Welcome to AutoNation’s Second Quarter 2014 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. (Operator Instructions). 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 Robert Quartaro, Senior Manager of Investor Relations for AutoNation.

Good morning and welcome to AutoNation’s second quarter 2014 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; Cheryl Scully, our Chief Financial Officer; and Jon Ferrando, our Executive Vice President responsible for M&A. Following their remarks, we will open up the call for questions. I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. And now, I’ll turn the call over to AutoNation’s Chairman and Chief Executive Officer, Mike Jackson.

Good morning. Thank you for joining us. Today, we reported record second quarter EPS from continuing operations of $0.83, a 14% increase as compared to EPS of $0.73 for the same period in the prior year. This marks our 15th consecutive quarter of double-digit growth in earnings per share. Second quarter 2014 revenue totaled 4.8 billion compared to 4.4 billion in the year-ago period, an increase of 8%. In the second quarter, AutoNation’s retail new vehicle unit sales increased 8% or 6% on a same store basis. In Q2 the industry SAR was 16.6 million. We believe that the improvement in new vehicle sales will continue and we are reconfirming our full year estimates of 3% to 5% of plus 16 million sales for the industry in 2014. Now, I’d like to turn it over to our Chief Financial Officer, Cheryl Scully.

Thank you, Mike, and good morning, ladies and gentlemen. For the second quarter, we’ve reported net income from continuing operations of 101 million or $0.83 per share versus net income of 90 million or $0.73 per share during the second quarter of 2013, a 14% improvement on a per share basis. There were no adjustments to net income in either periods. In the second quarter, revenue increased 362 million or 8% compared to the prior year and gross profit improved 49 million or 7%. SG&A as a percentage of gross profit was 70.4% for the quarter which represents a 60 basis point decrease compared to the year-ago period. Net new vehicle floor plan was a benefit of 14.1 million, an increase of 3 million from the second quarter of 2013 primarily due to higher floor plan assistance. Floor plan debt increased approximately 25 million during the second quarter to 2.9 billion at quarter end, due to higher average inventory balances. Non-vehicle interest expense decreased to 21.3 million compared to 22 million in the second quarter of 2013 primarily due to lower debt balances. At the end of June, we had 365 million of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of 1.9 billion. This was an increase of 79 million compared to March 31, 2014. The provision for income tax in the quarter was 63.5 million or 38.7%. During the second quarter, we repurchased 1.1 million shares for $64.1 million at an average price of $56.05 per share. AutoNation has approximately 336 million of remaining Board authorization for share repurchase. As of July 16, there were approximately 119 shares outstanding. This does not include the dilutive impact of stock options. Our leverage ratio remained at 2.2 times at the end of Q2 as compared to Q1. The leverage ratio is 2.1 times on a net debt basis including used floor plan availability and our covenant limit is 3.75 times. Capital expenditures were 52.9 million for the quarter. Capital expenditures are on an accrual basis and exclude operating lease buyouts and related asset sales. Our quarter end cash balance was 69 million which combined with our additional borrowing capacity resulted in total liquidity of 909 million at the end of June. As further evidence of our financial strength, Standard & Poor’s has upgraded our senior unsecured rating to investment grade during the quarter. We now have investment grade ratings from both Moody’s and S&P on our bonds in addition to our corporate family ratings. Our stellar balance sheet, strong cash flow generation and opportunistic approach to capital allocation continue to support our goal of maximizing shareholder value. Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Thanks, Cheryl, and good morning. In the second quarter, AutoNation delivered a 4.1% operating margin along with solid growth in both sales and customer care. When coupled with a 15th consecutive quarter of double-digit EPS growth and a record second quarter EPS, we’re pleased with the quarter. As I continue, my comments will be on a same-store basis and compared to the period a year ago unless noted otherwise, starting with sales. In the second quarter, total gross profit for variable operations was $3,279 per vehicle, an increase of $67 or 2% with expanded gross profit per vehicle for both used vehicles and customer financial services. Relative to new vehicles, in the quarter, same store new vehicle revenue increased $200 million or 8% to $2.7 billion on the sale of 79,000 new vehicles, which increased by 4,700 vehicles or 6%. New vehicle gross profit of 159 million grew 10 million or 7% in the quarter and at $2,008 we’re able to maintain new vehicle gross profit per vehicle retail in what continues to be a very competitive new vehicle market. At June 30, our new vehicle inventory was 59 days compared to 67 days a year ago. Turning to used vehicles, in the quarter, retail used vehicle revenue was 976 million, an increase of 23 million or 2% on 52,000 used vehicles retailed, which was relatively flat compared to a year ago. Revenue per used vehicle retail increased $527 or 3% to $18,836. Retail used vehicle gross profit of 87 million was up 4 million or 5% and gross profit for used vehicle retail of $1,687 was a solid increase of $91 per vehicle of 6%. We’re pleased with the growth in gross profit and clearly recognize that we missed some opportunity on the volume side. We ramped up our…

Thank you, Mike. We will now take your questions.

Thank you. (Operator Instructions). The first question is from John Murphy with Bank of America Merrill Lynch.

Good morning, guys.

Hi, John.

Hi, John.

A first question on used, which is, is where there was some variance versus our expectation of the big variance versus our expectation. It seems like the same store sales were a little bit on the light side considering the strength in new and just seem like there would be more opportunity for trade-ins and to churn your used vehicle inventory. Yet you alluded to the inventory for used being 36-day supply, so it didn’t seem like there was a shortage of inventory necessarily. Just really trying to understand what you’re seeing in the used vehicle business and if there is a bigger opportunity to maybe reaccelerate those same store sales growth there?

John, it’s Mike Maroone. We were pleased with our gross profits being up $91 a car, but we really did miss some opportunity. We ramped the inventory as the quarter went on and finished the quarter at 36 days. So we’ve taken the inventory up about 20%. We’re up to about 27,000, I believe, in inventory right now and really need to push the volume up in this quarter. So we’ve got the gross, we did not get the volume and there’s always some shortages but as the quarter went on the CPO business was strong but clearly we didn’t retail the trades that we needed to retail and we’re going to really focus on it this quarter as we have ramped that inventory.

Okay. So as we think about that, that was really sort of starting the quarter with tight inventory and that was really the reason and was just sort of a lack of focus with that tight inventory and you think that just the re-inventorying should really create some opportunities there? It just seems a little bit tough in the quarter.

Yes, I mean the supply was tight for the right merchandize. Again, there’s plenty of CPO merchandize out there. It’s medium priced, reasonable mileage cars that are just in tight supply. We believe with more cars coming off lease in the next couple of quarters, the supply should be in better shape but we have ramped their inventory because we can’t wait for that to happen.

Okay. And then on parts and service, there was a very good same store sales comp. I’m just curious, I mean it sounds like the recall is only having a very small impact on the total business. I was just wondering if you expect that to be greater in the coming quarters or is this as good as it gets on the recall activity and really the strength is coming from just an increase in the UIOs in the zero to five to zero to six-year-old population?

Well, first of all, there is growth in the zero to five, it’s still probably two-thirds of the business but there’s some headwinds in the six to ten. I think the recall activity is going to continue to be very brisk and we believe there is opportunity. We need to expand our capacity. We came into the year planning on adding about 400 technicians were on that plan but frankly we need more, so certainly the amount of customer activity has tied up some capacity and we’re actively out recruiting to expand that capacity and believe there’s good opportunity.

What’s the base of techs, the 400 off of a base of how many techs roughly?

On a same store basis, it’s 4,400. On a total store basis, it’s about 4,700. So, again, this was a plan we put in place before all this recall activity and we now need to accelerate it.

Okay. And then on the digital expense in the quarter, Mike, you have alluded to that on your interview on CNBC as something – there was a little bit of a headwind on costs. Can you give us an idea of what that was in the quarter and what we should expect going forward?

Yes, John, I talked about it on the last quarter. We launched the brand just a little bit over a year ago. It’s been embraced by our customers and our associates. We’re really ahead of where we thought we would be at this point both on how well accepted the brand is and the amount of traffic it’s generating for our digital sites. So we’ve decided to accelerate the new phase which is increasing our marketing around the brand AutoNation to drive even more customers to our digital sites and of course a big investment in the capabilities of this site itself, which the next big step would be that this site goes transactional at the end of this year, meaning that customers can select specific vehicles, get a committed price, give us a deposit and that becomes their vehicle without ever having entered the store. And if somebody walks in 10 minutes later and wants to buy that vehicle, now it’s committed to that digital transaction. And then through the course of next year we’ll expand the digital capabilities to include purchasing customer vehicles and giving them a committed price on trade, giving them committed quotes on financing and of course a dramatic improvement in the entire customer care experience, everything from how you make your appointment to how you pay your bill and how you get an update on the vehicle life in for service. So it is a transformational effort on the part of the company. This is our strategic vision, if you will, that we believe today’s customer and future customers want one experience not an online experience and an in-store experience but one seamless experience where they can interact and transact both digitally and in the store. Now, we’ve called out that we’re investing an additional 100 million in this effort compared to what we kicked off a year ago. How the spending falls will depend basically on how fast we’re able to go and what kind of barriers we come up against, but sometimes we’ll move fast but sometimes we’ll go slower. So we ask for your understanding that we are not giving a specific breakout as to how it falls on each quarter other than to say it was significant during this quarter and will be significant in further quarters with 100 million being spent over this two-year period of ‘14 and ‘15 to solidity the brands, drive the traffic to the sites and turn it into a transactional site.

Mike, just one question on that, a follow-up, that will not just have a material impact on improving the customer experience, but it sounds like it would have a material impact on your cost structure. Is that your characterization and could we see a dramatic step down in your cost structure going forward as a result of this if it’s very successful?

So, John, I would say all of that is in the vision of both whether it’s share opportunities or cost opportunities. But I would not bake that into your planning today. I think we have to wait and see how skillful we execute and what the marketplace’s reaction is, but this was the reason behind why we rebranded the company coast-to-coast. We could not envision doing this with multiple names. We think it’s far more powerful with one name, but I think you’re thinking about it the right way but nothing I can bake in the plan today. It’s sort of like the shared service center which took us seven years to fully implement that gave us both a cost advantage and a performance advantage and also in many ways was the foundational element for this digital undertaking that we need all the stores on the same technology platform for everything from data base management to how we run the company day-to-day. So that was a key building block that went in place, then rebranding the stores and now on that digital platform that we have in place the next big step is to go transactional. So it’s certainly not the end of the story over the next two years. There will be more chapters but we’re in a very ambitious and exciting phase, I call it an investment phase, that we feel in our ambition to build a great company and a great brand in the long term, we need to make and is the right vision for the company and to win in the marketplace.

Sounds exciting. Just one last one on capital allocation. The stock, it’s currently is below where you guys were buying it back in the quarter. I mean obviously it’s just below the $56.50 that you guys were buying back in the quarter. I mean obviously this looks like a pretty good deal. I mean obviously you would be a buyer at these levels I would assume as far as your capital allocation giving it was below the average price you bought back in the last quarter?

I think that’s a safe assumption, John. I’ve never missed the buying opportunity.

Looks like a good one. Thank you, guys.

Thank you. The next question is from Rick Nelson with Stephens.

Thanks. I’d like to follow-up on the SG&A and the digital marketing spend. SG&A came in about 13 million higher than what we were modeling for the quarter. I think that was about $0.07 in EPS. I know you don’t want to breakout specifics for the quarter but what causes you to go faster or slower with the $100 million spend?

I would say on the marketing spend and the branding spend when we see traffic to our sites increasing, then that means that the investment we’re making in the brands is getting the right reaction in the marketplace. If traffic was flat to our sites then we would step back and say, we got to rethink this. Something is wrong in the message. So step one is what is the reaction in the marketplace on traffic? And Mike you might have some number there we can give you to our sites. Second step is what is the customer experience on the site and what is our closing rate on the site? And therefore the competitive experience they’re having and how effectively this site is working. We’ve clearly identified from our research, Rick, that the site needs to go transactional. Informational sites are useful. They’ve taken us to a certain point but the customers are not interested in doing all that work. Disconnecting and then coming to the stores and starting all over again. So the sites need to be able to reach into the store and transact on real inventory, real incoming inventory with real pricing, with market data that validates that pricing and then customer when they see the car they wanted the price they want are able to send us a deposit and make it their car for the fine holding period. And again, we’ll expand the transactional capability after that. So to the extent that it’s working we go faster. To the extent that we run into obstacles we’re in assumption we’ve made has proven to be wrong, then we have to slow down and rethink it.

Okay. Thank you for that. Also, I’d like to ask about your industry assumptions for the year. You were up 6% same store new vehicle sales, so second quarter you’re up 5% and year-to-date we saw a lot of strength and May and June combined you’re full year forecast up 3% to 5%. To view that as a conservative forecast at this point or…?

I’m glad you’re asking the question, Rick. So, my forecast of plus 3% to 5% is for industry sales, not AutoNation sales. That’s my opinion of industry sales. So that’s two different things. Now here is my thinking on industry sales year-to-date. They were basically flat in the first quarter because of a disruption with weather and they were very strong in the second quarter taking the year-to-date improvement to 4.5 which is on the high end of our range. Within that, I look at the fact that car sales are flat and truck sales are up 8%. That is a very strong signal from the consumer because it’s saying the following. We all know transaction prices on trucks are higher and we also know that we’ve dealt with volatile and higher gas prices during the quarter, yet the consumer has continued to buy trucks. So that’s a bullish consumer and the industry has a comprehensive answer for the consumer around the fuel economy. Well, it’s not that this time the consumer doesn’t care about fuel economy. They actually care very deeply about fuel economy, but with the internal combustion engine and everything that comes with it today, they’re able to have a larger vehicle that goes faster and yet improve the fuel economy. So all that says we’re at the higher end of our range, certainly plus 5 if not more. So we could end up at $16,400,000, $16,500,000 units this year for the full year. We could end up there. So it’s an optimistic outlook for new vehicle sales for the industry. Within that we don’t give our specific forward guidance on our sales, but every month we tell you what we sold according to what we reported to manufacturers.

Now that’s very helpful data. Good luck as we move forward, Mike.

Thank you.

Thank you. The next question is from Gary Balter with Credit Suisse.

Hi, Gary.

Hi. How are you?

Excellent.

Two questions. First, just doing quick math when you mentioned you’re adding about 10% technicians, I’m assuming we’re going to start to see P&S start growing at 10%. Is that fair?

Yes, I think we’re staying with a mid-single-digit growth, Gary. You still got some headwinds in the 6 to 10…

Right. On the customer pay side.

That target was over a period of a year and we think there is opportunity in customer care, but I would call a growth rate.

No, we’re not saying next quarter but we’re thinking over the next few years that you’d start to see even better growth.

We think there’s great opportunity in the customer care business and that’s why we’re investing for it.

Yes. And then on the digital side, we hear the investment and is there a way to talk about like some of the opportunities that this creates from a numerical point of view. For example, savings by not going on other people’s websites because they’re going to be more identified with the AutoNation site or just the ability to drive sales and like close sales from the Web. How should we be thinking about what the positive impacts of this investment we’re seeing now are going to be in the future?

The way we think about it, Gary, what we’re looking at is we see the third parties with whom we do business. Over the last few years we’re taking an ever increasing percentage of our marketing pie and to put that in some context, they were 13% of our business – 13% of our vehicle sales were generated by third party sites but the marketing spend with them was significantly higher than that. So we were like a fork in the road where we have to decide to take that money, invest it in our own brands or invest it in their brands. So that was certainly a point and we think that we can generate that traffic at a significantly lower cost than we are with the third parties with our own sites or just generate a heck of a lot more traffic. But we know there’s a major cost differential between third party traffic and AutoNation site generated traffic, significant cost delta. Additionally, whether there will be cost savings in the store as we make a more efficient, faster experience with the customer where so much of the work is done digitally and what that means within the store and our ability to price much more centrally rather than store by store, there are a whole list of thoughts and ideas but they’re really somewhat over the horizon in that our concentration at the moment is on this period of building the brand, driving the traffic and moving towards a transactional experience. Those are the building blocks, the next building blocks that have to go in place. Beyond that, I think there is a lot of opportunity and we could realize that opportunity in different ways either from a share opportunity or a cost opportunity. But it’s difficult to put numbers on it today. And I think as we get deeper into the journey, obviously a big milestone, we’ll be going transactional later this year, 2015 we will know far more exactly how this is working.

Thank you. I think it’s great that you’re leading this charge and I look forward to watching it over the next few quarters.

Yes, we’re very excited about it.

Thank you. The next question is from Patrick Archambault with Goldman Sachs.

Yes, thank you very much for taking my question. Just wanted to follow-up on the used side. So it sounds like there was a lack of inventory that was the main constraint in the quarter to getting the volume you wanted. You’ve since kind of trued up those inventories by 20% to drive volume. Should we be thinking about – or how should we be thinking about the implication on margins? You had a good margin performance this quarter, but if you’re going out and sourcing a lot of stuff in the auction market, is that something that could potentially be a little bit of a headwind in the shorter term until some of the lease returns come back?

Patrick, this is Michael Maroone. First is by pushing the inventory up, we’ve already seen a benefit. So far in July we’re up about 7% on a year-over-year basis. We have not seen pressure on the margin at this point. It’s still early in the quarter but we’re really working hard to win more trades, doing a lot of training in the field, a lot of metrics, a lot of benchmarking to make sure that we’re winning all the trades we can. We agree if we got to go out into an auction environment and acquire larger numbers of vehicles, there’s going to be some pressure but the off lease – the number of vehicles off lease really is starting to accelerate. We think there will be enough supply. We’ll just probably be bolder on the supply side and don’t want to give up a lot of margin. We may have to give up some from time-to-time.

Okay, that’s a helpful perspective and I appreciate that. And I guess another question was just on the M&A environment. You have kind of gone to M&A maybe a little bit more recently than some of your public competitors. Can you just give us maybe an update as to how good the environment is? What kind of targets you are seeing in terms of the overlap, in terms of valuation? And then I’d be specifically interested actually in that perspective if there’s more opportunities kind of on the domestic side than on the import side, just that perspective on dealer points would be helpful? Thanks.

Pat, it’s Jon Ferrando. In terms of acquisition, yes, over the last 24 months through acquisition and ad points, we have successfully added 1.2 billion in annual revenue. We’ve been very focused on adding brand representations in our existing markets. And if you look back at all those deals including the most recent one, that fits very well with our strategy and we’ve been successful. In terms of going forward, we don’t give growth forecast but I can say there is certainly a solid pipeline of potential deals out there and I would say that are run over the next few years. So we will have plenty of opportunities with sellers to continue to execute our strategy of acquisitions meeting our brand market and return criteria. We will do deals again depending upon the market. We’ll do domestic acquisitions. That was our last acquisition, but you also saw a very healthy mix of luxury and import over the last couple of years. So I think you’ll also see that going forward.

Okay, terrific. Those were my questions, guys. Thanks a lot.

Thank you.

Thank you. The next question is from Ravi Shanker with Morgan Stanley.

Thanks, good morning, everyone.

Morning.

Just a couple of follow-ups. On the F&I side, your F&I per unit declined sequentially and growth slowed year-on-year to the lowest level in about three or four years. Was that just a one-off in this quarter or are you seeing some signs of pressure on the F&I side maybe from higher rates or just more competition?

I don’t think that we feel like we have flattened out. I think the quarter might have been a one-off but we’re very confident of our ability to grow that and again, we really worked hard to shrink the bandwidth of performance and are pretty optimistic going forward. We have put a huge concentration on selling service contracts, have really moved that number up in terms of our penetration and that the focus is value-added products and I’m very confident of our ability to grow that going forward. We have had a steady growth path for almost 10 years and I don’t think this quarter would be anything to indicate that there won’t be future growth.

Got it. And in your comments earlier in the call, you said that the industry was very competitive. Any further color on just pricing trends in the industry? And also as you roll out the digital initiative, what do you think that does to your overall pricing? I know there are some other dealers who are trying to take steps to go to fixed pricing and such. Do you think the public dealers as a whole can come together and maybe make some moves to kind of reduce that competitive pressure a little bit?

This is Mike Jackson. I don’t see the public retailers coming together to agree on price. That’s not going to happen. But if you look at our performance we are – our variable gross profit per vehicle retail is increasing steadily, so I think the situation is entirely manageable. Mike would also like to add to that.

Yes. Again, we’re up $67 a car when you take the total variable gross per car. We were pleased to be able to hold margin on a dollar basis in a super competitive industry and there’s a lot of volume-based incentives that put pressure on volume and gross, and I thought our team did a very good job. We continue to develop our capabilities internally to provide our stores with real-time market information and continue to put more science into how we price. But I don’t see us going to fixed price but certainly the bandwidth of margin on transactions is tightened a good bit as we’ve got a very well informed consumer. But we’re really pleased with our ability to manage the gross and have done it over several quarters. So we’re pleased with our margins.

Got it. Just finally on the used business, you said that CPO supply is good, but I think late model used non-CPO was tight. Where do you think the vintage sweet spot is in the industry right now? Is it that three to six-year-old non-CPO vehicle or maybe even something older than that?

Yes, so the inventory itself you’ve got some cheap very high mileage vehicles; those turn very quickly and you’ve got the nearly new product. I think you’ve identified the sweet spot. It’s anywhere between two and four years depending on miles and as you look at your average lease term right now is about 35-month, so I think the vehicles that have gone into service are going to be coming out at a very good point. But really the way to run the used car business is to win more trade. That’s our most effective, most efficient way of doing it and we’re going to continue to hone our abilities. We’ll supplement it with outside purchases but the off lease and the trades are really where we need to shine and I think again, our short-term results based on pushing our inventory gives us great optimism about the used car business.

Great. Thanks.

Thank you. The next question is from Brett Hoselton with KeyBanc.

Good morning.

Morning.

Good morning, Brett.

I was hoping to ask you to begin with, on the M&A front, what do you think the possibility of doing a more material or a larger acquisition is, i.e. something with maybe 1 billion or more in revenue? Do you think that’s a low probability for AutoNation or do you think it’s a possibility?

Hi, Brett. It’s Jon Ferrando. I think our focus will continue to be on deals that meet our brand market and return criteria. I would say we certainly have the capital and resources to successfully acquire a larger group if at some point in the future that came together from a brand market and financial return standpoint, but our primary focus is on adding brand representation in the markets that we’re in.

Thank you. And then the $100 million that you’re looking to spend on your digital initiative, can you give us a rough estimate of how much of that you spent in the second quarter?

Yes, Brett, we’re not providing a specific number into the quarter. I would say generally our SG&A as a percentage of growth came in at 70.4% for the quarter. We typically like to target that below 70% to somewhere between where we came up and where we’ve traditionally been is directionally a bit portion that would be digital.

And then over the next few years, parts and service growth, we’ve seen some increasing – an increase in the growth rate in warranty. It looks like your customer pay has slowed down a little bit, possibly offsetting that. What do you think would be a reasonable parts and service, same store parts and service revenue growth rate over the next few years? Is it low single digits, mid single digits? Do you think you can get into the high single digits? Do you think you can get into the low double digits?

Our target continues to be – this is Mike Maroone – to be in the mid single digits. We believe we’ve got opportunity on the customer pay side. The recall activity really did take up a fair amount of our capacity and I think you’ll see as that levels out, you’ll see more growth on the CP side. But all-in we think mid single digits is an appropriate way to look at the business on a forward-looking basis.

Thank you. And then just one final question for Mr. Jackson. CFPB, can you just give us an update as to what you’re seeing there in F&I?

We’ve implemented in nine stores what we call Pacifico technique. It’s been successfully implemented without much disruption and no impact on results. We will now take it to additional stores on a gradual basis. The discussion continues in Washington. My view is ultimately there will be some sort of common ground found around the issue that is acceptable to banks, dealers and CFPB. And that will unfold over the course of the year, but my expectation is there will be some sort of agreement and some sort of common ground.

Excellent. Thank you very much.

Thank you. The next question is from Colin Langan with UBS.

Great, thanks for taking my question. Can you just remind us, the recall is 4% of gross profit, what percent of – 4% of your parts and service is gross profit, what percent of your sales was the recall benefit in the quarter?

I’m not sure that we got that metric. It’s 4% of gross which is up from prior quarters. The actual sales number I do not have at my fingertips.

And how should we think about the recall? I mean, there was obviously some at the very end of the quarter announced. So will this continue through the rest of the year or should we see a dramatic decline going forward? I mean how does it normally play out for these type of recall volumes?

I would say these are not normal times and the recall cadence continues to be quick brisk. Obviously the OEMs have taken a different view and certainly a more conservative view and are recalling a lot more vehicles. It’s difficult to get a forward look. By the way, on your first question, it’s about 3% of the revenue. One of my teammates just provided that information.

Okay, thank you. But we should expect – because people don’t usually bring that back and many of them don’t come back immediately, so we should still see a lot of them come back over the next couple months?

I think it’s going to provide a lot of traffic and that’s why we’re moving even more aggressively to add technician count which gives us more capacity, even brick and mortar capacity.

If you think about it this way if you just take General Motors which is approaching 30 million announced recalls of which 500,000 are completed.

Okay, that’s helpful.

We’ll be talking about this next year.

Okay. You mentioned a couple times when you’re focused on M&A that you’re focused on your core markets. So any thoughts though about going into other geographies that you haven’t been in? Is that something that you think might make sense longer term with your new brand strategy and leveraging that in other markets?

Yes, Colin, this is Jon Ferrando. I wouldn’t – we are focused on our core markets but we also look at secondary markets that fit into our management infrastructure. So that is certainly a possibility if we find the right assets that are very attractive and that fit nicely into a secondary market that we can manage from our existing regional management structure.

Okay. And one last question. There’s been some articles about the CFPB starting to look at add-on F&I products. Is there a risk there or any concern about potential regulation on those non-financing products?

We have seen zero real activity in that area. All the focus is on the reserve amount. When you think about the reserve amount in all the discussions of deal reserve be put under the microscope, if we look at our finance income the markup to the customer is about 90 basis points. Our income is higher than that because the bank is paying us a higher origination fee than what’s in the contract for having originated the loan. So, our finance income is a combination of a markup on a loan to a consumer of 90 basis points on average and an additional contribution from the bank. So CFPB is focused on the customer portion and our 90 basis points is so in line with their thinking. That’s why I think we’ll find common ground and the solution. My sense is that CFPB will be very satisfied if they can come to an industry agreement on how dealer reserve works. It’s always hard to predict the future with the government but I do not see a lot of scrutiny around the product issue.

Okay, all right. Thank you very much.

Thank you. The next question is from Rod Lache with Deutsche Bank.

Good morning, everyone.

Good morning, Rod.

A couple things on used. It seems like a growing number of retailers are focusing on used now, and some are experimenting with the category to drive growth; a couple things on that. Are there signs that the category might become somewhat more competitive going forward? Has AutoNation reassessed the used model, the used business model, in any significant way? And is there a digital opportunity here as well which would help you leverage the inventory beyond individual stores?

It’s Mike Maroone. First of all, it’s certainly a very competitive environment and a lot of the discussions about what’s happening going forward haven’t yet occurred. So people that are announcing they’re going to open stores haven’t even opened a store. Certainly CarMax had a pretty aggressive opening. So it’s been a very competitive environment. Will it be more competitive going forward? Yes. The market is huge. The market’s over 40 million a year versus a new car market in the 16. Had we reassessed our desire to go outside of our current store footprint? The answer is no. We think we got plenty ability to drive that business in our current footprint. We’ve been in the standalone business again and I don’t see us going back. Is there an opportunity in digital? There’s a huge opportunity in digital and that’s why we rebranded the company coast-to-coast and believe that we’ll be able over time to provide more traffic driven to our website that we think can give us really nice returns.

Okay, great. And can you also just quickly comment on what drove the $80 million of other revenue in the quarter? It seemed like that was a pretty meaningful uptick.

Other revenue is on the fleet side, so what you see there is an increase in fleet which is not a material portion of our business.

Okay, great. Thank you.

Thank you. The next question is from Brian Sponheimer with Gabelli. Brian Sponheimer - Gabelli & Company: Hi. Good morning.

Good morning, Brian. Brian Sponheimer - Gabelli & Company: With all the recall activity and all the publicity that GM has gotten, it really hasn’t shown up in their retail sales. Just anecdotally what are your GM level dealers telling you about what customers are saying when they’re coming back? And if you’re thinking two, three years down the road, does this open any opportunities for you from an acquisition bases to potentially buy more GM dealers than say a discount than you would some other brands?

This is Mike Jackson. There’s a clear rather sophisticated bifurcation in the consumer’s mind about the situation with GM. On the one hand, everybody sees this catastrophic tragedy that occurred around this ignition switch, but they definitely blame that on the old GM and the old GM culture. And at the same time they see that the new GM has taken all the appropriate steps you would expect a responsible company to take. Mary Barra has given exceptional leadership from meeting with the victims’ families to the (indiscernible) to deal report which is riveting reading and he spared nothing to her to deal with the compensation issue. And also clearly GM is looking at anything and everything that should even think about being recalled and recalling it that sort of hit the reset button with the vehicles they have on the road and what they have in the pipeline. So that’s resulted in the business today. Within the GM stores is actually quite good. The consumers like the new products, they’re buying the new products and as long as GM continues and Mary continues to give this level of leadership through the remainder of the crisis, I think GM will be fine. We have not seen or been presented with any GM store in a distressed sale circumstance and I don’t expect that circumstance to develop. Brian Sponheimer - Gabelli & Company: Okay. Thank you. Just one other question, just kind of big picture for the market. We’re starting to get some deceleration or certainly some declines actually in housing starts, particularly in the southern United States. Is that affecting how you’re thinking about potential increases and specifically in pick-up truck sales but also whether we may be running out of a little bit of steam for large several purchases?

As far as the economic outlook, housing is in a cyclical recovery after a horrendous readjustment period of six years and it will now be a long recovery. Will it be perfect every month, every quarter? No, of course not, but I think for the next several years we are optimistic about the U.S. economy and that includes housing, auto, energy. You really put it together and on a run rate throwing out the first quarter as anomaly, I mean high 2% if not 3% GDP growth is entirely possible. So we are not concerned about it. Brian Sponheimer - Gabelli & Company: All right, thank you very much.

Thank you.

Thank you. The next question is from David Lim with Wells Fargo.

Hi. Good morning, everyone. I just wanted to sort of ask about the used vehicles. Going into Q2 I think you mentioned that inventories were light but I’m sort of curious. Back in Q1 I would have imagined that you may have anticipated the flow in Q2 or was there an issue where there wasn’t enough new vehicle sales to drive the trade? And if you can give additional color on that, I would appreciate it.

This is Mike Maroone. We had good enough new vehicle sales. We didn’t take the kind of trades we wanted to take. And late in the quarter we went out and started supplementing that inventory and built that inventory as the quarter went along. Again, there was plenty of CPO product and there was a lot of high mileage product both of which we liked but that mid tier affordable used car we didn’t acquire enough of them. And so we just need to redouble our efforts there.

Was that just a function of availability as you’re exiting Q1 or was there some sort of other circumstance behind that?

The market was very – it was very tight through Q1 and coming into Q2 and again, we didn’t – we always have pressure on values in Q2 as you move towards the summer but we just didn’t acquire enough of the right product. Again, we’ve now done that and has experienced a nice short-term growth in the business.

Got you. And then the other question I have is just to clarify, did you hire additional technicians in Q2? And if so, if it weren’t for the hiring of those technicians, how would P&S gross margin, how would that have come in, in the quarter?

This is not just a Q2 initiative. We’ve been ramping our technician population up and have – again, we have a goal of 400. We’re over halfway through that goal but we also have expanded our quick service capability tremendously and those techs aren’t quite as efficient as your shop techs. So we continue to push the envelope and think there’s even more opportunity there. So it’s a key initiative in the company.

Another way to answer the question, Dave, is if we were not adding technicians we would not be able to grow the business. Our utilization rates in the high 90s.

Okay. So you’re utilization rate. When you say utilization rate in the 90s, is that related to your base or technicians or how should I think about that?

That’s related to the technicians.

Okay.

Yes, the capacity issue is on the technician side not on the base side, but that’s taking your technicians and available hours and to Mike’s point we’re in the high 90s and that’s why we’re accelerating our efforts.

So to sort of talk about that a little more, so you don’t have an issue with base capacity, it’s mainly technician capacity now. Are you finding it difficult to hire more qualified technicians?

Yes, it’s an issue. These are great paying jobs. If you take the top 20%, average paid is above 75,000; top 10% is in six figures. These are very well paying jobs for skilled individuals but we are competing with other industries for this technical skill. If you look at the energy industry like fracking, I mean that’s completely different than drilling an oil well and checking on it in five years. I mean that’s like running a factory. There is technical people on those fracking sites all the time. So there is a real demand in industry, multiple industry for individuals with technical skills that are willing to pay very well for but it’s not like – we say we need to hire more technicians, we got a line standing at the door with applications and we just bring them in. We really have to go out and find them. So that’s a critical path for us on growing the customer care business.

So the question there is I know that a lot of people have been discussing this wave of zero to five, zero to six-year-old vehicles coming through, but it seems like the real bottleneck to really take advantage of that particular wave is having enough technicians on hand. I mean how would you – would you categorize that as a true statement or is there some sort of thing that I’m missing there?

I think the unexpected level of recalls this year made your statement true. In that if we had more technical capability, we would be growing faster right now. We had not folded into the plan a record year of – who knows what the final number will be? 40 million, 45 million recalls, whatever it is. So in that sense it gives you an indicator how on the margin we are here and just that surge in demand, we are at this point substituting recall work for normal customer care work because we don’t enough technicians. So, that’s why we raised it as an issue but I’d also say it’s not something we can fix from one day to the next, but we have increased our plans at technical capacity.

And one final question for you, Mike Jackson, where do you think U.S. sales will eventually plateau?

Well, I said that the sustainable rate is between 16 million and 17 million. We give a forecast at the beginning of the year for the specific year. I think we can sustain something between 16 million and 17 million even when rates begin to normalize next year, but I am not one of those who sits here and says, you can make a case for 18 million or 19 million. From today’s vantage point, I don’t see that. If it happens, I’d welcome it, but it’s not in our plan. We see a sustainable rate between 16 million and 17 million.

Great. Thank you very much.

Thank you. The next question is from James Albertine with Stifel.

Great. Thanks and good morning, everyone. I’ll keep it relatively brief and sorry to beat a dead horse here with a question on used, but I want to understand – arguably nobody is doing as much incremental work considering that you’re ahead of the curve here on this coast-to-coast branding and digital initiative arguably. So I want to understand conceptually which is more important considering where we are in the new cycle. Is an incremental new vehicle customer or sale more or less important than a used vehicle customer or sale? So how do you think about how each of those impacts the broader ecosystem?

Well, I think it depends quite frankly on the brand. If you take our premium luxury business, it’s booming. We have tremendous demand for both new and used, so there’s no tension there. I think in the domestic business, as I called out earlier, trucks are having a great year and that’s a traditional strong point of the domestics, so there’s no real tension there. I think on the Asian business and we’ve talked about it before, with the stair-step and very aggressive volume-based incentive programs that at the store level at certain points in the month there is a dilemma and a tension between new and used, because you’re staring at a very specific new target that has to be met and you have a finite amount of traffic. So I think it’s an issue there and we’re working very hard to balance that. Mike, you want to add something.

I agree with what Mike said and where we really sought is we saw a fall up in the CPO business in the import segment for just the reason he described. It becomes that inflection point where if you’re going to hit the target you really need to push in one direction. So that’s where it really showed up.

Thank you.

Last question, please.

The final question is from David Whiston with Morningstar.

Thanks. Looking at your new vehicle brand mix within premium luxury, Lexus had a lot of the growth in that segment from a mix point of view. Can you talk about what Lexus models are selling well and what type of consumer demographic is driving that increase?

First of all, Lexus has had a number of new products on the car side. They’ve always dominated on the crossover side, at least in the premium luxury. They’ve got capacity that others don’t have, so we’re seeing real strength in the Lexus line. It’s really performed very well for us. We do not have a lot of stores but the stores we have, have high throughput but it’s both in the sedans and in the crossovers.

Okay. And briefly since we’re running out of time here, could you just on the age-old question with Tesla during the background stores versus the franchise model, can you just comment on why franchise model works? Why do you think it’s superior?

So first I think Elon Musk has the right to pick whatever distribution system he wants since there is no existing Tesla dealers to harm. When I look at the franchise model, I see that the consumer – what a consumer pays for a vehicle, around 6% is for retail distribution. 6% of the price they’re paying goes to the retailer. I don’t think you can find another industry that has a comparable number and that we have to pay all our costs out of that. So it’s highly cost effective for the consumer and it’s also highly cost effective for the manufacturer. Again, where else can you distribute a product and only have 6% of its price dedicated to retail distribution costs. So if we were sitting on big fat margins that would be one thing, but it’s very hard to create another model that’s going to make that 6% even more efficient than what it already is. There can be some movement here or there but that’s not the case. So that’s how I think about it. Then you say, well, how are you guys still in business with that small frontend margin? Well, it’s because of used cars, finance, insurance, service and parts and collision. All the other things we do where we have high-added value and higher margins. So it’s a system that works for all constituencies and I’m very optimistic, very confident that 10 to 15 years, 20 years from now this auto franchise system will still be in place. Thank you, everyone, for your time today. We very much appreciate all your questions.

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