Welcome to AutoNation's First Quarter 2018 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 and if you have any objections, you may disconnect at this time. Now I will turn the call over to Robert Quartaro, Vice President of Investor Relations for AutoNation. Sir, you may proceed.

Thank you. Good morning. Welcome to AutoNation's first quarter 2018 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, Chief Executive Officer and President; Cheryl Miller, our Chief Financial Officer; Lance Iserman, our EVP of Sales and Chief Operating Officer; and Scott Arnold, our EVP of Customer Care and Brand Extensions. Following their remarks, we will open up the call for questions. Chris Cade and I will be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call including any statements regarding our anticipated financial results and objectives constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in or press release issued earlier today and in 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, Chief Executive Officer and President, Mike Jackson.

Good morning and thank you for joining us. Today, we reported record first quarter earnings per share from continuing operations of $1.01, a 4% increase as compared to earnings per share from continuing operations of $0.97 for the same period in the prior year. First quarter 2018 revenue totaled $5.3 billion, a 2% increase as compared to the same period in the prior year. Same-store revenue for the quarter was $5.2 billion compared to $5 billion in the year ago period, an increase of 3%. Same-store gross profit was $825 million for the quarter compared to $800 million in the first quarter of 2017, an increase of 3%. We're seeing significant results from our comprehensive brand extension strategy in several of our business sectors. The growth in our pre-owned business is largely due to continuing acceptance of our One Price strategy within the marketplace. Same-store used vehicle gross profit was $82 million for the quarter, an increase of 9%. Same-store used vehicles retail during the quarter was 60,300, an increase of 3%. Same-store Customer Financial Services gross profit per vehicle retail was an all-time high $1,779, an increase of 8% compared to the same period a year ago. Over the last six months, we believe we had nearly doubled the growth rate of our peer group average in Customer Care gross profit on a same-store basis due to the successful implementation of our brand extension initiatives. On a same-store basis, Customer Care gross profit was $378 million, an increase of 5% led by a strong performance in customer pay, partially offset by headwinds in warranty due to difficult year-over-year comparisons in warranty and recall. Customer pay gross was $158 million, up 8% year-over-year. Warranty gross was $79 million, up 2% and collision gross was $33 million up 6%. In the…

Thank you, Mike, and good morning, ladies and gentlemen. For the first quarter, we reported net income from continuing operations of $93 million or $1.01 per share versus net income of $98 million or $0.97 per share during the first quarter of 2017, a 4% increase on a per share basis. In the first quarter, revenue increased $121 million or 2% compared to the prior year and gross profit grew $23 million or 3%. SG&A as a percentage of gross profit was 74.4% for the quarter, which represents a 180 basis point increase compared to the year-ago period. As discussed in our fourth quarter 2017 earnings call, the increase was largely driven by our brand extension investments, including our new aftermarket collision parts business and the timing of stock comp expense as compared to the prior year. Costs associated with our aftermarket collision business were comprised of both launch-related and ongoing supply chain cost, on which we expect leverage as selling increases throughout the year. For the full-year 2018, we continue to expect SG&A as a percentage of gross profit to be roughly flat with full-year 2017. That said, we expect the normalization of the rate to occur mostly during the back half of the year. The provision for income tax in the quarter was $33 million or 26.1%, in line with our previous guidance, reflecting the benefit of the Tax Cuts and Jobs Act. Non-vehicle interest expense increased to $32 million compared to $29 million in the first quarter of 2017, driven primarily by higher average interest rate, partially resulting from the paydown of lower cost debt with the issuance of our Senior Notes issued in the fall of last year. The negative impact of interest expense from the issuance of our Senior Notes was temporary, as lower rate…

Thank you, Cheryl. We continue to expect the industry vehicle sales to be approximately 16.8 million vehicles in 2018, with a significant shift between cars and trucks, and with growth in the pre-owned market. With that, we'd be happy to answer any and all of your questions.

Thank you, Mr. Jackson. Our first question comes from Bret Jordan with Jefferies.

(11:04-11:11) in the Texas market, whether the energy cycle is improving there?

We missed most of the question, unfortunately. Could you repeat it, please?

So, yeah. Could you talk a little bit what you're seeing on a regional basis, what you're seeing maybe in the Texas, California, Florida markets and whether the energy cycle's improving Texas?

Lance, why don't you discuss that, please?

Yeah. I think, in general, we're seeing improvement in Houston. So, that's our big energy market. So, it's definitely improving. And I think we're past the hurricane effect. So, we're seeing normalized business and we're seeing good growth there in Houston and Corpus Christi.

Okay. And then, I guess, you talked about the parts availability in collision in May. Are you doing mechanical parts through the AutoNation USA service now too?

This is Scott Arnold, and yes, we are.

Okay. I guess, just a follow-up question on that. How have you seen service contract sales in AutoNation USA on the used side? Does it look like you're going to be driving much volume through those bays?

This is Lance. In terms of the sales and service contract, we're seeing penetration levels that match or beat our traditional stores and Scott will answer the question.

Yeah. So, this is Scott again, and yes, we will see that transition into our service bays there, as well as our maintenance that we are doing on the vehicles, too.

Okay, great. Thank you.

Yeah. We also, on our AN USA stores, we also give with each purchase, a maintenance (12:57) for the first three months, so that we help drive our customers back to our AN USA stores.

Okay, great.

So, that includes oil changes, tire rotations, et cetera.

Okay. Have you decided how broadly you're going to stake the parts business? I mean, how – I guess, maybe talk about maybe inventory that you're committing to the collision and mechanical parts and how broadly stake – what kind of inventory turns you think you're going to see in those parts businesses?

This is Scott again. So, inventory to support the aftermarket collision parts is approximately $15 million. And we think that once we build up the momentum as we currently have in OE that we'll see similar turns to the OE parts and very comfortable with that.

Okay, great. Thank you.

Thank you, Mr. Jordan. Our next question is from Chris Bottiglieri with Wolfe Research. Sir, your line is open.

Hi, thank you for taking the question. I want to talk a little bit about SG&A. Maintained the previous guidance calling for SG&A growth to be flat with a decel in 2H. So, you're really hitting a pretty torrid (14:00) pace, I would say, significant greenfield growth albeit closing some underperformers. But how much of the deceleration in the back half to the one half is tied specifically to the launch-related costs, supply chain costs?

Yeah, there's a couple of things there in SG&A. So, if you remember, first, the timing of the stock comp expense was weighted into the first quarter versus the second quarter last year. So, that's a drag to Q1. We certainly have some ramp costs related to the collision parts initiative, which will increase on a sell-in basis as you head to the back of the year. And as you guys know, seasonally Q4 is always the best SG&A quarter. So, we feel comfortable that the full-year will still be flat with last year at about 72.5%, but certainly back-end loaded for those reasons.

Got you. Okay. And then, on greenfield growth, can you maybe just provide us an update on – I just can't remember on top of the head, but what's the pace of opening for AutoNation USA auctions and collision centers over the next call it one to two years?

So, on the USA stores, we have five up and running. And we always said that once we had five up and running, we would have a pause period where we define the ramp to profitability to decide which additional stores to open when. We do have additional sites located, purchased, permitted, but that will be a decision later this year at when we greenlight those stores. We're certainly very pleased with Phoenix that we took all the lessons learned from the first stores that opened in Texas, although it was very disruptive with all the hurricanes to really come to conclusions, but they were all applied in Phoenix and did show a very quick ramp to profitability four months. But we have to see if that can also be done in the other stores and ultimately what happens with the Texas stores. So, I think it's later this year that we decide when and how many additional USA stores to build.

Got you. Okay. I'll pass it on. Thank you for your time.

Thank you.

Thank you, Mr. Bottiglieri. Our next question is from Rick Nelson with Stephens. Sir, your line is open.

Hi, guys. How is it going? This is Nick Zangler on for Rick. Want to discuss the use or the unit sales cadence. Some peers had talked about a weak January and February performance with strength then materializing in March and maybe accounting for 60% to 70% of earnings. Did you see a similar thing here? And if so, did you make operational adjustments during the January and February period that may have boosted performance in March? Or was that just an industry phenomenon?

I think it's pretty much just an interesting industry phenomenon. January and February are always core key months every year and it's really Presidents' Day that is the opening of the annual sales that you can really make a judgment as to how the year is going to go. And we had a very strong period from late February through March. But that is absolutely traditional and expected business has remained fine for us into April, we had new vehicle sales plus 2% in April.

Great. And then, on the used vehicle side, obviously, used vehicle margin pressured a bit in the quarter, as expected. But with the impacts of the hurricane replacement demand well behind us now, can you kind of frame the outlook on the used vehicle backdrop for the rest of the year? And should we expect those GPUs to normalize on a go forward basis?

Yeah, Nick. So, I think that if you look at March, our used car margins were improved fairly strong from January and February. And as we talked about in Q4, we had some cleanup to do with oversupply in Houston, which is one of our biggest markets. So, we oversupplied that market with used vehicles. So, clearing that inventory impacted us slightly in January and February, but we had a very good improvement in March. And we feel like that's what we'll see going forward.

Great. And then, finally, just on F&I, I mean, another record level here, up $100 from your 2017 average and $200 from your 2016 average. Can you just talk a little bit about what's working here and where there's additional opportunity for further expansion? Thank you very much.

Yeah. As discussed often, we felt the new vehicle market was going to be difficult, as far as gross margin production in new vehicles, it's very competitive. So, hence the brand extension and that applies also to our Customer Financial Services, we developed AutoNation products, branded design by us and branded AutoNation and the customer acceptance has been excellent, and it's simply a higher percentage of consumers choosing our products. We haven't raised prices in $0.80 whatsoever. It's just a very good value with a product that they trust. That's put us in an industry-leading position. And because it's based on a brand with a product that has tremendous value, we're very confident that we'll continue to be able to put up this excellent performance.

Great. Thank you very much, guys.

Thank you, Mr. Nelson (sic) [Zangler] (19:50). Our next question comes from John Murphy with Bank of America. Sir, your line is open.

All right. Good morning, everybody.

Hey, John. How are you?

Just a first question, Mike, here on capital allocation. I mean, it seems like these – the used stores are ramping pretty quickly. I mean, profitable at the fourth month is impressive. Is it a chance that this $500 million number that you kind of put out there when you started the initiative could potentially be significantly higher? And is that kind of a cap? Or is that just kind of the starting point? And if this is really successful, you keep going after it?

Yeah. That is like a first tranche that we're willing to invest in brand extension. That includes bodyshop, infrastructure for the parts business and the entire comprehensive effort and the auctions. And so, on the USA stores, it includes 20, 25 stores, something like that...

Yes.

...in -within that $500 million. But as I discussed earlier, we will make a decision later this year on how far and how fast to go. With the additional stores, obviously, we're willing to greenlight 25 stores. That would be a real indicator that we have it totally figured out, and we have a high degree of confidence to deploy the capital. So, we sort of have, like, two checkpoints. The first one being, where we are exactly at the moment, we really want to understand the ramp in the different stores, with different locations, with different approaches, all lessons learned, (21:35) to all stores, get all stores moving in the right direction, then begin building additional stores, and if all that goes according to plan, then you can really just continue open ended.

And yeah, I think that's another reason, it's great to have $1.4 billion of liquidity, so that if the opportunity is there, we'll certainly be ready to see that. But as Mike pointed out, some of that ramp beyond the first five is already baked into the $500 million that we originally called out. And keep in mind that divestiture proceeds are also being used to fund that. So, we're being very prudent with the way that we're looking at our portfolio overall.

Okay. That's very helpful. (22:13)

...it's exactly as we said in – when we declared the $500 million, we thought we'd have underperforming assets that could basically cover that $500 million and that's proven to be the case with what we've done already and what we will continue to do in 2018, with little or no impact on EBITDA or having raised $500 million to redeploy in brand extension.

It's encouraging. A second question around, sort of, the supply chain for AutoNation branded parts. I mean, how are you operating? I understand the $50 million (sic) [$15 million] (22:47) is where you're sort of targeting inventory. But where are these parts coming from? What's the relationship with the suppliers? How are terms with them? Will you gain leverage over time as you grow this business? Just trying to understand the supply chain on that side.

Yeah. Scott will give you some details. But I think we're in a unique position when we talk to vendors and suppliers, whether it's on service contracts or collision parts. Now we have the scale to negotiate very good pricing. We understand the quality that we want and the suppliers and the vendors are absolutely thrilled and happy to talk to us and looking forward to doing business, and there's great acceptance of the AutoNation brand on the consumer part. So, all of that's going extremely well. Now, we have, of course, execution issues as its complex to make this all work. And Scott, why don't you talk a little bit about what's going on there?

Sure. As I stated earlier, the inventory level for ACP is about $15 million and we did set up supply chain coming out of Taiwan where most of the aftermarket collision parts are generated from, certainly lining ourselves up to meet the insurance industry's demands on those parts and set up the supply chain and infrastructure to distribute those into our OE parts wholesale that we do today, both to outside of our – our outside customers, as well as our internal customer, our collision centers. And so, as stated earlier, we believe it's a complement to our OE sales that we do today.

And John, just to be clear, I think you might have said $50 million, Scott was saying $15 million. So just to be clear, it's $15 million of inventory currently.

Got it. Thank you for that clarification. That's a big one. And then, just lastly, on floorplan assistance, it looks like it was kind of flat year-over-year. It seems like that kind of makes sense generally what the business is doing. But just curious, as rates rise, is there any flex in that floorplan assistance, anything that will be rate-sensitive? And also, just in general, sort of the – in that same vein, what is the relationship with like the – with the automakers at this point? I mean, the industry is getting a little bit tougher. The plateau is kind of there, but it's actually declining a little bit. Just curious, in general, what the ratio is with the automakers, if it's better, worse or same as usual.

This is Mike Jackson. So, the minus 2% at retail is exactly what we expected. And I can't really forecast what the manufacturers are going to do on the fleet side and how fast everybody's going to turn their fleets. So, inventory, I think we can do more to come down and we will. We have not seen any additional assistance from the manufacturers on floorplan, thus far. And we have some manufacturers that perennially push high inventory that really is not justifiable as these rates have begun to move. The free inventory is over. And so, we are going to work on that the balance of this year.

So, John, if you look at net floorplan, it's about a $6 million headwind year-over-year in the quarter, but certainly we've been expecting that. So, we've always put into our forecast expected increases in rates. We'll continue to manage the inventory tightly. We also continue to work to negotiate spreads down, and we'll look carefully at floorplan providers and make moves where we need to, to make sure we minimize that spread. But to Mike's point, a lot of it's in the inventory management as well, and as rates rise, we continue to be extremely focused on that point.

That's very helpful. Thank you, guys.

Thank you, Mr. Murphy. Our next question is from David Tamberrino with Goldman Sachs. Your line is open, sir. David Tamberrino - Goldman Sachs & Co. LLC: Great. Thank you. Mike, towards the end of your comments, you kind of reiterated your expectations at 16.8 million. I know, we kind of just covered it a little bit, but we're running a little bit faster than that so far, through at least the first four months of the year. Incentives haven't really been layered on this year just yet from the OEMs. What gives you the confidence that you're going to see this sort of kind of back half decline or drift downwards to the 16.8 million?

So, you think the 16.8 million is optimistic? Is that what you're saying? David Tamberrino - Goldman Sachs & Co. LLC: No, no. I'm just saying so far for the year, we're at 17.1 million, 17.2 million-ish, and the OEMs have barely spent on increased incentives to really juice the sales.

Oh, I see your point. Yeah. So, the variable is fleet. So, the forecast on what's happening in retail, which is the world we live in, is spot on. Minus 2% is where the industry is through the first three months. I don't have April sales yet. I already told you our figures there were good for April, plus 2%, but I have no idea where the industry is in April. So, that's why I don't want to take the 16.8 million up, because in the real world, retail is down 2%. And I can't predict what the manufacturers are going to do on fleet and I can't predict what the rental car companies are going to do on fleet. So, that is a variable. There is a scenario where it could end up being 17 million, because of fleet. Doesn't really help me, though, to say it's 17 million, because that's not the world we live in. So, that's how I see it. David Tamberrino - Goldman Sachs & Co. LLC: Okay. That's fair. I mean, we all end up having our opinions on this and get proven right or wrong. What have you seen from the retail consumer for the first couple of months and really in this March and April time period, following tax reform, following folks getting their tax returns as well? Has there been any increased activity that's coincided? I think we talked about or you talked earlier about what the cadence looked like. Has that been the driving force behind some of that or just what are you seeing from that customer today?

You have to view it overall very positive when you consider that passenger car sales are down 10% and truck-based sales are up 10% and the transaction price difference in our volume business, Cheryl, is how much per car? $6000, $7000?

Yeah.

Right. $6000, $7000 a car different.

Higher in certain brands.

Higher in certain brands on that shift. So, if you put it in dollar terms, that's a very bullish statement on the part of the consumer that you have this shift going on underway where the consumer is selecting a vehicle that, on average, is $6,000 more than a passenger car. And then, you have the substitution effect with all these nearly new lease vehicles, which the mix is beginning to reflect much more SUVs in that mix that's coming off lease, which is very attractive to consumer on a value basis. So, you put it all together, it's a pretty positive story. I just think it's unrealistic to say that vehicle sales at retail are going to grow on top of all that. David Tamberrino - Goldman Sachs & Co. LLC: Got it. And maybe just lastly I'll follow-up on the point you just made. The mix of off-lease vehicles coming back is a little bit more skewed towards your crossovers and your SUVs this year. Do you expect to see any pressure from the new vehicle sales as you have some diversion away from new, if there is that nice late-model used coming off lease?

That is the explanation for the minus 2%. Absent the off-lease vehicles, new car sales would still be growing. David Tamberrino - Goldman Sachs & Co. LLC: Understood. Thank you very much.

That is the issue with new vehicle sales. And I said it four years ago, when leasing went over 30% of the mix, I said, be careful, what you wish for, these things are all going to come back in record numbers. And it's going to offer the consumer a new choice. So, if you combine the total market of new retail and pre-owned retail, the market is still growing, but you have a substitution effect or a cannibalization effect away from new into pre-owned, because you'll have a nearly new segment in record numbers. David Tamberrino - Goldman Sachs & Co. LLC: Got it. Thank you, Mike.

Great.

Thank you, Mr. Tamberrino. Our next question is from Michael Montani with MoffettNathanson. Sir, your line is open.

Hey, guys. Good morning. Thanks for taking the question. Just wanted to ask, if I could, first on the Tax Cuts and Jobs Act, it was interesting you mentioned demand obviously started picking up in the back half of February because that's when a lot of the payroll tax withholdings would have shifted. So, I'm just wondering if there's some incremental color you all can share on the new and used side in particular either by regionality or by kind of consumer income levels in terms of how that behavior may have changed or shifted?

Well, the Premium Luxury business was excellent. So the high-end is doing well. Even though the German manufacturers are – the majority of their mix is passenger cars, they have done a great job of expanding their offering with SUVs and getting into the marketplace in improved numbers, although, we're still asking for more of a shift even from the German manufacturers. But Premium Luxury has been very strong. And I don't know if I have much new to add geographically. Lance, can you think of anything?

No. I don't think so, Mike. You covered the March effect, that's pretty universal. So whether some of that's attributed to taxes, increased paycheck, et cetera, it's hard to tell, because we've seen this dramatic increase in March over January and February historically.

Yeah. At the start (33:09) and really kicks off with Presidents' Day weekend still in February, runs strong through the end of March. Then you have a pause around everybody filing their taxes. You feel like you're never going to sell another car again and it takes off again in the middle of April and we had a very good last two weeks of April and now we're in the official spring market that will run into the summer.

Okay, great. Just one housekeeping one, on the corporate and other line, there was an increase there, it looks like of about $30 million. Just wondering if you all can give some additional color and clarity on what drove it and how to think about that the next couple of quarters.

Yes. So that was really the AutoNation USA stores, so that's where they fall in from a P&L perspective.

Okay, understood. And then, if I could just – can you provide any updated thinking around the Waymo partnership? I believe they did announce some incremental vehicles that they would be pursuing and some expansion and I know its early days, but anything you all can share there?

We have a great relationship with Waymo. I did a fireside chat with John Krafcik at the National Automobile Dealers Association Convention in Vegas. You can YouTube it and everything you want to know about autonomous, sharing, electric. John and I go through it. I wouldn't waste your time. I think it's fairly worthwhile. While the relationship is strong, we have an iterative process where we find – where we have added value for them. And the experience thus far is that we take on more and more. Everything is proceeding as we hoped. Cheryl, do we have additional – any additional news to announce? We're very active in Phoenix.

Yeah. We're very active in Phoenix. I think, obviously we have a great partnership with Jaguar who's one of the manufacturers that (35:18) the partnership coming out (35:22). So we're excited about the work we're currently doing and look forward to some potential additional future opportunities.

So we hope to grow with Waymo. The relationship is good and we're pleased with it thus far. We're learning a lot, they're learning a lot, and we think Waymo is the right partner.

Thank you.

Thank you, Mr. Montani. Our last question is from Armintas with Morgan Stanley. Sir, your line is open. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Good morning. Thank you for taking the question. The share buybacks have historically been somewhat lumpy, but the stock is approaching levels where you did quite a bit of buybacks back in the third quarter of last year. Can you refresh us on your thought process around share buybacks and how we should think about that going forward?

Yeah. I like lumpy. That doesn't sound like a complimentary word, but...

Opportunistic.

...but, I'm very proud of our lumpiness on share repurchase. And if you go back and look at it over time, I think the lumps are in the right place. That's the whole key. When we like the price, we've been known to buy aggressively. I would say, our first call on capital, of course, is the existing business and our brand extension. That is our priority when the stock is particularly attractive, so we don't hesitate to purchase aggressively and opportunistically. We like being investment grade on the balance sheet. So we're very aware of that and would like to preserve it if at all possible. And I think, Cheryl, you announced our share count is down to 91 million something like that.

Yes. It's down to 91 million. And as many of you know, we've repurchased 80% of our shares back over time. Proud to say the average price of that is still under $20 a share. So we continue to have the capacity. So we refresh the authorization. We now have over $300 million in available authorization for the right opportunities. And as you know, we'll continue to monitor and put it in the context of our broader capital allocation strategy.

My philosophy has always been that there's going to be periods of time where the stock price does not reflect the value that we believe in the company and can often be for understandable reasons, so we had a different point of view. And in this case, like last summer, we believe in brand extension. If you look at the results in fourth quarter and the first quarter as far as how we are able to drive improvement in gross profits, it's quite compelling and if that's not reflected in the share price and that's a buying opportunity that we haven't hesitated to take advantage of. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. And then, on the used car standalone business with AutoNation USA, you're not the only one making a push into the business and intuitively make sense given where we are in the cycle and the defensive characteristics around used cars. But what's different today versus when you tried this before? What are some of the lessons learned that you've been able to apply and improve on?

Yeah. So that was back in 1997, 1998, 1999 when I arrived. Unfortunately the scale of the – and pace of the rollout of the original AutoNation USA stores back in the day, if you will, was completely wrong and completely unmanageable and unsustainable. While there were many aspects that absolutely had customer appeal as far as running it profitably as how they did it, it was not – there was no path to profitability. So we took all the lessons learned from those days, have changed the size of the store, the layout of the store, what's going to happen within the store and the fact that we have one of the early stores already profitable means we've really done something very different than what happened back in 1997, 1998. My recollection is that business was never profitable with the way it was done. So but a lot of the other reasons are still the same. To round it off, it's pre-owned. At retail, it's a 40 million unit a year marketplace, that if you have a brand and a better customer experience and a better offering, you can take significant share in the pre-owned market from what the competitive choices are out there. And so, we are not repeating the mistake of 1998, 1999 where you have a great idea and a great concept. But you move so fast that you don't have time to adapt and make adjustments and changes to figure out how it's all going to financially work. So we're going through that period right now in a very disciplined way. And I assure you when we start moving faster, we will do it with a high degree of confidence. But for five stores now, that's the number we need to come to all our conclusions. We have indications at things that are very good. We have other stuff to work on which we are. And when we get through all that, we'll give you an update and that we're moving to the next tranche of stores. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. Got it. Thank you for taking the question.

Absolutely.

Thank you. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Thank you, everyone for joining us today. Oh, there's a few more. She said the last question. Okay. Go ahead.

Thank you, sir. We have a question from James Albertine with Consumer Edge. Sir, your line is open.

Great. Thank you so much for letting me sneak this one on and apologies if I queued up incorrectly there, but thank you, Rob and Cheryl and everybody. Mike, at least twice going back in history, you've had some very prescient, remarkable calls in preparation for what was coming. Pre-recession, obviously in terms of the portfolio and scoping and getting out of certain brands and then three years ago or so calling sort of the peak margins and new vehicles that we've seen continued erosion in that environment since. So with that in mind, as you sculpt this brand extension strategy and the sort of new vision for your portfolio, what's the vision for EBITDA margins? Because they clearly seemed to have peaked three years ago or so with your margin commentary on grosses for new. And we want to get a sense for, is this brand extension strategy about replacing what's been lost and getting back to 5%-ish? Or is this some vision where we can conceivably get somewhat higher than that in the long run? Thanks.

Well, there's no question that the revenue gross margin profit opportunities in the brand extension field are tremendous, absolutely much more compelling than anything we've ever done before in the history of the company. Now, that's not to say it's easy to do and it's going to happen from one day to the next. But we are absolutely convinced that the strategic move was the right one, that branding was essential and that all the steps we are taking today in brand extension in all these different fields of business will open the doors to do even more. And our ambition is to be a player in the do-it-for-me marketplace to the great extent possible. It's big. It's complex, but we have expertise. We have scale. We have brand and we are well on our way to bringing it to life within our own business first and then moving to fields of opportunity beyond that. So we wouldn't have taken the pain and the risk for brand extension, if we didn't feel that it was absolutely necessary in order to have a future where we can grow this business without being dependent upon the cycle and without being – have this headwind on new vehicle front-end margins on the vehicle itself, which is like World War I trench warfare. And every year, you want to give up another step in it. And we needed something that not only neutralizes that challenge, but, at the end of the day, it puts us in a position to grow this business significantly, despite that headwind. That's what we're doing. We're very optimistic and confident. We understand that we will have to demonstrate and show everybody over time, but this is not something that is a one or two year journey. This is something that's open-ended in a five, 10-year horizon. It's of that strategic significance.

Thank you again. I appreciate all that detail and best of luck.

Right. Next question.

Thank you, Mr. Albertine. Our next question is from David Lim with Wells Fargo. Your line is open, sir.

Hi, good morning, everyone. Thank you. Of the five, Mike, did you say only one AutoNation USA store is currently profitable?

That is correct.

And also I know you get to see the product plans...

By the way, that's quite something. I mean, to have one that's already profitable, that was our latest store that within four months that has all the learnings of the earlier stores we'll take. Believe me.

So when is the outlook for the other four stores to become profitable? Will that take a little longer?

I think sometime in the fall, we'll have a better idea.

Okay. Got you, in the fall. And then, I know also you get to see the product plans from your OEM partners way before the investment community. How would you characterize the robustness of the electrified product portfolio from like Mercedes, BMW, et cetera relative to Tesla? And how much will you need to invest to retrain your technicians to work on these new wave of electrified vehicles? Thanks.

So I could not be more bullish on German Premium Luxury business. As you know, I have experience there. It's coming up on 45 years and have been on product development committees with those companies. And I think they have the best pipeline I've ever seen. They are in a massive pivot and shift away from diesel investment into electrification in both pure electric and plug-in hybrid. And the vehicles I've seen are far superior to anything Tesla has, in my humble opinion. And they'll be arriving in the marketplace in the next year or two years and you will begin to see. If you look at just – probably one of the closest one – if you look at the Porsche Mission E, I mean, it is spectacular vehicle that will have great success in the marketplace. Now, as far as what it means to our Customer Care business, I think, there will be far more plug-in hybrids than there will be pure electrics. And actually, the complexity on a plug-in hybrid is significantly higher than internal combustion engine, pure internal combustion engine. So it actually will enhance our business. So if I run the numbers out, just say for 2030 and look at the vehicle and operation fleet in 2030, there will be more internal combustion engine/plug-in hybrids which also have internal combustion engine than there are today. So strategically, units in operation that are ideal for our expertise on complex vehicles will be higher 10 years from now than it is today. Of course, maybe 10% of what's sold in 2030 is pure electric. And there the maintenance requirements will be somewhat less. But then, again, who can work on them, will be fewer and fewer. So I'm very confident that there is no strategic threat whatsoever and that, as far as our ability to compete with Tesla, I think, our position gets stronger starting in 2019 and its open ended. And by the way, we also have very good electric vehicles from the body (49:04) manufacturers. The next generation LEAF is excellent. The General Motors Bolt is absolutely first rate. So you can see that the OEM's pivot and commitment to electrification is irreversible. And I would say, if you add it all up, if everything that's going on, it's $150 billion of investment for the manufacturers in electrification over the next five years, something like that. So there's no turning back and the vehicles are absolutely outstanding.

Great. Thanks for all the color. Thank you.

Thank you, Mr. Lim. We do have a follow-up now from Michael Montani with MoffettNathanson. Sir, your line is open.

Yeah. Great. Thanks for taking the follow-up. Just wanted to ask on the Tax Cut and Jobs Act, initially you all had mentioned retaining somewhere in the range, I believe, of 80% to 90% of that. Is that still the right way to think about it? And what have you seen from a competitive response in terms of new vehicle GPU and also on the used side, since that's taken effect, if anything?

This is Mike Jackson. So the competitive pressure on front-end margins purely associated with the vehicle, not counting our Customer Financial Services which we're using to counterbalance that pressure, has been in place for several years. It's nothing new. It's continuing. It's a combination of the transparency and the shopping tools that the customer has, combined with how the manufacturers structure the programs. I don't expect anything to change there, but I don't really see any new dynamic with the arrival of tax reform on that issue. But it remains an issue.

Yeah. And keep in mind that the private cap, the majority of them are structured as pass-through entities, so they don't have the same direct benefit that we did as a public company based on the way we're organized. So keep in mind that the playing field for them didn't improve as dramatically as it did for us.

Got it. Okay. Thank you.

Thank you, Mr. Montani. Our last question at this time is a follow-up from Chris Bottiglieri. Sir, your line is reopened.

Hi. Thank you for this. Just want to follow-up from my earlier question. I'm trying to understand the balance between the excitement over AutoNation USA and I just wanted to prove the concept. So I guess, could you tell us like how long it takes to open a USA store and Auction respectively. And then, since you're slowing this down to kind of to fall to kind of like, kind of reach its conclusion, how does it affect the pace of the 2025 openings? And maybe the answer is, you already have is permitted and you're flexible there, but wanted to hear your thoughts.

So within our whole brand extension portfolio and effort, our most mature is in Customer Financial Services and so therefore I'm most excited about that, because I have all the results in and you see where the numbers are going and they continue to grow. Next comes, in the sense that the gratification and the return comes so much faster. Then I look at the whole Collision Center effort and the Parts effort and that's extremely exciting and that I make investments in infrastructure and inventory. We see the sales and we see the improvement in gross margins. We see the win-win. So there's a lot of instant gratification in that entire effort. Then, I look at the Auctions and they turn profitable very quickly, but it's more a structure to run the entire pre-owned business. Then I look at brand extension in pre-owned and I looked at improved volume with improved gross margin and the additional capabilities that it takes. So then I come to the USA stores and we had the question earlier, I want to make sure before I build a lot of these, that I have it figured out and that we do it right. So there, I want a more patient, disciplined approach and it's really and I can take that disciplined patient approach, because of everything I said before. All the other brand extension is underway, it's paying off, it's going to be a benefit to this company. Before the year is over, it's going to be evident what it means to us in the years ahead. And therefore on the USA stores where it's a lot of capital involved in some facilities, I really want to have it correct and know the sight line to profitability and whatever other issues are there before we move faster. So that's our approach. So I think it's a good plan. I think it makes a lot of sense.

Sounds very good. Thank you for the help there.

Yes.

All right. Thank you everyone for joining us today. Appreciate the conversation. Thank you.

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