Welcome to AutoNation's First Quarter 2017 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, I will turn the call over to Andrew Wamser, Treasurer and Vice President of Finance for AutoNation. You may now begin.

Thank you, operator, and good morning. And welcome to AutoNation's first quarter 2017 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and CEO; Cheryl Miller, our Chief Financial Officer; and Bill Berman, our President and Chief Operating Officer. 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 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 our Chairman and CEO, Mike Jackson.

Good morning and thank you for joining us. Today, we reported EPS from continuing operations of $0.97, an 8% increase as compared to EPS from continuing operations of $0.90 for the same period in the prior year. First quarter 2017 revenue totaled $5.1 billion, which was flat compared to the prior year. In the first quarter, AutoNation's combined retail vehicle unit sales were flat on a total store and same-store basis. The new vehicle market remains in a plateau phase with elevated inventories, rising incentives and leasing penetration near all-times highs. During the first quarter, we saw an increase in used unit volumes as we focused on our One Price strategy, which is now fully rolled out in all AutoNation stores. Also during the quarter, we worked through the majority of the inventory that was previously on recall hold. Therefore, we expect to see a sequential increase in both used unit volumes and gross profit per vehicle retailed in the second quarter. I'll now turn the call over to our Chief Financial Officer, Cheryl Miller.

Thank you, Mike, and good morning, ladies and gentlemen. In the first quarter, revenue increased $20 million or 0.4% compared to the prior year, and gross profit declined $6 million or 1%. SG&A as a percentage of gross profit was 72.6% for the quarter, which represents a 130 basis point increase compared to the year-ago period. We continue to expect SG&A as a percentage of gross profit to remain above 72% for 2017, due to pressure on gross profit from disruptive OEM marketing and sales incentives, as well as investments related to our brand extension strategy. The provision for income tax in the quarter was $62 million or 38.5%. At the end of March, we had $2.5 billion of non-vehicle debt, a decrease of $174 million compared to December 31, 2016. Our non-vehicle debt fixed to floating mix was approximately 70% fixed and 30% floating. Non-vehicle interest expense increased slightly to $28.8 million compared to $28.3 million in the first quarter of 2016, driven by an increase in capital leases due to acquisitions and higher interest rates. Other operating income was $19.5 million in the first quarter of 2017 compared to $5 million in the prior year. Other operating income included a year-over-year increase in gains of $3.7 million related to divestitures and payments of $9.8 million we received from manufacturers related to a legal settlement and for the waiver of certain franchise protest rights. AutoNation has approximately $298 million of remaining of board authorization for share repurchase. As of April 21, there were approximately 101 million shares outstanding. And again, this does not include the dilutive impact of stock options. Our leverage ratio decreased to 2.6 times at the end of Q1 as compared to 2.7 times at the end of Q4. The leverage ratio is 2.5 times on a net debt basis including used floorplan availability, and our covenant limit is 3.75 times. Capital expenditures were $74 million for the quarter. Capital expenditures are on an accrual basis, excluding operating lease buy-outs and related asset sales. Our quarter end cash balance was $56 million, which combined with our additional borrowing capacity resulted in total liquidity of $1 billion at the end of March. We remain focused on executing our brand extension strategy in addition to opportunistic capital allocation in order to drive long term shareholder value. I'll now turn the call over to our President and Chief Operating Officer, Bill Berman.

Thanks, Cheryl, 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 $431 million, down 5%. Variable gross was $3,233 on a per vehicle retail basis, a decrease of 6%. Combined retail unit volume was flat compared to the first quarter last year. New vehicle revenue was flat compared to the prior year at $2.7 billion. We retailed 73,600 units, a decrease of 3%. New vehicle gross profit was $1,886 on a per vehicle retail basis, a decrease of $39 compared to the same period a year ago. Used vehicles retail revenue for the quarter was $1.1 billion, an increase of $42 million or 4% compared to the period a year ago. Used vehicles retailed were 59,100, up 6%. Used vehicle gross profit was $1,243 on a per vehicle retail basis, a decrease of $389. During the quarter, we worked through the majority of the inventory that was previously on recall hold. We expect to see sequential improvement in used unit volume and gross profit per vehicle retailed in the second quarter. Customer financial services gross profit was $1,634 on a per vehicle retail basis, in line with the prior year. Total gross profit for customer financial services was $217 million, which was flat compared to the same period a year ago. In the quarter, customer care revenue was $820 million, an increase of $25 million or 3%. Customer care gross profit was $361 million, an increase of $17 million or 5%. Customer-pay gross was $146 million, up 4%. Warranty gross was $78 million, up 14%. Finally, I'd like to thank all 26,000 associates for their hard work and dedication. I'll now turn the call back to Mike Jackson, our Chairman and Chief Executive Officer.

Thank you, Bill. We continue to expect industry new vehicle sales to be above 17 million, 2017 due to continued replacement need, ample credit availability, and attractive niche products. Now, we'd be delighted to take your questions.

Thank you. Our first question is coming from Rick Nelson. Your line is now open. Once again, our first question is coming from Rick Nelson of Stephens. Your line is now open.

I'm sorry. I was on mute there. Sorry. So I'd like to ask about the rollout plans for AutoNation USA. Houston, I believe, is your first market, along with Corpus Christi, and have you got plans for Phoenix and Las Vegas and additional stores there?

Yes, Rick. Yeah. We believe that we will grow our pre-owned sales much faster than the new vehicle sales. The outlook is very positive there with increased supply, with very reasonable acquisition costs, and we really view it as an opportunity. We think the brand is strong, and we think One Price is the correct marketing strategy, and therefore, we've One Priced the entire company. So we intend to grow our pre-owned business both in our existing stores and then, also in the brand extension in the USA stores. We will open – we're excited. In the second quarter, we'll open two stores, both of those in Texas and then later in the year, we will have an additional three stores. We'll be very keen to see what the ramp is on sales volume and gross profit, because we know we can manage the costs over time as technology comes on. We really want to see the customer reaction to the stores. So that's what we'll be benchmarking in the first three to six months to see how that goes. But if we look at the reaction we're having to One Price from our customers and the associates, positive reaction. If we look at our central buying capability that is giving us inventory for the future, we're pretty excited what we're going to do in pre-owned through the balance of this year.

Thanks for that color, Mike. Also, curious what you are hearing from the OEMs as it relates to your newer strategies, do you have something about the private label parts in particular?

Well, the conversation with the OEMs goes basically as follows, that they have developed the tools to manage the front-end gross for new vehicles in the marketplace and they have taken them down to a level from which they're not going back up. So we are basically – they're basically asking us to sell new vehicles just covering our cost to having sold them, not making any money on them and that then we need to make money everywhere else. So, that's what we're doing. And if I look at our company, in that situation, you can't just sit there pat. You have to say, well, what are my opportunities to grow the business? I think there's a certain understanding on their part that, yeah, it's not third parties, it's not digital transparency that's brought down front-end gross. It's tools that the manufacturers have developed and implemented. So I think there is a certain respectful understanding that we then have to grow our business and build our profitability elsewhere.

Okay. Got you. All right. Thanks. Finally, if I could ask you, other income was pretty big this quarter. We're calculating $0.12. How should we think about that line item as we move forward? Obviously, the Audi settlement (12:41) going forward? (12:42)

Yeah. So Cheryl talked about it in the script, we sold it (12:44) out, and obviously it's non-recurring, but, Cheryl?

Yeah. What I would say, Rick, and, first of all, just to keep into perspective, we don't do adjusted EPS. Last year, we went exclusively to all GAAP (12:55), and obviously, the other is on the face of the financials. So, two factors tying into other. I would say the first, which we talked about was related to the emissions payment. So, really, the way we think about that is recouping of lost value and profit. That is materially done. So, you saw some of that in Q4, and you saw some of that in Q1 as well. I don't expect any material amounts coming in from that in the future periods. The second is really related to asset sales and property dispositions. That's something we have done historically. You've seen in our numbers. If you look at last year, for instance, we had $5 million related to that in the first quarter of last year. So, the change year over year related to that was about $3.7 million. As we've talked about with respect to investing in accelerate, we will continue to do some potential strategic dispositions to generate some additional cash flow to offset some of the outgoing CapEx numbers. You'll see some potential gains similar to what you've seen in the past, very difficult to predict the cadence of this. So that's really the two drivers for the quarter.

Okay. Very good. Thanks a lot and good luck.

Thank you, Rick.

Our next question is coming from Mike Montani of Evercore ISI. Sir, your line is now open.

Thanks and good morning.

Good morning.

Just wanted to ask if I could. In terms of the guidance for improving used unit comp and grosses, I think, year over year. Was that referencing the idea that the 6% used unit comp would actually strengthen in 2Q, or were you just saying it would be positive and that the gross profit dollars per unit will be positive year over year?

Yeah. The second one.

Okay. Understood.

Sequential.

And if I could...

It's a sequential improvement in volume and profit per vehicle retailed.

So think number of units, not percentage change.

Got it. Okay. Sorry. I just wanted to clarify. And then, if I could, on the second part of it was, is there a certain used unit comp? So you mentioned obviously flat if you were to add new and used. But is there a certain comp where we should start to see some leverage over SG&A? I don't know, Cheryl, if there's anything you can say to that?

Yeah. I think what I would say from a new vehicle perspective obviously, we've continued to talk about versus historically, you've got some pressure related to the plateauing in new and where new PVRs are which is something that Mike has touched on. From a used perspective, our goal is to continue to increase the gross profit, both by driving additional unit volume and then by improving PVRs now that we're through the recall phase and now that we've implemented the One Price strategy. So we think that there is opportunity there with respect to improving grosses overall within the used vehicle portfolio. But we do note that you're still going to have some pressure versus historical leverage opportunities on the new vehicle side.

Okay. Is there a certain point in time, so if you look out over the next 12 months or the next 24 where we should start to anticipate SG&A gross would actually improve?

Yes. So what we've said again, we expect it to be above 72% for the remainder of 2017. We've also talked about the growth opportunities in 2018, particularly related to the customer care part of our business as we roll out the continued accelerate initiative in that area. And as that kicks in, you would expect to see some good leverage in that area through 2018.

Great. And the last one I had was on the omni-channel selling and the work with AutoNation Express. I don't know Mike or Bill, if you want to just add some color as to third party leads versus internal now and then maybe the overall market reception to AutoNation Express as you get One Price selling out there?

We're very satisfied with how AutoNation Express has developed. I think we said on the last call it now generates over 30% of the business. We still have excellent relationships with certain third parties that we've come to very good agreements with that we're satisfied with the cost basis and the operating agreements and they're around 10% of the business. Bill, what would you like to add?

AutoNation Express has been a huge success. It ties in perfectly with our One Price used car strategy and, overall, it will build and help the strong component of our accelerate project going forward.

Great. Thank you, guys, and good luck.

Our next question is coming from Jamie Albertine of Consumer Edge. Your line is now open.

Great. Thanks for taking the question and good morning. Mike, going back to your comments on the OEMs, I think one of the questions earlier, with respect to profitability, just basically covering your costs, I imagine the pressure is equal, if not worse, on some of your smaller independent peers. And I'm wondering if we're starting to see sort of an opening-up of the acquisition environment as it relates to that. And how should we think about acquisitions in terms of the list of sort of different initiatives you have sort of on tap here with respect to investment in the near term? Thanks.

So, to me, manufacturers, having developed the tools to keep front-end gross in a narrow corridor that just cover your cost is a fundamental strategic change in the business that has certainly, for the independent entrepreneur, taken a lot of the fun and excitement out of the business and certainly limits them what can be done. So I think it has to be factored into what the business is worth and what you pay in goodwill for the business. And from what we've seen thus far, sellers have not really come to terms with that. So if I look at the capital returns for brand extension versus acquisition, brand extension is far more compelling in our view. And it will take some time for that to become obvious, but that's how we see it. Now, if there's an adjustment in pricing on acquisition, that's another story. But so far, that hasn't happened.

Good. That's very helpful. Thank you for delineating as well. If I may, just a follow-up on credit. There was a lot of consternation it seemed during the quarter, you had Ally out in the market talking about residual value declines, NADA Data on the used car pricing front. Just lots of focus on the credit business. What update would you give to the markets at this point based on widespread credit availability, but also sort of the performance as you see it of outstanding auto loans? Is there anything to be concerned about incrementally since we last spoke? Thanks.

No. Credit is very available and very affordable. You have some peak subprime that people are taking some medicine, but that's not really material to our business since only 6% of our revenue comes from subprime. Now, there is some volatility in the pre-owned market. If you're looking for something that was built in 2008, 2009, 2010, there's relatively small supply, since it was little production in those years. And so those vehicles are worth a premium in the marketplace. However, there's a lot of late-model stuff coming off lease, and the issue is, more than anything, is it's the wrong mix, because the install capacity three, four years ago was heavily weighted towards cars, and that's where the marketplace was pushed, even though there was already a strong migration towards trucks. So, therefore, you have a mismatch between what the market wants to buy and what's coming back to market. So you have some residual value pressures there. So, at the end of the day, it depends on what seat you're in. If I'm in a seat where I've made a bet on residual values three, four years ago, and now this – there – you have this wave coming back with a mismatch in mix, I better have set up enough reserves for that, because it's going to be an issue. If you're a retailer like us, we're looking at it and saying, we got a greater supply coming, and whatever the price is, we turn the inventory so fast that it's basically a difference between what we acquire it for and what we sell it for. Obviously, if you have an aging issue with pre-owned, like we did with all the hold on recall, that was a problem. But that's really totally behind us now. So from our vantage point, we view the pre-owned situation as an opportunity going forward. Depending on where you sit, if you're a finance company or let's say a lease company with a big lease portfolio, depending where you put those residuals and what the mix is, you could have issues.

Understood. Thanks again, and best of luck next quarter.

Thank you.

Our next question is coming from Brian Sponheimer of Gabelli. Your line is now open.

Hi. Good morning, everyone.

Good morning.

Hi, Brian.

Just to get an idea on the gross per used and the difference so we could see going forward, do you have separated the gross per used unit for vehicles that were subject to recall versus those that weren't?

No. We don't have that for you. And it's hard to give – there's so much noise between having moved everything to One Price and the recall policy and the change in recall policy, it's very hard to separate. So, my view is, we just take a deep breath, be patient. Second quarter, we're declaring as a clean start without noise from recall and with One Price fully implemented and all the challenges and difficulty that presented. So, I think the second quarter would be a very good indication. I can tell you this. Sequentially, the numbers will be better both from a PVR basis and on a volume basis than the first quarter. I just am reluctant to quantify it until we know for sure. So I can give a directional statement, but I'm sorry, I can't untangle everything better than that.

No. Understood. And I guess my question is about – my second question is about capital allocation. If I were to go back a year ago, your stock was at these levels and you were more aggressive in buying back shares. Now that we are where we are for good or bad, what are your thoughts on the stock price relative to some of your other capital allocation initiatives here?

Well, I – Cheryl will add some color, but I would make a statement. We remain opportunistic, at the same time, strategic and sort of like as we're talking about acquisition. Brand extension looks like a very exciting opportunity to us. We've paid the cost to build the brand. I wouldn't do it without digital capability. We built that, we have that. That gives us a high degree of confidence, and it looks to us like the highest return on future invested capital will be in brand extension. Now that has to be borne out, but that's our point of view at the moment. Cheryl, would you like to add anything to that?

Yeah, I'd like to add, Brian. I think the great thing is we've got $1 billion worth of liquidity. We continue to generate great cash flow. If you look at the areas that we're investing in with respect to accelerate, you're looking at things like collision expansion, you're looking at the parts piece, where there's good margin and great multiples in that sector. If you look at our historical pattern, as you know and have followed for a long time, we sometimes will participate in the stock at a certain price, hold off, and then get back in at different point. We've done that continuously over time. We've brought in over 80% of the stock at a price of about $19. It's a very favorable results from that strategy, we'll continue that. (26:32) But I think the great news is that we're extremely well positioned liquidity-wise to be able to move quickly and be opportunistic when things present themselves. But I think it is important that we are focused on the brand extension and making sure that we're prudently allocating capital towards that. We'll do select dispositions to fund part of that to stay balanced, and that's really the approach that we're taking that's consistent with where we've been headed.

Okay. Great. Well, thank you very much.

Our next question is coming from John Murphy of Bank of America Merrill Lynch. Your line is now open. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Good morning, guys. Just a first question on incentives, and it seems like there is a – I mean, they're obviously growing, whatever form they're coming in. I'm just curious, Mike, as you're looking at this, I mean, there's a view that average transaction prices keep going up because mix is offsetting the price cuts. But it sounds like a very similar story to what we heard from 2001, 2005 going into 2007 where, if there's more and more trucks, we can discount them and it'll be fine. Are you just sort of increasingly concerned the industry is sort of giving away this richer mix at lower prices, and it's masking it with a mix improvement for now that you'll never be able to get this price back?

John, I – no. My view is a bit different. If you had not increased incentives by 16%, the volume would have fallen by more. And then, I look at it and say, okay, incentives are now up to 10.5% of MSRP, that's manufacturer incentives. To me, 10% has always been a red line where there's a severe diminishing return at 10%. To me, 30% leasing has always been a red line where you have a massive distortion if you take it above that. To me, inventories above 70 days is a red line. And we have three red lines that the industry in total is over on new vehicles. Now, admittedly, trucks is underpinning the profitability and the sustainability of that. I just don't think there's another step. And therefore, if you level off incentives and leasing and bring inventories into line, then, most likely, you have some sort of modest decline in new vehicle volume. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: That's helpful. I'm just curious if you're also seeing residual support. It's not showing up in that incentive data. And it seems like there's some pretty aggressive resid assumptions going on on some of the luxury pass cars. What are you seeing on resid support? Is that actually showing up in the incentive data or is that an incremental layer of price discounting that's going on?

They catch a lot of it, but not all of it and a lot of it is an intercompany – came in an intercompany guarantee that's hard to get between the captive and the marketing company. But, yeah, the issue is where is the spiral that everything moves against the new vehicle market and it looks like – I've said it for a couple of years now. We're at plateau. It takes higher incentives to stay at plateau. And when the effectiveness of higher incentives is diminished, then sales will go into a gradual decline. It's not a cyclical decline. It's just very difficult to maintain well above 17 million units. So that's why we have the point of view that new vehicles will be plateaued to slightly down. But from a retailer, the other side of the coin is, there's a significant opportunity that creates in pre-owned. And we feel we are now well positioned to seize that opportunity, and we'll manage the situation with the new vehicle market. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay. And then that just leads me to my second question on the used side. I mean, obviously, the GPUs were under pressure this quarter. You guys talked about those going back up. As you think about the used vehicle GPU opportunity, should we be thinking about sort of a recovery to the more $1,400 to $1,500 range, where historically, you guys have been doing GPUs on used in the $1,700 to $1,900 range? I mean, is there something – some magic number or is there a target specifically that you guys are looking at in that business as you look at the recovery in the next couple of quarters, but then also look at developing this as a whole new standalone business line over time?

I would say, John, we're going to take it a step at a time and see what the ratio is was between volume and price. I think the key take – we've created certain capabilities that we're now in the second quarter are going to be able to see without the noise of the recall and without the noise of all the training and changes that came with One Price. And I think if I look at our brand, if I look at the digital capability we have, the prudent thing to do would be to gradually move prices directionally and see where the volume, price shakes out, and then make decisions along the journey where the optimal route is. So I think at the end of second quarter, we're going to be able to give you a much better answer and have some idea where the volume, price optimal path is. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Okay. There's one very large competitor out there that does $2,100 in grosses. I mean, is there something in that model that you couldn't do that would allow you to get there in the standalone stores? I mean, it just seems like there's a real opportunity as you go into these standalone stores to really have big numbers if you operate well. I mean, is there some reason that you might not be able to get there any standalone stores?

If you're referring to CarMax, which I guess you are, it's really an apple and an orange. There's accounting issues there of how they handle reconditioning, which they put in the front end of the car, whereas we have it in customer care. So, I'd have to do some work on that to get you an apple to apple. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Got you. Okay. And then just lastly, Cheryl, I mean, as we think about the investment in new business lines, is that something that you can purely fund through these asset sales? And as we hear these asset sales coming through, we should really think about them as partially earnings, but also sort of redeployment of your capital base and maybe using it more efficiently over time?

Yeah. I think that's the exact right way to think about it. So a lot of it is just to cover some of the capital that were put into this brand extensions. But also, keep in mind that our base business continues to generate a lot of cash. So I feel very comfortable that we've got plenty of room to be opportunistic not only with making sure – as we talked about too the cadence of the brand extensions, right. So if certain parts kick in and they're going well, we can increase the pace at which we do those. We have the capital to do that. We'll continue to be looking at share repurchase as we always have for the last 15-plus years. And acquisitions, to Mike's point, right now, some of the pricing of what sellers are looking at isn't realistic. But if prices shift and there's great opportunity in certain markets, we're certainly not fully out and we'll also look at potential acquisition on the collision side if it's in the right market and we don't currently own a collision center. So I just want to emphasize we'll continue to be broad and opportunistic as we look at it and certainly, we have the capital to be nimble on the different things. Dispositions, you're thinking about properly, which is really just a better strategic redeployment, in certain cases, the land or in certain cases, if there's a good market opportunity with a price that a buyer wants to pay, we'll be selective and we'll use that to put it towards a higher returning project with the brand extension. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: So it's fair to say that there should be some volatility to the upside as we go through these asset sales over time. And quarter-to-quarter, it's hard to predict, but there'll be a bunch of these coming in probably in the next couple of years.

Well, I don't if that's – if you look over the last two years at cash raised from select sales, it's been about $250 million. So, we have done it selectively in the past. We've always been prudent about pruning our portfolio, repurposing assets at the margins where we need to on the bottom portions of the portfolio. So, there has been some of that in the base, and we'll expect to see some of that in the base going forward. But as you point out, it is hard to predict the timing of this. John Murphy - Merrill Lynch, Pierce, Fenner & Smith, Inc.: Great. Thank you very much.

Our next question is coming from Bret Jordan of Jefferies. Your line is now open.

Good morning, guys.

Good morning.

Hey. I guess, last year, we were talking about a lot of regional volatility and certainly some weakness in the energy belts. Could you just talk a bit about your primary Southern markets, maybe, Florida, California, and Texas, and talk about trends we're seeing down there?

Sure. Bret, this is Bill. So, the energy markets, primarily, Colorado and Texas, are still seeing pressure. There's less stress on them than there was, say, this time last year. California remains strong and is growing. Florida in the Southeast, we had a little bit of a slowdown, a little bit of a, let's say, economic impact. But overall, the different regions are performing well.

Okay. Great. And then a question on the brand extensions and really around the parts and service side. As you've got another quarter under your belt, have you thought about maybe how much – what percentage of your parts you're going to direct source versus out-buy? And then, obviously, you're talking about that being a high return on capital area. What do you forecast for the average facilities' contribution from the service side of the operation as opposed to the retail side of the operation?

I'm not sure I can give you a detailed answer on that. What we said on the last call, if we – the meaningful benefit from brand extension in parts will arrive in 2018, and it's $100 million in gross profits, incremental in 2018. We said that on the last call, and nothing has happened since the last call to give us any concern with that number.

Okay. And that's margin associated with direct source part sales, or is that margin associated with the entire service initiative?

That's just the parts sales.

Okay. And is there sort of a rough idea, I mean, as you look at, you model out a pro forma AutoNation USA, what the service pay contribution to it is, just sort of roughly?

So the way to think about the AutoNation USA stores is entirely the ramp and therefore, the pace with which we will build future stores. Obviously, with a company of our size, opening five stores in 2017 is no big deal. We can't really move any number meaningfully. However, if the ramp in the store to profitability because we have a brand and digital muscle and is an extension in existing markets is good, then we can really put a pretty good pace in in which we'll build future stores. In which case, we can give you a very good idea of what it would mean to the company over the next three to five years. It's a little premature to go beyond that until we get these stores open and see what the ramp is. And the ramp will determine the pace. If it's taking longer than we thought, then we'll go slower. If it's on pace, then we could be opening five stores to 10 stores next year, with 10 stores being on the high side and five stores being like the base plan. And if that goes well, then that can go on for years, and then we can give you a very good idea how it will play out. But it's just premature at this point.

Okay. Great. Thank you.

Our next question is coming from David Tamberrino of Goldman Sachs. Your line is now open. David Tamberrino - Goldman Sachs & Co.: Great. Thank you for taking our questions. Mike, you provided some pretty good color earlier on what you think the sales pace in the U.S. is going to be, continuing in the 17 million range. But really we need incentives to continue to drive that plateau, if you will, year over year. I'm wondering what you're seeing in the near term, maybe April or just heading into May, from an incentive perspective and OEM discipline, given at least the industry, not necessarily your inventory, is elevated at this point, if there's any brands or OEMs that are causing either yourself or other dealers to price a little bit more aggressive.

I think our inventories are fine. We're at 71 days. I think the industry is above 80 days, which is elevated. A lot of discussion around GM knowing their downtime and production plan and what they have coming, and we've seen this before. They frontload before they close the plants. So that's completely understandable. But I think the basic statement is, if I look at the level of inventory and the production plans, basically, decision has already been made. The industry will sell over 17 million vehicles this year. That is not the variable. The variable is the level of incentives and the level of leasing. For 2017, the die is cast. It's plus 17 million units. So now the next question is, well, what will 2018 be? And basically, that decision has to be made sometime over the summer or over the fall of 2017. And there, if the plan is to take incentives up another level to try to drive another 17 million-plus, I don't know whether that's doable or not. But 17 million is done. 17 million, the die is cast, it'll be plus 17 million units. Our only variable is what are the – how high are the incentives and where are they packaged. David Tamberrino - Goldman Sachs & Co.: Thank you. That's helpful. Just maybe as an offshoot of that, as we think about general incentives' continued increase in order to keep retail SAR effectively flat year over year in the first quarter. It was up about 15% at least based on the data we see. If we think about your comments there heading into 2018, if the industry were to say to themselves, hey, we want to keep 17 million sales pace again in the U.S. Do you think we're looking at a plus 20% incentive level, a plus 30% on top of what 2017's levels are? Do we get up into the 13% of MSRP or is that just (42:01)

I really don't know. 2018, I really don't know. It's too soon. As far as second quarter, incentive started out very quiet, but that's typical at the beginning of the quarter after they had a very strong close in March, but now they're in the marketplace. They're beginning to take hold. It's beginning to build and off we go. David Tamberrino - Goldman Sachs & Co.: Thank you. Appreciate it.

It's just – I've given you a feeling about 2018 and we need more time and more conversation to see how the hand is going to be played in 2018. David Tamberrino - Goldman Sachs & Co.: Thank you, Mike.

Our next question is coming from Adam Jonas of Morgan Stanley. Your line is now open. Adam Michael Jonas - Morgan Stanley & Co. LLC: Thanks, everybody. Mike, I got a question for you on used car values and technology, okay? Now, car company executives, they don't seem to hold back on their views that cars are going to change more – say, new cars will change more in showrooms over the next five years in terms of automation or safety than the last 50, but I can't get anyone in the auto retail space, new or used, to admit that there's any risk of potential obsolescence in the value of those eleven-and-a-half-year old cars on the road in a world where new cars could be five times safer for 100 million miles or whatever, take your number, because they say it's never happened before. I'd love to know your view. I understand this is a bit theoretical, but do you see any scope for any link between tech moving in an unprecedented way and used car values moving incrementally so towards an obsolete or uninsurable value? Thanks.

So, listen, I don't think it's a theoretical question at all, and I think it's a very profound question. The industry is going to have to come to grips with it. Maybe my time horizon is a bit different than yours. I'd make a couple of comments. One, what we see every day. Here's what happens on the showroom floor today. When people come in, most people, it's been four, five, six years since they've been in a showroom, and they are absolutely, positively amazed with the new technology in the cars and how far they've developed since the last time they looked and paid attention. And it is a big reason why they step up and pay the price for a new car and make the decision to go for a new car. It's a clear black and white. And you're absolutely right. It's on the technology side. If you go back into 1950s and 1960s, it was fins on the car that made them want to buy a new car. That doesn't get it done anymore. But technology is absolutely getting it done. Now, here's the interesting factor though. They're only willing to pay so much for the technology. So if it's for instance, fuel economy technology, which can be absolutely amazing, well, they want it for free. They're not willing to pay anything for it. Now on the safety side, there is some willingness to pay for the technology. But if you go fully autonomous, well, true autonomous state-of-the-art today is $200,000 a car and computers and sensors and everything else. So that probably comes into marketplace where you're replacing a professional driver and you can amortize those costs that makes sense. But the for the personal use market, it's going to come in as incremental improvements in safety and true full autonomy is 2025 and beyond and then you have 250 million, 260 million units in operation. And there may be some adjustment in pre-owned value, but the consumer still is very sensitive around price. So I think in principle, you are right, but I don't see a moment where you obsolete everything that's on the road because something has come along that's absolutely so Shazam, that at a price that someone's willing to pay that they say, I just won't have a pre-owned car. I don't see that, but... Adam Michael Jonas - Morgan Stanley & Co. LLC: Okay. Well, maybe to follow that, because...

(46:44) that technology is giving people a reason to buy cars, is happening on the showroom floors today. Adam Michael Jonas - Morgan Stanley & Co. LLC: Okay. Maybe just as a follow-up and I'll move out. I'm more referring to automated features like things that are less, like within 1% of the value of a new car that could make a car a lot safer, but still has a steering wheel. I'm referring to like Toyota Safety Sense being standard on every car by the end of this year and you're obviously a huge Toyota dealer as well. Do you think that that move by a 15% market share player in the U.S. to make 100% of their cars, including the Yaris and Corolla having A, B and/or pedestrian detection standard that that puts Honda in a position, like a kind of an untenable marketing position where they have to go 100% as soon as possible and that leads to Nissan, that means they need to go to 100%, meaning for competitive reasons, do you think that that Toyota move is significant enough to accelerate going standard for the industry?

Yes, I do. I think the benefit is so compelling that it's a true differentiator, and everyone will figure out when and how they can follow as fast as possible. And it'll become, over the next several years, almost the price of emission, (48:10) I think it'll unfold that way. But I don't think that pulls the rug out completely... Adam Michael Jonas - Morgan Stanley & Co. LLC: On the used.

...from on the value of the pre-owned marketplace. Adam Michael Jonas - Morgan Stanley & Co. LLC: Okay, Mike. Appreciate it. Thanks.

Okay.

Our next question is coming from David Lim of Wells Fargo. Your line is now open.

Hi, Yeah. Good morning, everyone. Mike, I just had a question when – on used vehicle GPUs, on the scenario that the index, whether it be Manheim or NADA, goes on sort of a slight glide path down. What is the propensity for you guys to maintain that and how does the model change if there's like a steep decline in used vehicle values out there?

Bill will talk about it, but now that the recall is out, our mindset is basically we're running a fruit stand with pre-owned. It's got a shelf life and it's got to go. So we like to have fresh fruit and we like to move it while it's still fresh. And we have a very high turn rate. And obviously, the whole recall thing slowed that down and was a problem, but that's behind us now. And so, if there is a gradual movement in residual values, it's a no issue of us because the velocity is so fast.

Yes.

If there was a precipitous move from one day to the next...

Yes.

...obviously, we would take a hit.

Yes.

But then it's immediately behind you.

Yeah.

Bill, you want to talk about it?

Yeah. And I don't know if I could put any better than the fruit stand, but on average, probably 30 to 45 day supplies, inventory, so at any one point in time, if there was a dramatic change in values, it would only affect us for that 30 to 45 day period of time. The new cars coming into inventory would come in at the lower values, and we'd be able to maintain that. And then with the capability that Mike was talking about, being able essentially to appraise and price our vehicles, we have great control over that, and we'd be able to react and adjust to it in a very timely manner.

Got you. And then on the One Price model, can you remind us how the salespersons are getting compensated? And then I have one more follow-up.

Sure. So, currently, our salesperson pay plan, about 80% of our sales associates are on a production based pay plan. So they have a salary component, and then get paid so much per vehicle sold. So it is a volume based pay plan primarily with different incentives for CSI on the new car side or things such as wanting to trade at the door, additional compensation on that end.

So that's also relevant to the One Price for used vehicles? That's what I'm trying to understand.

Yes.

Okay. Got you. And then, Mike, what we're hearing with OEMs in general terms, at least, maybe some of them, is that they're thinking residuals be darned, we got to get year over year volume growth and that's what we're hearing through the grapevine. Is that something that you're also hearing as well?

Oh, absolutely.

Got you.

Here's how the conversation goes. I describe the state of the marketplace, much like we talked about today. The OEM then goes, Mike, you're 100% right. And then he spends the next half hour telling me why it doesn't apply to his company.

Okay.

And you add it all up – it's for every company I talk to. You add it all up, and the market is going to grow by 15%, and it simply isn't going to happen. And what OEMs missed is, as exciting as their new products are, everybody has new products.

Yes.

Exciting new product is the price of holding your position in the marketplace. So, there it is.

Interesting.

Hence, you end up with 4 million units in inventory, and the decision is basically made. The industry will sell over 17 million units with the variable being.

But they do understand the residual risk that's involved here.

Well, their finance companies are going to be calling them...

Okay. All right. Great.

...because they're going to be forced to reconcile, depending on the reserves they set up. We know officially what they publish as the residual. They have a reserve set against that. How much they put into their plan? I don't know. But once they're outside that corridor, then they have to adjust for it.

Got you. Great. Thank you.

Our next question is coming from Brett Hoselton of KeyBanc. Your line is now open.

Good morning.

Good morning.

Let's see, a number of investors are looking at an IPO right now of a company called Carvana and I'm not sure how familiar you are with the company. But to the extent that you're familiar with it, I was wondering if you could kind of compare and contrast kind of the Carvana business model with your business model and then also, particularly looking at the digital capabilities of your business model versus theirs specifically around financing approval capabilities and maybe inventory management capabilities.

Yeah. Of course, we're familiar with Carvana. We look at everything that's out there. I would say the first difference is we're profitable and they're not, so that's the starting point. I'd match our digital capabilities with anyone and they're only going to get better. We started years ago. We understood that to compete in this marketplace, digital was going to be crucial. It was the reason we left behind local market brand names that were 100 years old, because to compete in digital, you need one name. And so we took the lead, built the brand AutoNation and then we understood that it had to be – your digital site had to be transactional, people had to be able to do things and we're well on our way. Here's another learning is that 99% of customers want to come to a physical place, examine the vehicle, have the right to change their mind to something else. On a price point that runs from 20 to 30-some thousand dollars on average between used and new, they want affirmation and confirmation that they're doing the right thing, they want to test drive, and they want to be able to change their mind. And here's one of the great ironies. They feel more empowered, in control in a dealership than they do in their own driveway, because it's awkward in their driveway when the car just shows up, and they look at it and say, oh, that's not what I hoped for, how do I get out of this mess, how I get this thing out of my driveway. They don't like it. So we think we have it figured out, this right combination of brand, digital muscle and brick and mortar. And we'll see that unfold over the next year.

Mike, that sounds compelling. Is the 99% some sort of a study or something along those lines?

That's our practical experience because we had an assumption that it was going to be very different and got our head into it. I have to look around whether a piece of research has been done on that.

That's fine. Thank you very much.

Okay.

Our next question is coming from Colin Langan of UBS. Your line is now open.

Great. Thanks for taking my question. I don't know if I missed this, but is there a breakout for parts and services performance by type, warranty, customer pay?

I couldn't – we couldn't understand the question. The line is breaking up.

Sorry. Do you hear me now or...

We can hear you. It's just every third word.

Hello. Do you hear me now?

Yeah, better.

I can hear you perfect.

Okay. I took off my headset. Just a general question, parts and services, did you provide the breakout by type, customer pay, warranty? I was wondering if you can give that color.

Yeah. This is Bill. Yes, we did. Our customer pay gross was up 4% and our warranty gross was up 14% on a year-over-year basis.

And how should we think about parts and services going forward? You still have a pretty good tailwind on the warranty then?

Parts and service will remain strong, will be in the mid-single digit growth rate.

Okay. And then F&I per unit was down slightly. Is there anything usual in the quarter or is that just where it's kind of headed now? (57:22)

It's good you asked that question. So our F&I on pre-owned is lower than it is on new. So as we grow pre-owned faster than we grow new, that will level off or be a slight decline on the F&I impact. So, it's a mix shift factor.

Okay. And just the last question. In the past, you've talked about stair-step, that seems to be an issue. I mean, is that rising again and has it creeped up or we have not seen a big change there?

I think most manufacturers have seen the harm to the brand that comes with the aggressive stair-steps, because we've been talking about residual value and nothing undermines residual values faster than aggressive stair-steps. And you may say to me, well, Mike, how can that be? Well, what stair-steps do is, you force retailers to make extreme discounts on certain units in order to hit your stair-step targets. And that puts a very wide bandwidth on pricing on your new vehicles and the retail market sees that and is valuing those vehicles at the low end of that price band. So if you want to say who are the big practitioners of stair-steps, I'd say, well, that's easy. Go look at three to four-year old retail values, the ones with the lowest one are practicing stair-step and you can definitely see the linkage between some of the extreme discounting that stair-steps trigger and retail value. So, most manufacturers say, oh, that's not a sound strategy, I shouldn't pursue that, because when I put my retail value in a ditch relative to everybody else, it puts me in an uncompetitive situation and it weakens the brand. So, there's still some out there. I don't expect the large responsible manufacturers and brands to go down that road.

Great. All right. Thanks for taking my question.

Our last question in queue is coming from Bill Armstrong of C.L. King & Associates. Your line is now open. William R. Armstrong - C.L. King & Associates, Inc.: Good morning, everyone. You've mentioned that you expect used car sales to grow significantly faster than new. And we thought that for a while also with the influx of off-lease vehicles on what should be more attractive pricing for used cars, but as you pointed out, the OEMs are aggressively incenting new car prices. And also, there's a bit of a disconnect in terms of the composition of used cars coming on the market that doesn't quite correspond with the demand. So, when we look at the interplay of all those factors, what's going to drive superior growth in used cars, because it sounds like maybe the value proposition that we might have initially expected may not be as compelling versus a new car?

I think, from my perspective, I agree with everything you said. The factor that you didn't mention is market share. So, AutoNation intends to take market share in pre-owned. We think our brand, our digital muscle, our ability to centrally acquire pre-owned at attractive prices, and a selling experience with One Price that the customer really has responded to, puts us in a position to take share. William R. Armstrong - C.L. King & Associates, Inc.: Okay. Makes sense. And maybe just coming back to an earlier question about the big safety technology and potentially causing dislocations or obsolescence in used cars. Maybe if we go back in history, back to the 1980s and 1990s when we had airbags and anti-lock brakes, and then even back to the 1950s and 1960s with the introduction of automatic transmission and air-conditioning, did those technologies, to your knowledge, have any meaningful impact on used car valuations?

No, I don't think there was any event that was a seismic disruption that you would use the word obsolete around. No. That's just not my experience. I think there will always be some sort of price premium for new, innovative technology, and the people who come in and look at it, can afford that, and they can justify stepping up to the price of a new vehicle to get that. So that's a very – it's a very compelling case for new vehicle sales, but I don't think it leads to obsolescence in the pre-owned market. I really don't. William R. Armstrong - C.L. King & Associates, Inc.: Okay. That makes sense. Thanks very much.

Thank you.

Thank you, everyone, for joining us today. We really appreciate the discussion. Thank you.

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