Welcome to AutoNation's First Quarter 2016 Earnings Conference Call. At this time, all participants are in 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. And now, I will turn the meeting over to Andrew Wamser, Treasurer and Vice President of Finance for AutoNation. Sir, you may begin.

Thank you, operator, and welcome to AutoNation's first quarter 2016 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, CEO and President; Cheryl Miller, our Chief Financial Officer; Bill Berman, our Chief Operating Officer; and Jon Ferrando, our EVP responsible for M&A. Following their remarks, we will open up the call for questions. Robert Quartaro and I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call may constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings, including our most-recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release and on our website located at investors.autonation.com. And now, I’ll turn the call over to AutoNation's Chairman, CEO and President, Mike Jackson.

Good morning, and thank you for joining us. Today, we reported earnings per share from continuing operations of $0.90, a 7% decrease as compared to EPS from continuing operations of $0.97 for the same period in the prior year. EPS from continuing operations were negatively impacted by $0.06 per share, which included unusual hail-related expenses of $0.03 and a shift approximately of $0.03 per share in stock-based compensation expense into the first quarter, due to a change from quarterly to annual stock option grants. First quarter 2016 revenue totaled $5.1 billion compared to $4.9 billion a year ago, an increase of 4%. In the first quarter AutoNation's retail new vehicle unit sales increased 1% and were down 5% on a same-store basis. We continue to see declines in our premium luxury business, which represents roughly 20% of our new vehicle unit sales compared to an industry at 9%. The same-store basis, our premium luxury profits declined 13% year-over-year. Our energy markets, which represented approximately 25% of our new vehicle unit sales compared to 13% for the industry, also saw a profit decline. On a same-store basis, energy markets were down 20% compared to the first quarter in the prior year. The safety of our customers is a top priority for AutoNation. We will not retail any vehicle with an open recall. Approximately 15% of our used vehicle units are on hold of which 60% have been on hold for more than 30 days. I will further note, over 60% of our used inventory on hold is related to Takata airbags. The Takata airbag issue is in its early innings of what will be an ongoing issue that the industry faces. I'll now turn the call over to our Chief Financial Officer, Cheryl Miller.

Thank you, Mike, and good morning ladies and gentleman. For the first quarter, we reported net income from continuing operations of $96 million or $0.90 per share versus net income of $112 million or $0.97 per share during the first quarter of 2015, a 7% decrease on a per share basis. Net income from continuing operations for the first quarter of 2016 was negatively impacted by $0.06 per share consisting of hail-related expenses of approximately $3.6 million after tax or $0.03 on a per share basis, as well as the shift in stock-based compensation into the first quarter of approximately $3.2 million after tax or $0.03 per share due to a change from quarterly to annual stock option grants. There were no adjustments to net income in the year period. In the first quarter, revenue increased $175 million or 4% compared to the prior year and gross profit improved $26 million or 3%. SG&A as a percentage of gross profit was 71.3% for the quarter, which represents a 160 basis point increase compared to the year ago period. Excluding the hail-related expenses and a shift in stock-based compensation previously noted, our SG&A as a percentage of gross profit would have been approximately 70%. We're continuing to adjust our cost structure to the plateau industry environment. The provision for income tax in the quarter was $60.7 million or 38.7%. Net new vehicle floorplan was a benefit of $11.4 million, a decrease of $2.8 million from the first quarter of 2015. The decrease was primarily due to increased floorplan balances and higher interest rates, partially offset by higher floorplan assistant per unit. Floorplan debt increased sequentially approximately $312 million during the first quarter to $4 billion at quarter end primarily due to higher inventory balances, increased borrowings on our used vehicle floorplan…

Thanks Cheryl, and good morning. Before discussing our results, I’d like to comment on the new vehicle industry selling environment. During the quarter industry retail sales were relatively flat with double digit increases in incentives and fleet sales which were both up 14% on a year-over-year basis. New vehicles sales leasing penetration was over 30% for the quarter. Industry inventories were elevated with retail day supply outstanding at approximately 80 days. As we indicated earlier this year, the new vehicle market is plateauing. Turning to our results, my comments today will be on a same-store basis as compared to the prior year unless noted otherwise. Gross profit for variable operations was $437 million, down 7%. Variable gross was $3,424 on a per vehicle retail basis, a decrease of $21 or 1%. New and used same-store unit volume were down 6% compared to the first quarter of 2015. New vehicle revenue for the quarter was $2.6 billion, a decrease of $121 million or 4%. We retailed 74,300 units, a decrease of 5%. New vehicle gross profit was $1,885 on a per vehicle retail basis, down 8%. This was due to our larger exposure to premium luxury in our energy markets in Texas and Colorado. As Mike mentioned a moment ago, our premium luxury segment in our energy market represent roughly 20% and 25% respectively of our new vehicle units sales. For the quarter, used vehicles retail revenue was $1 billion, a decrease of $39 million or 4%. Used vehicles retail were 54,200, down 7%. Used vehicles gross profit was $1,625 on a per vehicle retail basis, a decrease of $126 or 7%. As of March 31, approximately 5% of our inventory was not available for sale due to the open recalls. The held inventory represents approximately 1% of our new vehicle…

Thank you, Bill. We continue to expect total new vehicle sales for the industry for 2016 to be above $17 million. Within that though, we fully expect retail sales to be relatively flat. We believe we have the right strategy and the right tools in place to perform in this plateauing environment. Expressions of that confidence is clearly seen in our purchase of 8 million shares during the first quarter and the closing of a significant acquisition in Texas. Over the long term our diversified strategy has performed well and we will work through these near term challenges. With that, we're happy to take your questions.

Our first question will be coming from Mr. John Murphy of Bank of America. Sir, your line is now open.

Good morning guys. Just a first question, Mike, a lot of people are reading some of your comments as negatively, yet as we look in the quarter you saw a huge opportunity in your shares and made a fairly large acquisition and redeployed about $630 million in capital. I'm just curious how you're seeing things shape up here. Because there's an interpretation that you're saying the industry is very challenged and getting in trouble again, yet you're deploying capital which kind of indicates that you see real investment opportunity. I'm just trying to understand the juxtaposition of those two things.

Yes, thank you, John. Always for the moment, I call them as I see them, but the facts on the table as plainly as possible. Then in AutoNation style and my style, I clearly indicate we are up to meeting the challenges and we're dealing with them and try to get some idea of what we're doing that. And then say in the near term, I'm absolutely excited, convinced and confident about the company we built a brand that we built and the capabilities they have. And then over the long term, we're clearly going to perform. And if you want that to be more than words just look at the share repurchase and the acquisition that we closed in Texas. So everybody wants to focus on the call at on the challenges, but I think it is important to speak plainly. Now the facts are, the industry is in far better shape than it was in '08, '09, from OEM supplier and a retailer point of view. There is absolutely no comparison. So much productive capacity has been taken out and so many structural cost issues have been addressed and we have this benefited $2 gasoline that shifted to mix towards trucks, which is of some benefit to us, but is of tremendous benefit at the OEM and the supplier level. So all that goes in the plus column. However, when everybody is overly optimistic like at the beginning of the year and we are getting sales targets from manufacturers that are plus 5% to 10% and our production plan to support it and we see all our competitors are getting the same targets, I clearly called out. That is overly optimistic and that's not going to happen this year. And if I look at the first quarter, we…

No, the frankness is very much appreciated. As you look at this, though, the $630 million deployed roughly in the first quarter was a big chunk of capital. Do you see the opportunity to potentially continue to buy back shares fairly aggressively and do you have the capacity to do so through the course of the year just given the level the stock is at?

So on a forward looking – I'll give my standard answer first. We operate opportunistically. We are still active on the acquisition side. We are still in discussion and we still see deals that could meet our threshold, but you never know. We repurchased at $46 a share, very attractively a number where the stock is trading at around today. So I still think the share price is attractive. Obviously, we can't deploy $600 million of capital every quarter. That's not sustainable. We're very proud of our investment grade rating. It has value to the company and it allows us to tap into markets whenever we want. So we have to be respectful of that. But the share is still a good buy at today's price.

Agree. Then just lastly on the stop sale, particularly on the used vehicle side, how long do you think this issue will remain? And as we get through maybe a full year of this stop sale, particularly your specific strategy, could you anniversary this and it could have less of an impact on a year-over-year basis? Just trying to understand the duration of sort of the wait here.

Yes, very good question, John. So in principal, our decision not to retail vehicles with open recall has resonated very well for the brand with customers and surprisingly the support that we got from our associates saying very, very much. Even though it makes their life more complicated they're - truly the company is not putting them in a position of selling vehicles to consumers that have things like an exploding Takata airbag. So that stands. Now, I would say managing everything, but the Takata airbag has gone very smoothly as expected. And it is pretty much sorted out and absent of Takata airbag, we'll be in very good operating shape. Now, we can't ignore the mother of all recalls here that Takata is a very difficult situation. In that you have a safety device that in minor crashes is causing serious injury if not death and there is tens and millions of vehicles involved. So on Takata we’re in the early innings. We will adapt as best we can to manage this situation. I would say on as far as retailing any vehicle with an open recall that's out of the question, well, we have started to auction vehicles with very clear disclosure, with stickers on the car that make it absolutely clear what’s open as far as a recall. So they have gone to wholesale auctions and that will help us manage the overhang and is probably the missing piece that the puzzle to make this all work smoothly that we can stand on our brand principle, vis-à-vis the consumer but where there are no parts inside. And let someone else manage that vehicle to its completion as far as the recall.

Very helpful. And then just lastly, just real quick on F&I PVR, that increase seems to be filling some of the hole that you're seeing on the new and used vehicle gross per up. So just curious how much more opportunity there is on F&I PVR or are we kind of reaching an asymptotic limit at these levels?

The step we took last year to be able to continue our growth in F&I was the introduction of branded AutoNation products. The acceptance of the consumer of an AutoNation-branded product that have high value and a very fair price has been beyond our expectations that give us confidence that -- it may vary from quarter to quarter. Can't promise the same number every quarter; but directionally, John, we see potential to continue to grow our F&I business.

Okay great. Thank you very much.

Thank you. Our next question will be coming from Mr. David Lim of Wells Fargo. Sir, your line is now open.

Hi, good morning everyone. Mike, when you say above 17 million, do you feel given that we did 17.1 million in Q1 would that be more closer to the 17 million or more in the mid-17 million range? And what is your take on the state of the consumer? I mean are you seeing a little bit of the consumer being tired or the Q1 performance that the industry witnessed, is there some sort of weakness maybe in the subprime consumer?

No. I think when I say I expect the total market to be over 17 million, because I believe the manufacturer are going to get it there one way or the other. Now sort of -- in my mind, the 17 million is etched in stone so to speak. And either through incentive activity or fleet, the total industry number will break through 17 million. So I think that's a safe statement. Now as far as where the consumer is at, I think there is the ability for the industry to have a plateaued retail business for quite some time within a modest range of plus or minus a few percent for quite some time. There's still average age is 11.5. The availability of financing is still exceptional. I think we're just at a high enough level that there is just not enough another step up is how it feels to me. And as long as the industry manages for quality rather than trying to push past that retail threshold, I think it can be a very good market for everyone. And I guess that's my message.

Couple of follow-ups on that. I mean as you said earlier, and you put it very well, a lot of these OEMs are -- they have these sales objectives, they have the production to back that up but at the end of the day, how do you think that they are going to manage inventory, especially from a retail standpoint? I mean my guess would be incentives first, but can we rule out production cuts or is that in your view something that will be needed in order for industry inventory to be "rightsized", if you will?

Production adjustments will absolutely be necessary. Nothing like '08, '09 and '10, nothing like that; but whether it's bigger changeover time or taking down plans for whatever reason you can come up with for a couple of weeks, especially car plans; I think you'll begin to see announcements like that. I think it's entirely a manageable situation at the moment to use a combination of production adjustment with incentives to bring things into line. And we see manufacturers have begun to do that. And they have pushed back from retailers, not just us but other who are -- who have been reducing our order significantly. So I think it's underway. I cannot tell you as of today though that all the decisions have been made that needs to be made, that gets us to a better place. That's all of us. By that I mean the total industry. There is no question in my mind as far as AutoNation is concerned. You will see AutoNation as a company in a much better place at the end of second quarter and we should be really in a good place by the end of the third quarter. That's our goal.

Got you. And one final follow-up question. Can you give us a little bit more color on Texas? Are you seeing better traction, if you will, in the major metro areas relative to maybe the non-metros? I was wondering if you guys could parse that out a little bit. Thank you.

Bill, could you take that for me please?

Yes. It's pretty much across the spectrum in Texas, but more heavily hit in our Southern and Eastern exposure in Houston in Corpus. Dallas itself, Dallas-Fort Worth strings slightly better, but the whole state has been impacted by the compression from the energy market.

Got you. Thank you so much.

Thank you. Our next question will from Mr. James Albertine of Stifel. Sir, your line is open.

Good morning and thanks for taking the question everyone. I wanted to ask if I may, we've gotten some apologies, I was a little bit late dialing in so if someone else asked this, but had some news yesterday out of one of your competitors that there are some stop sale orders now that extend beyond Volkswagen diesels. I'd be the first one to tell you I was surprised to hear that. Is there any color you can provide as it relates to other OEM actions with respect to pulling vehicles that may be either en route to your dealerships or on your lots at this point?

Are you specifically talking about the VW or you talking about the industry and recalls?

So again just to sort of paraphrase, I mean I've heard Lithia talk about GM, Toyota, VW and others. And we've seen now Daimler looking and doing an internal review on their diesels. And I'm just wondering is there a broader sort of phenomenon where manufacturers are telling you to hold off on selling certain vehicles at this point?

So that's separated into two discussions. Put VW and clean air to the side, let's just talk recalls and safety. There is no question over the past year that there has been a bifurcation on recalls that flowing into two categories, genuine safety concerns and more a technical compliance issue. And on the serious safety concerns the manufacturers when they issue those recalls or issuing a stop sales, stop retail instruction to the dealer with the recall. If we take Takata, the industry now has 14 manufacturers that have issued some sort of stop sale instruction to dealers. So if I go back to last year when we announced our policy, we both had a concern from the consumer point of view and we also saw from a safety point of view that stop sales were going to become much more prevalent from the manufacturers when it's a genuine safety issue involved. So that is clearly something that's been exist two years to three years to the extent it does today.

That's extremely helpful and I appreciate that color. If I may just a quick follow-up. We've seen now, again, it's only two of six dealers, but I think certainly we were surprised to see imports perform as well as they did overall and it seems to have carried through in your performance as well in the first quarter. Can you just help us understand sort of what's going on in -- I guess the two segments I'm most concerned about here are import and premium luxury, the latter of which premium luxury seems exceptionally weak and may be related to sort of a negative wealth effect or higher income individuals taking a pause. But I wanted to just get your opinion on again, import out-performance, premium luxury underperformance, if you could.

Yes. The premium luxury question we had earlier or I spoke earlier, that's very much related to the fact that it's very much a -- the strength of it has been in the car business. The majority of it is cars and then consumer has really stampeded to trucks with gasoline at $2.25 a gallon, even in premium luxury. As far as the import business, Bill, could you talk about that please?

The import business right now is being held up primarily, because of entry-level SUVs. For example, the RAV4, HR-V and CR-V from the hotter product lines are doing exceptionally well. Both of them have new entrance into the marketplace this year that they did not have last year. And so we have continued growth because of that, but it's 100% driven by their SUVs and the trucks.

Okay great. Sorry to have rehashed the premium luxury question, but thanks for answering anyway. I appreciate it. Thanks and good luck.

Thank you. Our next question will be from Mr. Brian Sponheimer of Gabelli. Sir, your line is open.

Hi, thank you very much. You know, Mike we've had another tragic earthquake in Japan recently and if you go back to 2011 that had a major effect on your growth. Obviously, the magnitude was much bigger. Do you have any sense when you're talking to the manufacturers that this smaller earthquake may actually help with your production concerns, maybe a little bit sooner than expected?

As far as it's disruption to the supplier production change, I don't think there is any comparison between what happened back in 2011, I think it was, and this one.

March 2011.

With this disruption I think GM just announced plant closing for couple of weeks. Obviously, there is some, but I don't think it compare. Bill, do you have any latest information from any manufacturers?

So you just called it out Mike. So General Motors idled four factories this morning because of the supply constraints. And Toyota is supposed to come back online on the 25th with the exception of one model line through the Lexus brand. But all in all, it's going to take probably somewhere little bit less than the 100,000 units out of the initial supply coming in. We can more than offset that.

Okay. And I guess I was surprised to see gross per used unit back up above $200 on a sequential basis from 4Q. Any color there? Is it just sales habits maybe changed to a little bit more normalized pattern during the quarter?

Hi, this is Mike Jackson. I think there is two -- I think there is two issues as the manufacturers take new vehicles incentive towards 10%. There is 9.6% at this point. That has a domino effect into the pricing of used vehicles. And I think we also had an issue with the number of vehicles and length of the time that we were holding vehicles waiting for parts on recall. We've now made the decision that if there is absolutely no parts inside then we will wholesale auction that vehicle with full disclosure. So as I talked about it earlier, that should effect in that issue overtime.

Okay. So you're not expecting anything again quite like the hit that you experienced in the fourth quarter on the used side from a gross profit per unit --

Bill, do you have anything to add there?

No. We've -- like you've talked about earlier, Mike, we're sort of auctioning off the excess supply of recalled vehicles and that has no fix inside. We've cleared most of that out between the fourth quarter of last year and the first quarter of this year. So we don't have quite as much exposure as we had before. And to Mike's point, as there is continued incentives and pressure on the funding of the new vehicles, new vehicles are much more attractive on a pricing point. I mean we're able to take advantage of that. So we should be able to remain with our growth from the last quarter.

All right, great. I will pass the baton. Thank you very much.

Thank you. Our next question will be from Colin Langan of UBS. Sir, your line is open?

Great, thanks for taking my question. Any color on the trajectory of new vehicle margins? Do you think they've start to improve throughout the year or how should we think about the cadence given the issues that we started in Q4, have they started to alleviate within the luxury business or is there going to be a headwind for the next couple of quarters still?

I think there is a lot of work to do over the next couple of quarters as far as the supply levels for both premium luxury and the overall market, which makes it difficult to forecast exactly where the new vehicle margins will be. I will observe though with our efforts in F&I our deterioration on a same-store basis was only was only $21 on the total vehicle margin. So again, we've managed that very well. Bill, anything to add?

The only thing I would add out there, Mike, is there is additional revenue that we do recognize in gross that comes in the form of ad credits from floorplan credits. And those are constantly changing between the OEMs. So you're looking in the aggregate. We've actually have some solid growth there.

Got it. And any color on parts and services that was up 5% on a same-store basis. Is that sustainable through the year? And any color within that how much recalls are helping or is that now a headwind at all within that number now that you had a record year the last couple of years? How should we think about the going forward?

This is Mike Jackson. 5% is a very satisfactory number and it is sustainable. I would say our recall policy in that it has slow the velocity of our used car sales as ironically, probably slowed our amount of reconditioning work that we would be doing on internal. So again, as we smooth out all the issues we have around recalls impacting or disrupting our used vehicles sales that will have a collateral benefit to our service and parts business.

Okay. Got you. Thank you very much.

Next question will be from Mr. Nick Zangler from Stephens. Sir, you line is open.

Hi, guys. Just looking for a little bit more detail on performance in among markets, particularly in Texas. I'm wondering if you're seeing a new sales actually shift to sales or if both are at equally weak? And then I'm wondering if any growth in service and parts collegiate that weakness and then just any comments on Florida would also be great?

Florida is great. Bill, you want to take the rest?

Sure, Mike. In Texas, we're not really seeing material shift from new sales to used vehicle sales. The one bright spot that we have seen is there has been a more access to vehicles, especially on the used cars side, especially when it comes to trucks. So a lot of the energy workers are getting out of their vehicles. We have access to them at a very attractive pricing and we're able to turn that back into the marketplace. But on a retail basis, our new and used cars business has been affected almost identically.

Great. And then I think you guys have said success amongst the OEMs this year will be based on truck production. Just given your visibility into production levels and manufacturing mix do you feel that OEMs have appropriately shifted production towards the truck segment for 2016 and beyond?

This is Mike Jackson. They are doing everything humanly possible within the constraints of how the plants are laid out. And you see everything from Chrysler completely switching over plants from core production to truck production to other plants that they do with the shift basis. So believe me, the OEMs clearly know the marketplace as move dramatically to trucks and are doing everything that's humanly possible to get there within the constraints of installed capacity.

Great. Thank you very much, guys. Good luck.

Thank you.

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

Hey, good morning. A question on the trajectory in the quarter and I guess as you look at the energy markets and there's been some stabilization and maybe recovery in crude pricing, are you seeing any turn in that market as far as consumer sentiment goes? Or is it still on the bottom?

If you're talking about Texas and trying to predict, I have to say and I have to be a weatherman. The weather has been so hellacious in Texas, it's hard to separate what are these epic weather events. Like Houston we just had 20 inches of rain that closed everything. Bill, are we -- what's the view in Houston coming back online?

Our stores came online fully yesterday, Mike.

Yes. So it was very disruptive. So it's a little hard to separate at this movement. We'll have to give a little more time.

I was thinking more along the lines of the energy economy, whether it's stabilizing is driving any improvement in demand down there, more so than the weather.

Bill, do you have any insights there?

Yes. It's just kind like when the price has started to fall, there was a math exodus. And as prices started to stabilize, you don't see them returning that quickly. There seems to be a lot of volatility in the marketplace and I think that's definitely having effect on the consumer in general. But it's too soon to really give any real guidance on what's happening with the consumer with a slight bump in the crude prices.

Okay, and then one other question. I guess you guys have been pretty acquisitive, are you seeing any shift in seller valuation expectations as the market is plateauing, and obviously you did a deal down in Texas, but are you seeing any improving pricing as you look at transactions?

We see every year a range of price offerings from totally unrealistic not really for sale to fair pricing. Clearly though with the opportunity we had on the share repurchase side and you're looking at the opportunity you have versus buying your own stock versus doing an acquisition, we are going to be much more selective on the acquisition side saying, hey, we really need a very good fair price here, or we just want to buy our own shares. So that conversation takes place but conversations are still going on and we'll have to see if that leads to deals or not.

Great. Thank you.

Thank you. Next question will be from Paresh Jain. Sir, your line is open.

Good morning everyone. I wanted to follow up on the need for industrial discipline comments. Many investors we talk to find it very hard to believe that industry will be any different this time. Both the OEM and dealer markets are extremely fragmented and all of them expect to gain share. And then again the credit environment is extremely supportive. Even captives are rolling out 84-month loan products and you've started seeing more used leases as well, so wouldn't volumes typically be the last thing to fall for OEMs or even plateau at this point?

Yes, that's the movie that all know very well and you are very - appropriately saying every time the industry has faced this test, it passed. There we are. That doesn't mean that it can't be different. Big changes have occurred in this industry, I can remember at going into plateau, the OEM's were already losing billions. This time we've arrived at plateau and they are extremely profitable. So there is new leaders there, and may be the industry can pass the test this time. I would say the conversation has gone pretty well and that we have pretty much agreement in the industry that it's plateau, step one. Step two, okay, it's taking a little while for them to come to terms what that means to their company and their plan. We have seen production schedules change. We have seen shifts go down so I am not totally pessimistic that the industry will go blindly marching forward and pulled too much business forward and when they finally, then come to capitulation its far uglier that it needs to be. But your point is well taken. I can't argue with it.

Got it. Thanks for the additional color. One more follow-up on the cost front. Volumes in your view are plateauing. We are in a push versus pull environment, which will keep GPUs under pressure. But those two are perhaps not so much in your control but when you think about SG&A and think about personal cost in particular, is there enough room to offset that GPU pressure and when do we start seeing the benefits of the express initiative on cost? Thank you.

Yes, so you think about it from SG&A perspective, I'd say one of the bright spots for us in an area that we really focused on when we began to see the plateau in the fourth quarter of last year was on compensation. So we've made really good headway on compensation year-over-year. So that’s an area that you definitely see that leveraging and advertising has remained in good order as well. Certainly when you have growth compression, it does impact on a percentage basis some of the store and overhead cost, but we've worked hard to offset that. So if you exclude the hail and the timing of the stock base compensation, you have the 70% SG&A that remains around our target level. You would like to see lower than that but in this growth pressure environment it’s going to be a little more difficult. I would say digital continues to be a medium to a longer term exercise. So we have made great headway with respect to the third party lead generators that we previously used. So we brought that below the 9% mark from 15% plus historically. So continue to see great traction there and it really helped us to delivery on the brand harness. So as we talked about we don’t use separate call up for the exact impact of digital, but I would tell you that all of the indicators continue to be very positive from those efforts.

Thank you.

Thank you. Next question will be from Mike Levin of Deutsche Bank. Sir your line is open. Q – Mike Levin: Good morning, guys. Mike, I just want to kind of get your thoughts around the progression of the retail SAAR. From I think J.D. Power we've seen it go from up 15.5 last September to about 12.6 in March. It's been sequentially declining every single month along the way. I just want to sort of understand what you guys are thinking about what might be happening there, kind of the health of the consumer, the economy sort of seems to still be going pretty well, credit availability as you mentioned is still pretty healthy right now.

Well, I'm not sure the overall economy as robust as you would have just described it. If I take GDP growth to last - well, we don't have the first quarter yet, but I'm not - nobody is real bullish on it. There is certainly going to be - I expect less than 2%, significantly less than 2% and fourth quarter was tough. You certainly saw the Federal Reserve pull back on its plans to increase its interest rates around its concerns on the economy. So I think it's not as strong out there as you might necessarily think. And we are at a high level. Don't forget we are at a high level for vehicle purchases. And is it really realistic to continue those types of increases. I would also point out I have concerns going into an election year. I've observed in the past on this very controversial election. And it looks like we are on the road to have one of those this year that consumers sometimes hesitate around big purchases. Usually pick it up after the election, but leading up to election it can be a little bit soft. So, I think economies had a hesitation or rough patch. We'll have to see if it resumes its stride. That would be very supportive of vehicle sales to get that. So I think my sense that I called out of the beginning of the year. And I clearly was the odd man out of the party as the Detroit Motor Show to say, hey, everybody. I don't think things are just going to zoom along here was a correct call. So we're adjusting. I hope the industry adjusts. And it's still an environment where you can be very profitable.

Got it. And we're pretty impressed by the level that F&I has reached and every time that we've thought it couldn't go any higher you've proved us wrong. And just sort of wanted to - I know you've commented already that you see possible growth still from here, but just wanted to maybe think about the AutoNation branded products. Is that the key driver behind this $100 sequential increase? What's the degree that you can get better pricing on those products or better penetration?

Yes, we get better pricing and better penetration. Bill you're leading the effort at the store level. Could you talk about it please?

Yes, it's a combination of things. So having our branded products is definitely contributing factor. We've always been able to get leverage because of our size when it comes to the products, but obviously taking them in house gives us 100% of the margin versus splitting it with a third party. As well as our stores still continue to execute at a high level and we still have opportunity in select stores and select brands for continued growth. So we feel very strongly with the performance of our team in the field on driving the numbers and we continue to see upside.

Got it. And maybe just one last one, so domestic revenue was up pretty healthy, 11%. It seems likely just on truck mix, but segment income was down about 3%. Was that just increased competition that you're seeing there or is there anything else kind of going on?

Bill, could you take that please?

Yes. It's definitely driven on the PVR side of the equation and the market is extremely competitive, as well as a large percentage of our domestic stores are in the energy markets of Colorado and Texas. So we've kind of got a double hit there between being in those markets. I mean the compression we had on that side as well as on the compression on the PVRs due to a more competitive marketplace.

Again just add to on the revenue side that reflect the acquisition of the Texas group, which was heavily domestic as well. Q – Mike Levin: Got it. That’s very helpful. Thank you.

Thank you. Next question will be from Michael Montani of Evercore. Sir, your line is now open.

Hey, good morning. Thanks for taking the questions. I want to ask on the inventory side if I could if you've provided or could provide the increase year-over-year? I think it was 35% in dollars in aggregate but what would that have looked like on a same-store basis? And then also could you give some clarity along the lines of premium luxury versus domestic and import?

Bill, you have those numbers there or Cheryl?

So on a same-store basis our inventory on a - I guess a day supply is the best way to look at it. We went from 55 days to 66 days as far as overall inventory, that’s approximately 1000 units but it was mainly - wrong number, sorry, it was 63, 657 last year, with 68,000 this year. So it's about 5000 unit increase. Mike you called it out earlier a lot of it is just based on the exit rate coming out of March.

Okay, and then, sorry, just in terms of the segment levels.

One more time, couldn't hear you?

Sorry, just is there any clarity you can share in terms of the segment level splits for the inventory build?

We'll go have to get that - get to the exact numbers and either Robert, Andrew or myself can reach out to get to you a more detailed response.

Okay, great. And just the last one that I had was more conceptual, but in thinking about Mike managing for quality versus quantity, you know how should we think I guess moving forward about the trade-off between GPU, which was down 8 on the new side versus the unit volume that was down 5? Is AutoNation increasingly focusing on preserving the integrity of that GPU or are you willing to maybe trade that off for some volume? Just how do you think about that and manage through that?

So we are not using price to try to get volume. We are more just moving with where the market is. We are not lowering price aggressively below market and therefore taking the market down further. So we’re just sort of add market as far as pricing and I think our volume results are very much reflection of the economic stress that's in the markets we’re in particularly energy which we talked about a lot and premium luxury which is going through this challenge with over dependence on cars and trying to shift the mix to trucks.

Great. Thank you.

Last question will be from Irina Hodakovsky of KeyBanc. Ma'am your line is open.

Thank you very much. This is Irina Hodakovsky on for Brett Hoselton. Good morning or almost afternoon. Two questions for you guys. One on the use of recall initiative. What is your current percent of grounded inventory and has that changed since the Takata recall kind of accelerated in terms of stop orders?

This is Mike Jackson. We had 15% of our pre-owned inventory on sales hold and I would say what has happened is that has been the same numbers since even into last year is that gradually the non-Takata situation has got under control but the Takata challenge has increased the point where I called out 60% of the vehicles are on hold are Takata. So Takata is the reason the number hasn't budged and I already talked about the steps we are taking to deal with that going forward.

Thank you. A quick follow-up to that. We've heard the suppliers of the replacement parts for the Takata recall have pushed out the timing of the revenue benefit they anticipate. Should we take that as a translation in terms of a little bit more bearish on the amount of vehicles grounded due to this recall going forward?

I haven’t heard the report, are you saying we are getting more sooner or slower?

Slower. They are expecting the benefit, for example Autoliv made a statement that they are expecting the benefit from the replacement parts, the revenue from that to come in a little bit later than previously anticipated.

Well that's not good news. I mean it's going to take longer to get the replacement parts. You know that - so we really need the parts as soon as possible and that would make life more complicated if parts availability expectation has slowed.

Got you. And then the last question for you on the leasing front, what is the percent of leased vehicles that are coming back that consumer, how many of those consumers are buying out the used vehicle and how many of them are leasing a new car?

Bill, you want to take that please?

I have to get the exact number for you on that but traditionally the vast majority of the customers do not buy out their leases and the high, high majority my gut would tell me it's in excess of 80% leasing another vehicle.

Got it. Thank you very much. Have a great weekend.

Thank you for joining us today. We very much appreciate all of your questions. Thank you very much.

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