Welcome to AutoNation's Third Quarter 2018 Earnings Conference Call. At this time, participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the call over to Robert Quartaro, Vice President of Investor Relations for AutoNation. Sir, you may begin.

Thank you. Good morning. And welcome to AutoNation's third quarter 2018 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman, Chief Executive Officer and President; Cheryl Miller, our Chief Financial Officer; Lance Iserman, our EVP of Sales and Chief Operating Officer; and Scott Arnold, our EVP of Customer Care and Brand Extensions. Following their remarks, we will open up the call for questions. Taylor Williams and I will be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our brief statement regarding forward-looking comments. Certain statements and information on this call, including any statements regarding our anticipated financial results and objectives, constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, including economic conditions and changes in applicable regulations that may cause our actual results or performance to differ materially from such forward-looking statements. Additional discussions of factors that could cause our actual results to differ materially are contained in our press release issued earlier today and in our SEC filings including our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q and current reports on Form 8-K. And now, I'll turn the call over to AutoNation's Chairman, Chief Executive Officer and President, Mike Jackson.

Good morning, and thank you for joining us. First, I'd like to take this opportunity to thank our AutoNation family across the country and rose the support our fellow associates during and after the devastation of Hurricane Michael. Today, we announced an investment in Vroom, a leading online car retailer. Our investment of $50 million represents an ownership stake of approximately 7%. Turning to our third quarter results. Today, we reported EPS in continuing operations of $1.24, a 24% increase in earnings per share compared to the same period in the prior year. Net income from continuing operations for the quarter was $112 million, a 15% increase compared to the same period a year ago. Third quarter 2018, same-store gross profit for the quarter totaled $838 million compared to $824 million in the same period a year ago. Same-store used vehicle gross profit was up 6% compared to third quarter 2017 and same-store retail used vehicle unit sales were up 3%. Same-store Customer Care gross profit for the quarter increased 7% compared to same period a year ago. We continue to prove that our brand extension strategy, particularly in Customer Care, was the right decision. Over the last several quarters, AutoNation's fixed gross profit has consistently outperformed the peers' average. We remain committed to increasing our focus on Customer Care Brand Extension and driving results. I'd now turn the call over to our Chief Financial Officer, Cheryl Miller.

Thank you, Mike, and good morning, ladies and gentlemen. For the third quarter, we reported net income from continuing operations of $112 million or $1.24 per share versus net income of $98 million or $1 per share during the third quarter of 2017, a 24% increase on a per-share basis. During the third quarter, revenue decreased $83 million or 1.5% compared to the prior year and gross profit grew $9 million or 1%. SG&A as a percentage of gross profit was 73.2% for the quarter, which represents a 140 basis point increase compared to the year-ago period and a sequential decline of 20 basis points from the second quarter. In October, our Ford store in Panama City, Florida suffered extensive damage due to Hurricane Michael, which will impact our fourth quarter SG&A expense. We currently expect fourth quarter SG&A to gross profit to be in a similar range to the third quarter of 2018. Additionally, we no longer expect a flat year-over-year SG&A to gross profit for the full year 2018 due to expenses related to Hurricane Michael, pressure on new vehicle margins, and continued investment in our Customer Care Brand Extension initiatives. The provision for income tax in the quarter was $33 million or 22.6%. During the third quarter of 2018 and in connection with the finalization of our December 31, 2017 federal tax return, we adjusted our deferred tax asset and liabilities for the income tax rate change associated with tax reform resulting in a 340 basis point favorable impact on the third quarter tax rate. For the full year 2018, we expect our effective annual tax rate to be in line with our previous guidance. However, due to the possibility of negative adjustments including market fluctuations on certain of our income tax items, we may experience a…

Thank you, Cheryl, and good morning. My comments today will be on a same-store basis as compared to the prior year, unless otherwise noted. Gross profit for variable operations was $455 million, down 1%. Variable gross was $3,303 on a per vehicle retail basis, compared to $3,255 same period last year. Same-store retail unit volumes were down 3% compared to the third quarter last year. Our One Price strategy continued to drive growth in our pre-owned business. Used vehicle gross profit was $88 million, up 6% compared to the third quarter of 2017. Used vehicles retailed were 58,700, up 3%. Used vehicle gross profit was $1,456 on a per-vehicle-retail basis, up 2% compared to the third quarter of 2017. We expect the continued growth in the supply of off-lease vehicles and our We'll Buy Your Car efforts to support used vehicle sales in 2019. New vehicle gross profit was $123 million, down 13%. We retailed 78,300 new vehicles, a decrease of 6% versus the industry retail sales, which were down 4%, partly driven by our difficult year-over-year comparisons in Texas, which benefited from strong replacement demand after Hurricane Harvey last year. We anticipate difficult year-over-year comparisons to continue in the fourth quarter, as well. New vehicle gross profit was $1,571 on a per-vehicle-retail basis, down 7%. As we mentioned last quarter, we continue to experience significant margin pressure and we expect to see continued pressure for the balance of the year. Customer Financial Services total gross profit was $244 million, up 4%. Our first brand extension AutoNation branded Customer Financial Service products has enabled us to drive industry-leading PVRs. Customer Financial Services gross profit on a per-vehicle-retail basis was $1,781, an increase of $107 or 6%. We want to provide an update on our five AutoNation USA stores. We are encouraged by current progress and are continuing to evaluate the existing stores. The investment in the AutoNation USA stores adversely impacted third quarter of 2018 by less than $0.02. We do not currently have plans to expand AutoNation USA in 2019, and we'll continue to evaluate our initial five stores. Finally, I'd like to congratulate the 18 stores that were recognized by Automotive News and are part of the 2018 top 100 Best Dealerships To Work For. These stores exemplify the strong culture and leadership present at each of our stores from coast to coast. I'll now turn the call over to Scott Arnold, our Executive Vice President of Customer Care and Brand Extensions.

Thanks, Lance, and good morning, everyone. We were encouraged by the results of our brand extension strategy and see the strongest investment return opportunity in our Customer Care business. We've increased our focus on Customer Care Brand Extension initiatives, which includes Precision Parts, collision centers, collision parts and AutoGear. Turning to our third quarter 2018 results, my comments today will be on a same-store basis and compared to the same period a year ago, unless otherwise stated. We continued to demonstrate industry-leading results in Customer Care, with AutoNation gross profit growth continuing to double the public peers. Customer Care gross profit for the quarter was $382 million, up 7%, compared to $358 million in Q3 2017. We remain on pace to earn approximately $100 million of incremental gross profit from our parts initiatives in 2018, which is evident in our solid customer-pay gross profit growth. Customer-pay gross was $160 million, up 7% year-over-year and warranty gross was $79 million, up 3% year-over-year. As part of our next steps in Brand Extensions, we've introduced a private label credit card powered by Synchrony. Customers will have the opportunity to use the credit card for the purchase of AutoGear products, automotive maintenance and repair services, and select Customer Financial Services products. In 2019, we are increasing our Customer Care Brand Extension initiatives, including dealer-linked collision centers, collision parts, Precision Parts, and AutoGear. I'll now turn the call back to Mike Jackson, our Chairman, Chief Executive Officer and President.

Thank you, Scott, very much. With our investment in Vroom and strategic partners with innovations like Waymo, AutoNation remains uniquely positioned to lead our industry towards the future of consumer mobility experience. We're now happy to take your questions.

Our first question comes from Chris from Wolfe Research.

Hi. This is Chris Bottiglieri with Wolfe. Thanks for taking the question. So maybe you can talk about the Vroom purchase. Is this a fairly passive stake? Or do you have formal plans to collaborate? Are there any purchase options that you have embedded with the deal if it hit certain like thresholds or targets? How are you thinking about all of this?

Yeah. So what caused us to make the decision to invest in Vroom was, first, they have very admirable and accomplished and professional executive management team put together under the leadership of their CEO, Paul Hennessy. And Paul has very impressive credentials in the whole digital technology space, as you all know, between Priceline and Booking. He also was a car enthusiast. So we have that in common to talk about. And Vroom has a very impressive journey in building the business to where it is. Therefore, we're very excited to make a $50 million investment in Vroom. Now with that, obviously, since we're both in the automobile business, we can talk about are there possibilities to do other things together. But that is at the very beginning of discussions. Nothing has been decided and that is firmly in the we-will-see category.

Got you. And then how are you thinking about the AutoNation USA initiative longer-term given this partnership? Do you view this is kind of a hedge if that's the way the market moves in the future? Or maybe just how are you thinking about it?

So to talk about the USA stores, I've put it all in the brand extension category. And during the quarter, we were looking very closely as to where we invest time management and capital more aggressively and you can't do everything at the same time and where then do we take a bit more patient view. Certainly, in the brand extension in the whole field of parts and accessories, it's a great success, and we have more demand than we're able to deliver. So the brand has accepted. The demand is there. The market assessment was correct. We have somewhat a mismatch with our sales history as to achieving a fill rate that realizes all the potential. We're at a 50% fill rate, and Scott can talk in a minute a bit about our plans to where that – to take that where you fully realize that demand is there. Lance has already mentioned that we have a – we're at a – progressed at a point where we had about a two – less than $0.02 loss in the quarter on the USA stores. But when you look at what we can do over in Customer Care, we've decided to push our plans there. Let another year unfold on the USA stores. And to your point, yes, make a $50 million investment with Vroom, have discussions with them over the course of 2019. See what comes from that. There's no decisions today, nothing to talk about today. But, you put that all together, that's our approach for 2019.

Thank you. The next question comes from Michael Ward, Williams Research.

Thank you. Can you hear me, okay?

Yes, we can Mike.

Two things. First of all, Cheryl, in the SG&A in the second quarter, was there anything unusual there? Or was that just some of the cost for the investment continuing on the AutoNation USA?

Yeah. The two things really impacting it are the brand extension investments, particularly in the Customer Care area, where we continue to aggressively ramp in that area as well as some of the compression in new vehicle margins, which, as you know, affects the denominator. So we feel like we're getting close to peak on those expenses, and look to get to more normalized levels into next year.

Okay...

Yeah, just like Cheryl said, there, it's very important and it was part of the review we took during the third quarter where the brand extensions that we will emphasize in 2019 have the highest returns versus any incremental investment that was required that our SG&A can begin to move to more normal or traditional levels into 2019 and where they were the past couple of years as we invested in brand extension.

Okay.

Yeah. Mike, when you think about core store OSGA (18:14) and there's we're very comfortable with that and what you're seeing closely right now is the ramp-up particularly in Customer Care.

Okay. That's right, okay. And then you mentioned about Panama City. Is it just one store that was affected? Or were there others?

No. It was just one store. We had a fourth store there that was absolutely devastated and...

Sorry to hear that.

...and our employees were significantly impacted.

Sorry to hear that.

Nothing that can't be fixed, but a lot of misery to go through.

Sure.

I think probably the highest damage we've ever had on any individual store, Cheryl?

Yeah, from a hurricane impact, I think the great thing, though, unfortunately having that experience in the area feel like we had very good continuity plans in place in what was the third worst storm that hit the U.S. So we feel very good about that. We continue to pay associates through. So we have a really good plan in place that ensures continuity of associates. Happy to say that the stores reopened already. And I think given the state that it was in, that's a significant accomplishment. So kudos to Lance's team and Scott's team for getting it operational as quick as possible in addition to a fantastic show from our facilities team.

Okay. And then Scott, you mentioned about AutoNation USA, and I wasn't sure what you're talking about. You said, there are currently five locations. Now was that just for the auctions? Or was that some of the pre-owned sales?

That was Lance actually.

Oh, okay.

We have five USA stores up and running, which, as we already said, in the third quarter loss less than $0.02. And we've made the decision not to build more USA stores in 2019. We'll let these stores continue to develop and move our emphasis over Customer Care Brand Extension. That's where we'll get the highest returns next year with the least incremental investment.

Okay. And those...

And, Mike, we have four auctions open currently and those are branded under AutoNation Auto Auction.

Okay. So the five stores you're talking about are the pre-owned?

That's correct.

Okay. Thank you very much.

Thank you. The next question is from John Murphy, Bank of America.

Good morning, guys. This is Yarden Amsalem here on for John. So first question on your portfolio optimization effort. I think your original goal was $200 million in proceeds for this year. So just wanted to get a sense of where do you stand on that year-to-date and how should we think about the pace of divestitures for 4Q and next year?

Yes. So year-to-date, we've generated about $162 million of proceeds. So we are on pace to hit the $200 million mark and then the pace in the future will depend on broader brand extension. We will continue to look at select divestitures and we'll continue to provide updates on that as we get to next year, but we do continue to be on pace to hit the $200 million for this year.

So is this mainly – are you guys divesting underperforming stores? Or is it geography or brand-based?

Typically underperforming stores, so...

It's really all of the above.

Yeah.

We haven't sold anything with meaningful earnings and then it's all of the above.

Got it. And then on capital allocation, you guys have been pretty active on the share buyback front over the past two years, but it appears the pace has slowed materially recently. Is this represented even anywhere of a change in the capital allocation strategy? Are you guys shifting away from the traditional path of buybacks and acquisitions toward strategic and future investments? I mean how are you guys weighting those different investment opportunities?

Yeah. So it's the same as we always have. We repurchase shares opportunistically. We always have to balance what we're currently looking at from an investment point of view. Cheryl can talk about the investments that we made during the third quarter. And the fact that we did the Vroom deal was decided during the third quarter. So that was a significant amount of capital that was committed in the third quarter. Cheryl, do you have that number?

Yes. As you look at some of the capital that we spent during the quarter, you have Vroom, which happened just after the quarter, but obviously we were looking at that. Additionally, if you remember, we had some Premium Luxury add points. So, some of the capital we're spending is continued build out of some of the stores in place where we had to add points in the past as well as brand extension and then certain additional IT investments in the digital space as well.

Okay. Great. Thank you for the color. And then lastly, can you talk about profitability trends you've been seeing by segment and particularly for light truck crossovers and SUVs? I mean, this doesn't have to be specific. I'm just trying to understand how competitive these segments have become compared to earlier this year?

You're talking about the new vehicle business?

Correct.

Yeah. Well, I would say, the marketplace is very competitive, regardless of segment. And affordability is an issue with rising rates for the consumer. You can tell them all day long that these are very attractive rates. All they know is money used to be free and now they have to pay for it. So that's an adjustment period that they're going through. I think for the manufacturers, the shift to trucks is extremely profitable and they'll be fine.

Okay.

Thank you. The next question is from Jamie Albertine, Consumer Edge. Your line is open.

Great. Good morning. Thanks for taking the question.

Hi, Jamie.

And, Mike, wanted to just say thank you for everything and certainly wish you the best as you're moving on here. Wasn't sure if this would be our last call or not, but you've done a great job over many decades and I just want to say we appreciate it and wish you the best in your next venture.

That's very nice. Thank you very much.

As it relates to very quickly just on the Vroom side, and maybe I'm asking the same question in a slightly different way, Vroom has been around for a few years, as we understand it. You've talked about the last few quarters slowing the store growth for AutoNation USA standalone. Just wondering if we should be reading into here a call that you're making or something you're seeing in the data that suggests that maybe there is more online-only demand than we thought prior and perhaps an omni-channel approach is the best next step for companies like yourself. Just wanted to understand what you're seeing in terms of the metrics on the demand side for services similar to what Vroom provides?

So we're, certainly, watching all the developments in the automotive environment. And so, if you look at how we approached autonomous service, we looked at all the players in there and came to conclusion that we thought Waymo was in the lead, by far, with great leadership, great ownership. And we felt they were the company we should partner with. And that partnership came in the sense that we're investing in capabilities to support Waymo vehicles without any near-term goals on profitability. And that relationship is developing in a very positive way, which I feel, over time, will open doors that are very interesting. So that's our basic approach. And I would put Vroom very much in the same category. Now in this sense, we began with an actual investment in the company and that's all we have to talk about today. But I feel the same way about it that, if you look at the two companies, it could be an interesting development. But I could be sitting here a year from now and say to you, well, it was a great investment, that was it. So you just don't know. And so, it's firmly in the we-will-see category. But the way I think about it is the pre-owned market segment is approaching 40 million units a year. I think it's clearly going to be the segment vis-à-vis new for the next several years. I've been saying that. So we want to be in it in a meaningful way and I like to create different paths to success and I think this investment in Vroom is a possibility. But for today, it's an investment. I think it's a great investment. I'm excited about the investment, but I like the other factors around it and so discussions will happen and we-will-see, but it's literally an investment today.

Understood. And that's very helpful. If I may just, Cheryl, from a modeling perspective just to help us think about maybe the next few quarters, I know you don't provide guidance, but it does seem to be quite a theme here building new vehicle, gross margins have been under quite a bit of pressure on a per-unit business. And you've already been on absolute terms one of the best among the dealers on F&I PVR. Should we assume that what comes in terms of the expense the losses on new vehicle GPUs? Should we assume you're making up at least a portion of that, if not all of that, an F&I PVR going forward? Or am I drawing too much into that relationship?

Yes. If you look at variable over time, and we've had very good stability and overall variable when you take into account the opportunities in CFS, and we've always had best-in-class CFS and continue to feel very strongly about that area. New vehicles are competitive. So we really managed the total variable and then we want to make sure we continue to focus on Customer Care to grow that very stable part of the business and provide a nice counter-cyclicality over the long-term. So that's how we really think about the business. And I think what you see right now in flow-through is really the surge in the investments to continue to position in brand extensions and particularly in Customer Care Brand Extensions. And a portion of that is also digital investments, direct digital as well as investments similar to Vroom for optionality in the marketplace. And that's the broader context that we think about, but we do look at total variable as opposed to – certainly, we manage each of the line item, but we make sure that based on customer end market, we're being competitive in a way that brands and customers are approaching the market which does change over time.

Yeah. So I couldn't agree more with what Cheryl just said. We anticipated headwinds coming in the new vehicle business and, to balance that, we launched branded products in F&I which are succeeding very well. And then we said, okay, there'll be a shift from new towards pre-owned and how to realize that success. We said, okay, we'll One Price across the country. So that was quite an effort to centralize our entire pre-owned business and create the technology to run a One Price pre-owned business, but the customers love it. That's the report card. And we went down this unprecedented growth of brand extension in Customer Care around Precision Parts accessory and AutoNation collision parts. And the demand is extremely high to build the infrastructure. And we had learnings from sales history now to do better ordering going forward. So that gives us confidence. Now, we have to elevate SG&A to do all that. You can't – there's no magic wand to create all that and not have the elevated SG&A. So – but we're through all that. So next year, you'll begin to see the benefit of having those brands' extended capabilities with the trend line back towards normalized SG&A. And of course, I shouldn't leave our the USA stores where we're up and running and they're progressing about where we thought. But considering the other investments that we decided to make in the third quarter and the fact that the stores need still time for maturity that we will not build additional USA stores in 2019. So that's the conclusion of report card that we had promised you on this call for brand extension.

Understood. Thanks again and best of luck.

Thank you.

Thank you. The next question comes from Armintas from Morgan Stanley. Your line is open. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Good morning. Thank you for taking the question. Maybe you could walk through some of the pros and cons that you've seen with AutoNation USA, some of the learnings as well as areas where you're excited about?

Yes, this is Lance. So I would say some of the areas that we've seen success is a couple of areas. Our average recommissioning, the process that we use is slightly different than our traditional stores. I mean we've been able to drive our recommissioning cost down several hundred dollars over – or below our traditional stores. This is also a one price, one person selling environment. So we have one person taking you from front to the back including paperwork and through CFS process. So we've been able to replicate near the original OEM stores. Results on used car are very close to replicating our profit margin in CFS. So those are things we're very encouraged by and look forward to continuing to develop. And we have to – some of our stores have sourced used cars very well from We'll Buy Your Car. Phoenix store is averaging 40 cars a month and we need to get the other stores up to that. So those are cars that we're buying off the street from individual customers, which typically drive the best margins just as trade-ins we do in our traditional stores. So those are things – those are areas we're really concentrating on and continuing to improve upon. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Okay. And then you mentioned with the Brand Extensions that the demand is there but there's a mismatch of the sale rate. Can you elaborate on that a little bit?

Sure. This is Scott. When we look at that obviously, we would direct with our own sourcing on parts. And when you look specifically at AutoNation collision parts, we're a large wholesaler of OEM parts. But on the aftermarket parts, we don't have as much of a demand history. We put together our own charting of demand and made assumptions to do that but every month we get better with fill rates and inventory levels. So we're maturing quickly on that. And as Mike Jackson said earlier, as we get our fill rate up and our breadth of inventory up, the demand continues to stay in front of us and our sale rate continues to increase. So we're very excited about that. Armintas Sinkevicius - Morgan Stanley & Co. LLC: Got it. Thank you for taking the questions.

Thank you. The next question is from Mike Montani, MoffettNathanson. Your line is open.

Hi. Thank you. This is Ioana Alecsiu on for Mike. Cheryl, so your 4Q guidance implies that the full year SG&A to growth ratio would be about 100 bps higher year-over-year in 2018 just given the hit from the hurricane. Can you give us any sort of guidance on this metric for 2019? Should we expect that step-down in the rate closer to the 2017 levels?

Yes. We said we expect a normalization. I think as you start to see us peaking here towards the end of this year on brand extension investments that you start to see that begin to trail off next year and expect to see a normalization. We'll also need to see where the new vehicle market comes in, because obviously margins can't pressure the denominator on that. But I think overall, we'd expect that normalization. And even when you roll back previously, we had expected the surge in brand extension investments. We've talked about that. Previously, you've seen that come through in the numbers. So again, we expect some reductions in that into next year.

Okay. Thank you. And then I have one more quick one on the new GPU, still seems under pressure. Can you give us any color on the outlook for 4Q or maybe something into 2019?

I'm sorry, what was the question about, new gross margin?

Yes. New GPU.

Yes. And I think we saw strong replacement demand in Texas and with that we saw some better margins last year in Q4 both in new and used. And I think the continued stair-step programs that we're seeing this year, we continue to have to make decisions on a store-by-store basis depending on where our targets are and where we think of the attainability of those targets. So, it's a balance that it's very difficult because it's constantly changing from brand-to-brand and from store-to-store. So, it's just a balance that we're trying to reach and so we continue to see the – we feel like we're going to see the same thing continuing into next year.

Okay. Thank you.

Next question is Rick Nelson from Stephens. Your line is open.

Thanks. Good morning. So, you announced the Vroom investment today, previously the partnership with Waymo. Mike, I'd like to get your latest thoughts on how you see the future of the dealership model, how you see that evolving?

Well, I think the dealership is as relevant as ever over the next decade with high added value for consumer and for the manufacturer. And retailers have proven to be very adaptable and resilient and willing to embrace the changes. If I look at it, though, I think having scale and brand is a tremendous advantage more so today than ever, because of all the issues that retailers are going to be confronted with. So I like our position and I like the investments that we've made over the last several years, I think, put us in a very good position. So I see us with taking scale, brand and digital capabilities to create these new opportunities and forming these partnerships and investments, whatever you want to describe it, puts AutoNation in a unique position to perform in the years ahead.

Thank you for that. Also, like to learn about your early progress on the CEO search. And hopefully, this isn't the last call, Mike; it's been nice working with you for a number of years.

Well, there is no update on the CEO search and there will not be an update on the CEO search until the announcement of the new CEO. So, there's no interim reports.

Fair enough. Thank you. Good luck.

Thank you.

Thank you. The next question is from Stephanie Benjamin from SunTrust. Your line is open.

Hi, good afternoon. Thank you for the question. I was just hoping if you could just provide a little bit more color on the customer care investments and kind of decision to double-down a little bit next year or focus the attention. If you could just maybe speak to some metrics or performance you saw during the quarter that kind of led to that decision. So, just a little more color there would be great. Thank you.

Yes. The main thing that we're excited about is the high demand for our accessories parts and our collision parts. It's always nice to have. Now, we have somewhat of a mismatch that we will sort out between what people want to buy and what we've put in inventory. And we have to make some adjustments and some additional steps in our logistical capability to get everything to the marketplace. And we're putting in a bigger footprint than what we had originally envisioned because of the demand, but if you look at the margins and the returns, it's definitely very exciting. And we'll get the emphasis of our focus to make sure that all gets done and we finish the build-out that has to be done, which was already underway which we accelerated both already in the third quarter through year-end.

Got it. All right. Thanks so much.

Thank you. The next question is from Colin Langan, UBS. Your line is open.

Oh, great. Thanks for taking my question. I think the initial guidance for parts and services, like the private label strategy, was about $100 million in incremental gross profit. I think year-to-date, it's only around $50 million and that's actually without the core business. I mean so is it coming up shorter? Or would it be down if not for that? Or am I incorrect on that target?

I think it's on track. Scott?

We are on track. So we still are on pace for approximately $100 million. Currently, right now, we're in the $70 million range. So we're very bullish on it.

And so would that imply that the core business actually would be down if it wasn't for this program? When I look at parts and services gross, it's only $50 million year-to-date.

I'll do the math on it, but I think the underlying growth for the peer group was around 3%, something like that, right? And we're at 7%. So if you say the peer group is the base and we're different than the peer group because we have brand extension. So we're outperforming the peer group by more than double.

Yes. The $100 million that we're talking about too wasn't all incremental this year. There was some of it into last year when we mentioned that. And I would also say if you just look at margin performance, we're over 45% for the last two quarters and that's historical highs for us to be in that range on it. But just the $100 million is on pace. Some of it included the end of last year because as you remember we ramped up.

I'll get the exact calculation in front of me and we'll give you a phone call. I think it's close.

Got it, okay. All right, thank you.

But I think, Colin, warranty obviously is under pressure and I think you've seen that throughout the sector. But I would say if you look at the broader performance for the year from where people expected it towards the end of last year, I'd say warranty has been a big negative factor and we have discussed that previously.

Yes. But that has – Cheryl is absolutely right. That has nothing to do with brand extension. So if you say something like warranty being down, more of that's for every publicly traded group faces headwinds and warranty. So just back of the envelope we say, okay, what are the publicly traded groups growing their gross profit in customer care at the base line that takes into consideration the fact that where the economy is, where the customer is, where the warranty is going sort of just like a baseline. And whereas AutoNation where – so the baseline is plus three and we're plus seven. And then just do the math on that differential. We'll double check and get back to you.

Okay. And it came up a lot already, but SG&A, have you ever given color on the investment cost this year that you're spending within numbers? And what is the long-term target if you could just remind us in terms of SG&A to growth?

Yes. The long-term target we've talked about getting back below 70% and we think as we press brand extension investments and as we get some additional efficiency and digital over time, we think that that's very achievable to get back below 70%. And then with respect to brand extension, we haven't called out discrete direct investments in distinct periods in the past.

Okay. All right. Thank you very much for taking my question.

Well, thank you, everyone, for joining us today. Thank you for the interest in our business. Very much appreciate your questions. Thank you.

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