Welcome to AutoNation's Fourth Quarter 2016 Earnings 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 I will turn the call over to Mr. Andrew Wamser, Treasurer and Vice President of Finance for AutoNation. Sir, you may begin.

Thank you, operator, and good morning. And welcome to AutoNation's fourth quarter and full year 2016 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and CEO; Bill Berman, our President and COO; Cheryl Miller, our CFO 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 following the call to address any additional questions that you may have. Before we begin let me read a brief statement regarding forward-looking comments. Certain statements and information on this call 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 or 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. And now, I'll turn the call over to AutoNation's Chairman and CEO, Mike Jackson.

Good morning and thank you for joining us. Today we reported EPS from continuing operations of $1.14, which included a gain related to a business divesture of $0.19 per share. We mentioned in the latter part of last year that we will make asset sales to fund our $500 million brand extension initiatives. Since 2015, we have raised approximately $215 million from asset sales including real estate. And we'll do another $250 million over the next year and a half. This was part of our strategic plan. We're excited about our upcoming AutoNation USA stores' grand openings and Bill will give you more details in a few minutes. Fourth quarter 2016 revenue totaled $5.5 billion compared to $5.3 billion in the year-ago period, an increase of 3%. Total gross profit was $809 million, which was relatively flat compared to $812 million in the year-ago period. Operating income was $237 million compared to $200 million in the year-ago period, an increase of 18%. In the fourth quarter AutoNation's retail new vehicle unit sales decreased 1% overall or 4% on a same-store basis. Revenue for the full year was $21.6 billion, up 4% over prior year. Total gross profit was $3.3 billion, an increase of 2% compared to the year-ago period. Operating income for the full year was $980 million (sic) [$890 million] (3:18), also an increase of 2% over prior year. We expect industry new vehicle unit sales will exceed 17 million in 2017. I now turn the call over to our President and Chief Operating Officer, Bill Berman.

Thanks, Mike, and good morning everyone. My comments today will be on a same-store basis as compared to the prior year unless noted otherwise. Gross profit for variable operations was $422 million, down 7%. Variable gross was $3,269 on a per vehicle retail basis, a decrease of $132 or 4%. New and used same-store unit volume was down 3% compared to the fourth quarter last year. New vehicle revenue for the quarter was $3 billion, a decrease of $72 million or 2%. We retailed 78,900 units, a decrease of 4%. New vehicle gross profit was $1,967 on a per vehicle retail basis which was down 5% compared to the same period a year ago. At year end, approximately 7% or 2,400 units of our total used vehicle inventory was on hold due to the Takata airbag recall. We expect to have 2,000 to 3,000 units on hold at any point in time due to manufacturer-stopped sales. We will continue to experience used vehicle margin pressure and wholesale losses as we sell older inventory that was previously on sales hold. We expect to see used vehicle margin improvement in the second quarter of 2017. Used vehicle retail revenue for the quarter was $1 billion, an increase of $60 million or 2% compared to the period a year ago. Used vehicle retail were relatively flat year-over-year at 51,400 units. Used vehicle gross profit was $1,291 on a per vehicle retail basis, a decrease of $170 or 12%. The decrease was largely related to the change in our recall policy and our ability to sell older inventory that was previously on sales hold. Customer financial services gross profit was $1,569 on a per vehicle retail basis. Total gross profit for customer financial services was $205 million, down $5 million or 2% compared to…

Thank you, Bill, and good morning ladies and gentlemen. In the fourth quarter, revenue increased $141 million or 3% compared to the prior year, and gross profit was relatively flat, down $3 million or less than 1%. SG&A as a percentage of gross profit was 72.2% for the quarter, which represents a 220 basis point increase compared to the year-ago period. SG&A as a percentage of gross profit is likely to remain above 72% for 2017 due to continued pressure on gross profit from disruptive OEM marketing and sales incentives as well as investments related to the brand extensions, as we announced last quarter. The provision for income tax in the quarter was $72 million or 38.3%. At the end of December, we had $2.7 billion of non-vehicle debt, a decrease of $37 million compared to September 30, 2016. Our non-vehicle debt fixed to floating mix was approximately 65% fixed and 35% floating. Non-vehicle interest expense increased to $29.6 million compared to $26.5 million in the fourth quarter of 2015. The $3.1 million increase in interest expense was driven by higher average debt balances resulting primarily from share repurchase and acquisitions. Other operating income was $48.1 million in the fourth quarter of 2016 compared to $5.8 million in the prior year. Other operating income included a gain of $31.7 million related to a business divestiture, as well as proceeds of $14.4 million from Volkswagen related to business disruption from their recent emissions scandal. During the fourth quarter, we repurchased 597,000 shares for $26.4 million at an average price of $44.29 per share. AutoNation has approximately $299 million of remaining board authorization for share repurchase. As of February 1, there were approximately 101 million shares outstanding. This does not include the dilutive impact of stock options. Our leverage ratio decreased slightly to 2.7 times at the end of Q4, as compared to 2.8 times at the end of Q3. The leverage ratio was 2.6 times on a net debt basis, including used floor plan availability, and our covenant limit is 3.75 times. Capital expenditures were $66 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 $65 million, which combined with our additional borrowing capacity, resulted in total liquidity of $879 million at the end of December. We remain focused on leveraging our strong balance sheet and robust cash flow generation to deliver shareholder value through the investments in our brand extension initiatives as well as opportunistic share repurchases and acquisitions. I'll now turn the call back over to our Chairman and CEO, Mike Jackson.

Thanks, Cheryl. 2016 launched an exciting time for AutoNation with the announcement of our comprehensive brand extension strategy. We have built an industry-leading brand, and we'll continue to leverage that brand in 2017 with the opening of our AutoNation USA stores. We're very excited about the pro-growth agenda of the current administration, including a more rational regulatory environment and corporate tax reform. As a purely domestic company, we'd benefit greatly from a reduction in our corporate tax rates, which could add approximately $0.50 to $1 to our annual earnings per share, depending on the details of the final legislation. Finally, I'd like to congratulate all 26,000 Associates of AutoNation for helping AutoNation to be named one of the country's Top 100 Corporate Citizens in 2016 by Forbes Magazine. Their tireless commitment to ending cancer through our Drive Pink campaign from coast to coast is really inspiring. We're happy now to take all your questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Rick Nelson from Stephens. Your line is open.

Thanks. Good morning. Can you help (11:40) can quantify the branding initiative, what sort of impact that may have had in the quarter, and as we push forward through 2017, how dilutive you think that might be?

That's very hard, Rick, to put a number on it. Obviously, we have some incremental costs and there will be a – particularly a countdown to opening the first five stores this year that will have cost to it. On the other hand we have some benefit already on the parts side that builds to a significant number in 2018 that Bill already talked about, $100 million of incremental gross. So it's very difficult to pin down exactly in 2017 all the pluses and minuses. Cheryl, you might want to add some color, certainly for the first and second quarter there'll be some costs involved?

Yeah. Rick, I think as we look at SG&A as a percentage of gross we called out that we think 72% or above for the near term, and for 2017, I think you could see some improvement on that as we get towards the back end of the year with seasonality and with the fact that we'll have some of the accelerate initiatives online, but certainly at the beginning of the year we start the pre-investment phase for those prior to the Auto USA launch and we also still have the pressure on the used side of the business from the finalization of the change in recall policy and that inventory clearing out through the system. So, I think 72% SG&A as a percentage of gross is a good way to think about that for the year as we go through the pre-investment phase and then as we get into the end of the year and to next year, I think you'll see some improvement in that as we start to see the earnings kick in particularly from the parts side of the business.

All right, great. Thanks for that color. Also I'd like to ask about the regional performance where strength and weakness might be occurring. I guess I'm particularly interested in Texas and Florida, what's happening there?

Bill, could you take that, please?

Sure. So, we're definitely seeing strength on the West Coast, Florida is weakened a little bit and we still have some challenges in Texas, primarily driven out of the energy portion of that, Houston and the Corpus Christi area.

Yes, and I saw things kind of flattened out, F&I per unit, are these the sorts of levels now we should expect on a go-forward basis?

Bill?

Yeah. We are at a very high level. There is still room for continued growth. It probably won't go at the pace that it's gone in the past but we still expect to be able to grow our CSS (14:25) numbers.

Very good. Thanks a lot and good luck.

Thank you, Rick.

Next question is from Mike Montani from Evercore. Your line is open.

Okay. Great. Thanks. The first question I had is for Bill and, obviously, Mike, which was on the One Price policy, Bill, I'm wondering if you could add any incremental color to how that's been received as you're rolling it out? How to think about the pacing to get that out to all the stores? If you could just add some color to that.

Sure, Mike.

This is Mike Jackson. I'll go first. Bill's done an extraordinary job of rolling it out across the country; he'll give you exactly how that's gone. The customer and associate reaction has been extremely positive. Once we get past the disruption from the recall situation, I think the full benefit of having implemented One Price across the enterprise will become clear. Bill, why don't you talk about where we're at?

Sure. So, currently we have three regions, our Western and Central regions are completely rolled out. We're in the process of rolling out our Eastern region, which should be done by the end of the second quarter, it's our largest region. To Mike's point, it's been extremely well received by both our customers and our associates, and we're seeing positive results in the markets where it has been rolled out.

Thank you. And then the next one is the decision to retail vehicles with an open recall, obviously a big one. We're looking for that to be a year-over-year improvement certainly for earnings. But I wanted to ask if you could provide some color on what the inventory position is like today, how much of that kind of 11% drop in GPU of used was really clearing product, versus just underlying ongoing pressures in the space. How to think about that going forward if you could?

Yeah, this is Mike Jackson first. So, we changed the recall policy at the end of November, beginning of December. So, really, it was almost in place for the entire fourth quarter. And to be clear, we still identify every recall; if the parts are available we repair it. If there are no parts available for the foreseeable future, depending upon manufacturer instructions, we either hold the vehicle and/or sell it with full disclosure. So, very much an industry-leading policy remains in place. There's no question that there is a hangover from the build-up of holding almost 20% of our inventory that has to be addressed. And Bill, why don't you talk about where we are? I would say the majority of the impact on our used gross margin is the recall situation.

No, you're correct, Mike. Right now, we currently have 7% of our total used car inventories on hold. I mean, that obviously fluctuates on a day-to-day basis as inventory comes in and different recalls are called out. And we still have a little bit of a hangover on inventory that had aged out prior to the retraction of the recall policy. I mean, that will continue through this quarter. So our margin pressures and wholesale auction of (17:39) aged vehicle pressures through the end of Q1.

So, we do expect through the course of the year that our front end gross margin on pre-owned will recover. And just on Takata availability, can you quantify where we are now with getting the parts you need to fix the vehicles?

It's still a very difficult situation. Bill, do you have the latest?

Yeah, it varies by brand and it also varies by geography, certain parts of the country are prioritized by the factories to be able to acquire air bags. So, for example, on the southeast part of the country, we'll get air bags sooner than the northwest would. It varies by brand significantly as well. Honda has a good supply, and is doing a very good job. Other of the OEMs, it's kind of a little bit of a hit and miss. Right now the 7% of our inventory is on hold, and that is almost entirely Takata.

Thank you.

Next question is from James Albertine, Consumer Edge.

Great, and good morning, everyone.

Good morning.

I have a question for Mike Jackson, and if I could, Mike, you've been a tremendous help, I think over the last few years, in helping us understand and sort of delineate what's going on in the relationship between OEMs and dealers? And we've seen incentives rise over the last certainly a few quarters, but particularly in the fourth quarter. I'm wondering if you could sort of help frame for us what the incentive environment looks like, because you've talked a lot about stair-step programs and sort of the impacts there, and I'm just curious, how you would sort of characterize the current incentive environment leading into 2017? And if you could in that response maybe opine a little bit on floorplan assistance, I think if you look back over the last few years, that's been another area where OEMs helped to offset some of the pain in the gross profit per unit line? Thanks.

Yeah. Very good question. So, as I look at the situation for 2017, I think the manufacturers have made the decision already to sell over 17 million vehicles in the United States, and the variable is not that number, but incentives, and I draw that conclusion from looking at the inventory levels we're taking into the year and the production plan going out. (20:01) No, no, (20:03) inventories are for the industry too high, and that's the environment that we're in, and so incentives are going to be aggressive. Now, I think from an OEM level, they can afford the incentives because the mix has shifted to such an extent towards trucks with an exit rate coming out of 2016 of 63%. And if you look at transaction prices compared to, say, five years ago, both due to mix and price increases it's up over $4,000 a car. So they're putting another $1,000, let's say, in incentives. So what, the mix is so rich on the profit side that they can make a tremendous amount of money with higher incentives. I think the only thing is on sustainable, that (20:50) I'm concerned about is the lease rate at 30% and with over 3 million vehicles coming back this year, and that continues to increase, could ultimately have an impact on residual values and resale values, which is then damaging to customers and to the brand. So that has to be watched closely. Now if you bring that down to the humble world of the retailer, you have high industry inventories with every incentive you could imagine in the world in a very complex, different structures, with the worst being the market target incentives. Now I think most manufacturers have recognized the corrosive nature of market target incentives and are modifying their programs in the right direction, still has a way to go but I'm cautiously optimistic that those most onerous incentives will not be as prevalent in 2017 as they were in 2016.

I appreciate that very detailed response, it's extremely helpful. If I just may, a follow-up or maybe just an extension of your comment to try and get some color around what a – and I know we all are trying to figure this out and we don't know exactly how it's going to play out, about the border tax, right? So, to the extent that there's an adjustment at the border, given what you just said about where we are in terms of incentives and leasing and so forth, how much cushion do you think there is in the market to sustain a flow-through or pass-through if you will of a potential adjustment tax or would that be a very – it would be very bad timing considering kind of where we are in terms of the incentive environment? Thanks.

Yeah. So, let's start with tariffs and the threat of a 35% tariff on products coming out of Mexico. There's still a 25% duty on trucks coming into United States, Mexico and Canada are exempted. So, if NAFTA goes away, that tariff snaps back and since truck plants have been built in Mexico and Canada under NAFTA, for those manufacturers that would be a significant impact and would definitely lead to price increases. They are not in a position to absorb that. As far as border adjustment taxes, I hear them justified that there are really – that there's 150 countries in the world that do border adjustment taxes. I don't think that's – I think that's disingenuous. Other countries have value-added tax, which is like a sales tax for domestic consumption, and it doesn't matter whether the good was produced outside their country or in their country. So, all products are on equal basis, there's nothing discriminatory about a value-added tax. So if we do end up with a border tax, it could come in two forms, so it's really like a tariff. I think that is almost politically impossible to impose on the United States and would lead to price increases from everything from clothing to smartphones, to cars, et cetera, et cetera. It's just unimaginable, a pure 20% border tax that acts like a tariff. Most likely, something along the lines of a net border tax for an individual company where they have to figure out what is their net import-export and that is – the differential is taxed and that would be very different depending upon what the company situation is. I don't want to speak for any companies but if you happen to export to the United States more than you import, you'd be in fine shape even though you're importing a lot of stuff. That is – my guess is if we do end up with a border tax, it's something along those lines. One thing I do know for sure is though on products as expensive as automobiles, when you start talking about 20% to 35%; if they get imposed in a clear-cut way then it's inevitable that price increases come with it that I think is unlikely. Any of that though would certainly come with a reduction in corporate tax rate. For a pure domestic company like AutoNation that doesn't import anything that would have a meaningful benefit to us somewhere between $0.50 and $1, depending upon how some deductibles are permitted or not.

Understood and thank you very much again. And best of luck in the first quarter.

Thank you.

Next question is from John Murphy of Bank of America. Your line is open.

Good morning, guys. Maybe if I could just kind of follow up on sort of the new vehicle environment. I mean, Mike, it looks like you guys were down 4.9% on same-store sales in new vehicles on a retail basis in 2016. I'm just curious, as you look at that, do you think of that as more indicative of what's going on in sort of the underlying level of demand than the total number that we saw up, I think, 60 basis points year-over-year in 2016? And also, as we look at this, the revenue per unit went up pretty significantly. I mean, is there a high level of elasticity of demand to price here that we're seeing in the market? I'm just trying to understand really what your thoughts are on sort of the underlying level of demand and the environment right now, because it seems to be a little bit different than the totals?

Yeah, John. So, first on the macro level, you have an American consumer that is feeling pretty optimistic, pretty robust. You still have average age pushing out to 11.6, 11.7. So, there's still genuine replacement need. You still have household formation well over 1 million, with two cars per household. So you can get to a justification for high 16 million, 17 million selling rate. Now you have this very genuine consumer preference for trucks, and trucks are priced higher, and the consumer has the willingness to spend more forward, and credit is readily available and attractively priced. Now you come down to our humble world selling them one at a time, and you have high inventories and high incentives that are very complex. And we are trying to manage a line of optimization of profitability that we have to walk between volume and front end gross profit. And we have regional differences that play into that. We have brand differences, and I would say 2016 was a particularly difficult year for a very onerous target marketing that hit a significant portion of our business that was very difficult to manage. So, that's how you explain it. For the manufacturer, this shift to trucks is extremely beneficial. You get down to the humble retailer, you have high inventories, all kinds of incentive activity, some of which were very onerous in their structure in 2016 that we had to grapple with, and find the right line between volume and price.

Okay. Maybe, to follow up on that, last time that an automaker decided to take the benefit of mix and raise incentives was GM starting in 2001, and the industry followed. And for total profitability for them, it made sense for a little while, but obviously we know how that story ended, horribly for them and the industry. You kind of alluded to the fact that the industry is willing to raise incentives even though, on a like-for-like basis, they might be taking pressure on price, but that they're getting the benefit of mix, kind of like exactly what GM did starting in 2001. Do they, are they aware of – thinking about the sort of Lagrangian profit maximization equation, if they push this too far, that the benefit of mix will suddenly be offset and it could reverse? I'm just curious, in your discussions with them, or in your interaction with them, it sounds like you're giving up the benefit of mix in a pretty – starting to give that up, and it seems like a dangerous precedent to send, I'm just trying to understand how they're balancing this all out?

So, again, it's all a matter of degree. This shift to trucks of 63% is unprecedented, and that's given them a lot of maneuverability room, plus their cost structure is in much better shape than 2001, 2002. There are warning signs there like leasing, which I called out, which, once you start to undermine resale values, then you really are on the slippery slope where the whole thing doesn't work anymore. If you have this conversation with automotive executives, you'll get 100% agreement in principle with what you just said. Unfortunately, the conversation doesn't end there, it continues, where they then explain to you why their company is different and their brands are different and their products are different, and they're going to take share, and we have an apple pie that adds up to 110%. So here we are, but I think as far as 2017, I think I've made the right call. It will be over 17 million and the variable incentives are higher, just how much higher, but I still think it will be a profitable year for the manufacturers and suppliers due to the mix, and there will be – new vehicle front-end gross margin pressure will continue at retail. That's a challenge, and retailers will look for that balance between volume and price. And on used cars, we have a specific issue with recalls in Takata that we'll recover through the course of the year.

Okay. And then just a last question, the land sales were extremely positive in the quarter, and I think a surprise releasing of asset value that you have, that sounds like you're going to continue to use to pay for the AutoNation USA and brand extension efforts. Is that the kind of thing that you have these assets sort of in your back pocket, in land, in dealerships, that will not have any impact on the ongoing earnings stream of the company? And also, would you have something way above and beyond the $250 million that you're planning on selling in the forward year-and-a-half to pay for this? Because it's – you own a lot of land. So it sounds like there might be a little bit of a hidden value here that you're starting to unlock a little bit to pay for this, but you might still have a large backlog of it?

John, you are absolutely right. We have not sold anything that had any material impact on ongoing earnings, nothing. And we've either relocated businesses to real estate that was less expensive and sold something that could be redeveloped into high-rises, or we sold a business that came through other acquisitions that really doesn't fit with us and we got our money back out of it. That sort of thing, and we have a plan that gets us to $500 million. We had that plan when we – we were already executing that plan when we announced our AutoNation brand extension. So I think, John, if you step back and look at it and say, okay, they're doing the brand extension, building the brand and building the AutoNation digital platforms. It's already, in essence, paid for. The $500 million we're realizing out of our $3 billion real estate portfolio and underperforming assets. So, it's a very exciting opportunity and just as an indication of what it can mean, Bill already mentioned that our conversations with the parts suppliers have gone extremely well. The customer acceptance of the first parts that arrived in the marketplace is extremely high. And we add it up and it's like $100 million of incremental gross profit to us in 2018 that's in the pipeline. So I think it's a very shrewd and a skilled deployment of capital that will pay significant benefits for the company.

Just one last, to put up just a slightly finer point of it, this then has no impact on your thought process as far as buying back shares going forward. This is purely pulling the money out of your back pocket to invest for the future and your ongoing free cash flow, you thought process there still will include share buybacks as always?

Well, our – we've always taken capital allocation extremely serious as you know, John. So when we decided for the brand extension, we've had a lot of meetings, as many meetings on the capital side as we did on the operating side, as to how to do this, and we remain opportunistic on deployment of capital. We're still open to acquisitions. For anything that meets our return thresholds, we are open-minded to share repurchase. And we've explained to you exactly how we're raising the funds for the $500 million in the AutoNation branding – brand extensions. Everything is opportunistic, nothing is locked in other than that $500 million, we've now explained in detail how we're doing it. And I think that's appropriate considering the amount of money and in fact it's a new leg for this company to stand on. And we'll continue to look at the opportunity between share repurchase and acquisitions.

That's extremely helpful. Thank you.

Next question is from Brian Sponheimer from Gabelli. Your line is now open.

Hi, thank you for letting me on. Mike, I – just to dig in a little bit more on the inventory situation. Over 4 million units on dealer lots in the U.S. and if you compare the mix now to where it was a year ago, I'd imagine you'd say it's better, but just from a context perspective, what are your thoughts on the inventory situation relative to where we were sitting 9 months, 12 months ago? 00

Well, I think the structure of the inventory is a bit better as expected, but I think the – I haven't really read every number for the industry, but my sense is that we're even higher than a year ago. And clearly the OEMs have in a plateau-ed environment have not adjusted inventory. So, that's why I say, I look at the inventory, I look at the production plan and said we're going to sell 17 million.

If you were to peg to an appropriate level would 3.50 million, 3.60 million more (36:29)?

Yeah. Yeah. You could take 0.5 million out easy.

And just kind of pivoting a little bit, OEMs shifting plans to electrification, hybrids, 48-volt, et cetera. Are you seeing any indication at the demand level that consumers are clamoring for any sort of electrification and given where ATPs are, do you think that they'll be able to absorb the incremental cost?

Well, I think this is going to be the big discussion about the Obama Administration slamming the door on the review period that was supposed to happen this year into 2018. From a customer point of view, what the customer said, listen, you can put all the hybrid technology in that car or truck you want, but I'm not paying a penny more for it. And so you're adding thousands of dollars of technology but the vehicle has to be priced the same as a comparable internal combustion engine vehicle. But the manufacturers are looking at the compliance targets they have to meet and understand electrification is the only way to get there. And the ramp gets steeper and steeper. So what they're doing now is essential just to meet the next few years, but it gets even more onerous after 2020. So, it's a big disconnect between what the customer is willing to pay for and what the manufacturers are being mandated to produce, and there needs to be a discussion in Washington about it.

Would you say the same extends for active safety and moves towards Level 3 and Level 4 autonomy?

I see two approaches on autonomy. I see from a consumer point of view, the guardian angel approach where you will add layer and layer of different sensors and accident prevention measures that will be on all the time, that support some level of advanced cruise control driving. As far as autonomous vehicles, where that word really applies, I think that will come in the shared space where you're eliminating a professional driver or a higher driver to justify the cost of the level of sensors and computing power that you need, which I estimate is six figures today to make a true autonomous vehicle that can handle all the variables and complexities of what's out there. So, I think full autonomy Level 4, Level 5 will arrive in the shared marketplace as a substitute for a professional driver and in the consumer market it will come in as guardian advances.

Thank you very much. Greatly appreciate the insight.

Next question is from David Tamberrino, Goldman Sachs. Your line is open. David Tamberrino - Goldman Sachs & Co.: Thanks. Great. Thank you. Let just stick with that for a second because we've heard at least one OEM which you have about 16% brand exposure to. Ford talking about having a fleet of autonomous vehicles in a robot taxi setting by 2021. Wondering if you see yourself as a potential maintainer of that fleet given your base going forward, I'm thinking really far out here, the OEMs and the dealership network kind of come together and the dealership network helps them keep those fleets maintained as we have more autonomous vehicles on the road. Do you see that as a potential for your business or the dealer business model going forward as a competitive advantage?

I do. The vehicles are going to be, only just the basics of maintenance from cleaning to charging, storage, managing the fleet in and out. So you need fleet management in the classic sense. But add to that you're going to have a level of complexity of computers and sensors that must absolutely be kept in a state of high calibration that is going to require a technical expertise that authorized franchise dealers are the closest to today, and can go to the next level to support. The idea that these things are going to be able to run a month at a time out there without a great deal of care, I think, is not realistic. So I think that is an opportunity for us and for others. David Tamberrino - Goldman Sachs & Co.: Has that come up in your conversations with your OEM partners or is it so far down the road that it's not even in the discussion yet?

Yeah. No, I think you could say it's a discussion but no conclusions. David Tamberrino - Goldman Sachs & Co.: Okay. And now, just bringing it back to the more near-term. New vehicle pressure on gross profit per unit, I think we've talked about it a little bit but I really wanted to dive into it. I think it was down, per unit retail maybe 4% year-over-year, is that all pressure from the domestic portion of the business, is that because of some of the OEM behavior or what's really driving that pressure year-over-year within your results and if you can break it out by the different OEMs or the different, is it car versus truck that's still being under pressure in what's impacting your business?

Bill, could you take that please?

Sure. The pressure is pretty much coming from all segments, whether it's import, domestic or premium luxury. There's a lot more pressure on the car side of the business than there would be on the small truck SUV side, but it's broken out evenly across the board. David Tamberrino - Goldman Sachs & Co.: Okay. I mean, is there anything I'm missing here because one of your peers reported yesterday, and they saw a pretty decent flat to up on new retail but you were down, so I'm trying to understand the difference between what you've reported today and versus how they did within the quarter?

We had a significant decline in volume in the U.S. same-store sale. David Tamberrino - Goldman Sachs & Co.: No – yeah. So, it was just the maximizing the margin versus volume.

It's just that line. I tip my hat to them, they did a good job of finding the line between volume and price, and net-net came out in a better place, so I tip my hat on. But it's a difficult walk. But I think they gave up a lot of volume. David Tamberrino - Goldman Sachs & Co.: Got it. Thank you for the time.

Next question is from David Lim, Wells Fargo. Your line is open.

Hi, good morning. Thank you. Wanted to address the AutoNation USA. When you look out, is it going to be purely greenfield or would you consider buying what Penske did, like some used vehicle, clusters of used vehicle stores. And how would you compete with like the direct model guys that are beginning to burgeon out there in the marketplace?

Hi, this is Mike Jackson. No, we have a brand so we don't need to buy a brand. So, we will build, now we may repurpose some real estate that we already own, but we don't see the need to buy, to pay a premium to buy something in order to get a brand name, we have a brand name. If I look at it, we have – we face digital competitors both in new and used, we think AutoNation Express, which is new and used, gives us a strength there. So I'm very confident we will be able to have good traffic in these stores from very early days.

And then the follow-up question, on residual values. As residual values fall trade-in becomes less than, obviously as the dominoes sort of fall here, the OEMs will likely ratchet up even more incentives. I mean, when does this all come to a head, I mean it just feels to us that the health of the industry, if we look out the next couple years, could be – there could be some serious risk.

I think residual values are the canary in the gold mine that has to be watched because, once you've been so aggressive that residual values start going down, then it becomes a self-defeating cycle, in that your next $100 of incentive immediately comes off the resale value, and what have you really done? And that's when you really hit the wall of what incentives can do. So, if you want to know the health of a brand, look at three-year residual values. That will tell you by brand where they are in the cycle. Look at their percentage of fleet, that's the other canary, launch by brand, and if the whole industry becomes over-dependent on fleet and incentive programs that are ruinous to residual values and resale values, you've hit the limit.

Sure. And one final question. When it comes to the SG&A guidance, should we see more of like a glide path kind of improvement quarter-over-quarter, or is there still going to be some level of seasonality involved in 2017? Thank you.

Yeah. There's always seasonality in SG&A, so you're going to expect the fourth quarter, obviously I would say you, would expect that typically to be slightly better. And given the fact that by then, we would expect that some of the parts initiatives will be kicking in from the accelerated initiatives, I'd expect that quarter to look a little better. But again, you're going to have pre-investment phases in Q1 and Q2 before the opening of the Auto USA stores, you're going to expect somewhat of a glide path towards Q4. But I think you're actually going to see, I'd say 72% is a good guide for the majority of the year.

Got you. Thank you so much.

Next question is from Bill Armstrong, C.L. King & Associates. Your line is open. William R. Armstrong - C.L. King & Associates, Inc.: Good morning, everyone. In light of what will be a flattening or maybe slightly down SAAR, an influx of used vehicle supply and a likely continued decline in used vehicle prices, which would give them an improved value proposition to consumers. It seems like this could be a good year for used car sales, and I was just wondering what your perspective is on the outlook for used car sales this year?

Yeah, I agree with that statement for the next three or four years. And that's why we've taken the step into AutoNation USA, because the lease returns are locked in for the next three, four years. That's already done. And I've seen no sign on leasing rates going backwards yet. So it's a huge opportunity, and you're absolutely right. As long as we buy right, we can have a very compelling proposition for the consumer. So we're – we intend to build both volume and gross margin in the pre-owned business over the next several years. William R. Armstrong - C.L. King & Associates, Inc.: Do you see used vehicles, especially late model used vehicles, potentially displacing new, as consumers may decide that the value proposition is a little bit better, little more attractive?

It could come to that. I will say, as far as 2017 is concerned, I've already made my call, it's going to be over 17 million new units. I think we have a share opportunity with pre-owned and a volume opportunity with pre-owned. But all these other things you call out could show up in 2018, could show up in 2019. But I think we got another year over 17 million units pretty much locked in, with the variable being the level of incentives. William R. Armstrong - C.L. King & Associates, Inc.: Got it. Thank you very much.

Next question is from Mike Levin of Deutsche Bank. Your line is open.

Good morning, guys. Wanted to just kind of follow up on the border tax adjustments. Again, we've actually done an analysis and kind of gone model by model by automaker, looking at net import, export flows. And we've kind of gotten to about $1,000 a car impact for the domestics except for Ford, which would be about flat, about $2,000 on some of the Japanese and Asian, and some of the others up to $3,000. So, just looking at your portfolio, you got about two-thirds that would be at around $2,000 to $3,000 price increase. Obviously, you're buying from a domestic entity, but that still is going to probably raise prices. So, just wanted to see how you're thinking about that in terms of elasticity of demand and ability to kind of maintain GPUs, if this does kind of fall through on that front?

Well, so very interesting question. If indeed that's how it goes about, exactly as you described it – each manufacturer proportionally will have to divide that up over what they're selling and they'll have to put it in their pricing. That will lead to higher new car pricing. Now, whether they get a regulatory relief on the fuel economy standards that can offset that is unknown, but the fuel economy standards are also quite onerous, and could change under this administration. So that remains to be seen. But I think if you put that level of price increase without a transition plan suddenly into the marketplace, it would impact overall industry volume. I'll be thrilled to be even bigger into the used car business at that moment, because that would certainly have stabilization, if not lift, used car prices or create a significant volume in used cars.

Got it. And maybe....

Now, as far as our front end gross margins, listen, it's hard to describe the competitive intensity that we're contending with at the moment, and I don't see that putting further pressure greater than what we already have on front end margins. Front end margins are – it's very tough, it's very competitive, this combination of high inventory and high incentives. So we would still have, in that scenario, high inventories and high incentives, and maybe falling volume, and we'd still be trying to find this optimal line between price and volume.

Got it. And when you talked about the $0.50 to a $1 impact that was really just looking at the corporate tax rate changes? That's right?

Yes. And the reason for the range is because....

The differences in deductibility.

The Republican bill says deductibility of interest will be excluded.

Right.

And we don't know whether that's just on debt or whether that's also includes...

More plant....

More plant, exactly. So that's – if you lose all deductibility at $0.50, if you can keep the deductibility of inventories, which seems reasonable to me, that's a genuine business spend, than we're around $1.

Got it. And that – so that didn't include any analysis of the kind of sourcing of...

No.

...all of the parts, in your parts and service business. I mean, maybe you're buying from domestic distributors...

We are.

...but I assume that most of that is actually probably originating from outside the U.S., unless it's OEM-manufactured.

We're as American pie as you get, all our employees live and work in America, they're all U.S. citizens or at least on a green card and everything we buy is U.S.-sourced.

So, your belief is that....

Or companies – as far as the entities we buy from.

Right. But, so do you have a sense of how much of the parts are actually manufactured within the U.S.?

No. I couldn't tell you.

Got it. Okay. And then maybe just one clarification on the $100 million profit improvement from the private label parts.

Yes.

Are you guys thinking about that more in terms of margin improvement or in kind of revenue growth within parts and service?

That's just margin improvement.

That's just margin improvement, okay. And maybe just lastly with rates, we've seen five-year swaps up over 70 basis points since the election. Are you seeing consumer rates actually starting to rise at this point?

Bill, have you seen anything?

It's been minimal.

Got it. Okay. Thank you, guys.

And keep in mind that if you have a 1% increase in interest rate over the average loan, that's less than $15 a month. So you've got a lot of ability to absorb certain rate increases without that creating a lot of pressure within the CSS (54:29) space.

Very helpful. Thank you, guys.

Next question is from Colin Langan from UBS. Your line is open.

This is Colin Langan, sorry, I said my name wrong. I just had – the first question actually you were just talking about the branded parts offering. How are the automakers responding? Does this in fact kind of put you in direct competition with OEM-certified parts and I imagine they might not be too happy about that?

I would say that, first, we still offer all the OEM parts, and we still use all the OEM parts for all warranty repairs or for any of the certified pre-owned programs. So we meet all the requirements, of course. What I've said to the manufacturers is if I go back 10 years ago, we had very nice front end gross margins on new vehicles and my costs were significantly less. And I actually made money selling a new car. Now, today, I got a front end gross margin of around 5%, I got costs of around 5%, I'm not making anything selling a new car. And I really don't think it's the transparency of the digital world at all. I really think it's the structure of the incentive programs and the push from the manufacturers that've gotten us here. So I say to them, I say, look, you've changed the basic contract between us which is, I build an exclusive facility for you and I can make money selling your cars and doing some other things to (56:21) I got to make all my money elsewhere than in selling new cars. And there is a certain understanding that that's what the industry has come to. And I'm not going to sit here naively and think that new vehicle front-end margins are going to recover. I can improve used vehicle front-end margins, but the new vehicle listing is bigger than me. And therefore, I need a strategy to deal with this new place that the automotive retail industry finds itself in, hence AutoNation brand extension. So there is a certain understanding on the other side that I didn't change the world, you changed the world, I have to react to it.

And you said you're using the certified parts on warranty and CPO, I mean any sense that they – are most of your part repairs for customer service certified parts or are they – are you using other brands anyway or it's (57:26)...

Bill can give you the numbers and if we take our part that's been in the marketplace the longest, the AutoNation lifetime guaranteed battery, Bill, why don't you talk about customer acceptance of that.

Sure. Colin, by and large, right currently or prior to our brand extension, all of our parts were sourced primarily through the manufacturers. Currently, we rolled out the AutoNation battery, it's been extremely well received and we had an exit rate, excluding warranty, of nearly 50% coming out of December.

Got it, okay. And then, when you talk about F&I was flat, it sounds like you think that it could grow a bit, but maybe at lower rate. I mean what's putting pressure on the F&I growth at this point?

Bill?

Sure. Well, first off we're – I'm pretty sure we're industry-leading CSS (58:19) PBR, so we're already very high on that metric. Our brand extension on our service contracts have been performing well. And now we really only have to focus on extending out those different products, as well as focusing on our lower-performing stores, but we're running out of room.

Got it. And to my question on parts and services, it's my last question, it's up 2%, seems to be slowing a little bit. Any issue there and how should we think about that trending into next year, should that – do you see a (58:47) boost with some of the used normalizing a bit and that refurbishment work getting done?

Bill, I was not able to hear that, were you?

Yeah. I will. I'll take it. I'm calling primarily due to our recall policy that we had last year, it put a drag on our internal reconditioning, and so that's why we didn't have quite the growth out of customer care, and going forward you'll see – it will grow back to what it was pre-recall.

Right. Okay. And so we think of the 2% as an anomaly or should that rate go up as we think in 2017, any color there directionally?

It will go up into the mid single-digits.

Okay. Thank you very much.

All right. Thanks everyone for joining us on the call today. Appreciate the time.

Thank you, everyone.

This concludes today's conference. Thank you all for joining.