balance between what we can buy the stock at and acquisitions. Certainly the stock was extremely attractive in the first quarter, and we bought a lot.

And I would add, too, Irina, if you take a look at the first two quarters of this year compared to last year, we spent between share repurchase and acquisitions over $550 million more this year than the prior year. So obviously we're bullish on the things that we've been putting money into the first half of this year.

Great. Thank you very much.

Thank you. Our next question comes from Mr. Brian Sponheimer of Gabelli. Sir, your line is open. Brian C. Sponheimer - Gabelli & Company, Inc.: Hi. Good morning. Thank you. Most of my questions have been answered, and I guess, first of all, welcome to the neighborhood in Westchester here. But that leads me to just M&A and the move outside of mile states. What made Westchester the right time now? Michael J. Jackson - Chairman, President & Chief Executive Officer: So, I would say we are at a level of maturity where we are looking in the Northeast, and we decided when we move into Northeast, we'll move into premium luxury first. Strategically, despite the difficulties, we already talked about with premium luxury in this year. Strategically, we are very optimistic and confident about premium luxury, and it is the easiest way to extend our management into new markets without adding a lot of infrastructure. And we don't have brand launch costs or other costs. So it's a very cost-effective way to move into new markets. Brian C. Sponheimer - Gabelli & Company, Inc.: All right. Terrific. And then just one more. Just conceptually, Mike, I don't know if you're able to get this sort of granularity on your purchases on buying foreign and domestic. But as far as average age, have you seen any difference in buying habits from the 23 or call it the millennial generation as far as average age ticking up at all? Michael J. Jackson - Chairman, President & Chief Executive Officer: We've been – we've taken a close look at millennials for the last five years. And it's tremendous – we have a tremendous insight into it. All of our stock capabilities that we've talked about, a big part of that was the millennial generation and designing it in a way that will appeal to millennial generations, and we have more updates in the pipeline that will even make it more effective. My view is that millennials will buy cars, I think. I have to check, but I think they could have bought more cars than any other generation. They, the millennials, came of age with the great recession. They went back to school and doubled down on education and student debt. They're now entering the workforce. They have to pay down that student debt. But their fundamental desires to marry, have children, have a home, have a car are there. You have to do business with them differently. You have to communicate with them differently. You have to know how to market to them differently. But those drivers are there. That's in principle are what we believe. Brian C. Sponheimer - Gabelli & Company, Inc.: Okay. Terrific. Thank you for sneaking me in here. Michael J. Jackson - Chairman, President & Chief Executive Officer: Great.

Thank you. Our last question comes from Mr. Mike Levin of Deutsche Bank. Sir, your line is open.

Good morning, guys. Just maybe one quick one where you've been talking about the divergence in behavior amongst OEMs. Mike, just wondering how you kind of see where the balance starts to tip one way or another, how many OEMs behaving like Ford, Fiat, Nissan, does it take to kind of upset the apple-cart and when do we sort of become the frog in the slowly boiling water here? Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes. Well, I would say three is enough.

Yeah. Michael J. Jackson - Chairman, President & Chief Executive Officer: Yes. So, I think we're out of crucial point because if I look at the whole history, Chrysler was the first practitioner of aggressive stair steps. They were highly skilled, very professional and rationale, and they probably today are the most skilled practitioner of aggressive stair steps. Then you had Nissan arrive which is just a loose cannon rolling back and forth across the deck wreaking havoc. And now, you've had Ford as of this year, joined in. So, if more go down that road, that is a real problem. But I think it's going to go the other way. The price deck of the irrational stair steps incentives is beginning to be understood and the damage to the brand, the change in your customer base, the impact on customer loyalty, the dissatisfaction in the fairness of pricing due to the fact that you've introduced a casino three car monte system. You've unleashed that on your customers. The manufacturer cannot talk about customer satisfaction in one breath and say on the other hand, they're going to do aggressive stair steps because it's basically massively unfair to the customers. And finally, the relationship with your retailers that you really just reached havoc. So I think the long term – yes, in the near term, it's like heroine. Yeah, that feels nice, feels pretty good. But then you look in the mirror one day and you look like Dorian Gray and you realized you can't go on like this. So, we're at a crucial point. It could go either way. I'm saying it's hopefully going to go back more towards irrational but three is enough.

Awesome. Thank you. Hopefully, we don't see the picture in the attic. Thanks. Michael J. Jackson - Chairman, President & Chief Executive Officer: Yeah, great. Thank you very everyone for joining us today. We very much appreciate your questions. We appreciate your time. All the best.

Thank you. This concludes today's conference. Thank you all for joining. You may now disconnect.