Asbury Automotive Group Inc (ABG) 2011 Q4 法說會逐字稿

Good day and welcome to the Asbury fourth-quarter 2011 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead sir.

Thanks and good morning to everybody. Welcome to Asbury Automotive Group's fourth-quarter and year-end 2011 earnings conference call.

Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's fourth-quarter and year-end results was issued earlier this morning and is posted on our website at asburyauto.com.

Participating with us today are Craig Monaghan, our President and CEO, Michael Kearney, our Executive Vice President and COO, and Scott Krenz, our Executive Vice President and CFO. At the conclusion of our remarks, we will open the call up for questions, and I will be available later for any questions you might have in my office.

Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by such statements. For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2010, any subsequent we've filed quarterly reports on Form 10-Q, and our earnings release issued earlier today. We expressly disclaim any response ability to update forward-looking statements.

It is now my pleasure to hand the call over to our CEO, Mr. Craig Monaghan.

Good morning everyone and thank you for joining us. Asbury is a different company today. You've seen this in our accomplishments and our results. This past year, we have paid down $95 million of debt, 17% reduction; improved our leverage ratio to 2.8 times, clearly in line with our industry peers; repurchased $45 million of our stock; completed $30 million in lease buyouts; purchased $16 million of real estate; generated over $50 million in cash proceeds from the sale of our non-core heavy truck business; completed a $900 million credit facility with improved terms and lower rates; and converted all of our stores to common systems.

Our financial results speak for themselves. Revenues were up 8% in the fourth quarter and 10% for the full year. We improved our cost structure, reducing SG&A as a percent of gross profit by 200 basis points in the fourth quarter. We delivered a fourth-quarter operating margin of 3.7%, placing us among the leaders in our peer group. Finally, full-year adjusted EPS was up 29% with fourth-quarter adjusted EPS up 46%. Considering last year's natural disasters and the resulting severe supply disruptions, these are outstanding results.

Now, Scott will provide more detail.

Thanks Craig.

Our fourth-quarter results of $0.54 were adjusted for after-tax loss and debt extinguishment of $400,000, or $0.01 per diluted share. Before these adjustments, reported EPS from continuing operations was $0.53.

We continue to make progress in improving our cost structure. SG&A to gross profit margin was 74.7% for the quarter, a 200 basis point improvement compared to the prior-year period.

Before I move on, I'd like to note that 2011 results include a one-time benefit of approximately $1.5 million pretax, or $0.03 per share after tax, from settlement of a legal matter and adjustments to certain of our retirement plans. So at the end of the day, our $0.54 adjusted EPS for the fourth quarter was more like $0.51.

Our fourth-quarter strong store operating performance enabled us to continue strengthening our balance sheet and return capital to our shareholders. During the fourth quarter, we spent over $57 million investing in our business, reducing debt, and repurchasing our common stock. For all of 2011, we invested over $200 million in CapEx, lease buyouts or real estate investments, debt reduction, and share repurchases.

With respect to CapEx, we spent $18 million of the $35 million we had budgeted for 2011. The remaining $17 million of projects was started in 2011 but the actual CapEx spend is carrying over into 2012. Because of the carryover CapEx from 2011, we are budgeting approximately $50 million of CapEx for 2012. A majority of the budgeted CapEx is for store upgrades, with the remainder for tax and maintenance. Our CapEx numbers exclude lease buyouts and real estate investments.

With respect to real estate, we purchased $16 million of real estate during the year in anticipation of future lease maturities. We have acquired $30 million of previously leased properties. We own approximately 60% of our stores and continue to evaluate additional lease buyout opportunities.

We repurchased $14 million of our convertible notes and prepaid approximately $75 million of our mortgages during the year. We have achieved our goal of reducing our leverage below 3 times to total debt, total debt to adjusted EBITDA. We ended the year with total debt to adjusted EBITDA leverage up 2.8 times. This compares favorably with our peers.

During the quarter, we repurchased $15 million of our common stock, or 814,000 shares. For the full year, we spent $45 million to repurchase 2.6 million shares of our common stock. This represents around 8% of our outstanding shares.

Our final DMS conversions went extremely well. We now have a common DMS in all of our stores.

Thank you to all of Asbury team as well as our partners. And for you listening, you guys did a great job.

With common systems now in place, we are taking the next steps in further reducing our SG&A expenses. Our goal is to reduce SG&A as a percent of gross profit on a full-year basis from the 76.3% we achieved in 2011 by another 200 basis points over the next 24 months. This implies a ratio of around 74%. Our view is that leasing versus buying property is a financing decision. Therefore, when evaluating SG&A expenses, we believe it is important to adjust for rent expense. Excluding rent expense, our 2011 SG&A as a percentage of gross profit ratio was 71.1%.

We ended the year with total liquidity of $232 million, which includes $205 million under our revolving credit lines, $11 million in cash, and $16 million available in floor plan offset accounts. We are executing our plan of allocating capital in a balanced and economically sound manner to optimize our balance sheet, return capital to shareholders, and position our Company for future growth.

I'll now hand the call over to Michael to discuss our operational highlights.

Thanks Scott. I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance.

New vehicle gross profit increased 3% compared to the prior year. Our new vehicle margins for the quarter were 6.7%, basically flat compared to the prior period. Adjusting for the luxury incentive we earned in 2010, our new vehicle margin improved over 30 basis points.

We believe the challenges that our Japanese branded dealerships experienced during the second half of 2011 are largely behind us, and anticipate more normalized inventory levels by the end of the first quarter, as well as continued opportunities for all of our brands.

Used vehicle sales continue to be a strength for us and provided an alternate product for many of our Japanese branded stores during the quarter. We increased used unit sales 19% over the fourth quarter last year. This is primarily due to the continued success of our Asbury 121 program.

Margin slipped 110 basis points to 8.8% as a result of normal seasonal pressures we faced in the fourth quarter, as well as an intentional reduction in preowned inventory levels from the third quarter. Our used-to-new sales ratio was 70% for the quarter. We end of the fourth quarter with $86 million of used vehicle inventory, or a 31 days supply on trailing 30-day basis.

Our Finance and Insurance business continues to remain strong for us as the execution of our F&I sales processes and training is generating record results for Asbury. Fourth-quarter F&I revenues grew 21% compared to the prior period. F&I per vehicle retail for the quarter was $1147, up 13% year-over-year. In addition to excellent F&I process execution, we continue to benefit from the current lending environment and the return of much more favorable lease terms.

In the fourth quarter, our parts and service revenues declined 1% and gross profit grew 2% compared to the fourth quarter of 2010. Parts and service gross margin for the quarter was 56%, up 160 basis points compared to the prior year. The year-over-year gross profit improvement was driven primarily by the 31% increase in reconditioning work.

I would also like to highlight that our gross profit from warranty work was down 27% over the prior period. This is due to tough comps from high recall volumes we saw last year, as well as lower units in operation resulting from the drop in new vehicle sales over the last three years.

We are making good progress on the national tire sales program we launched last quarter. This program is designed to retain our current customers and provide an incentive to all of our customers to return to our dealerships. As an early example of how quickly this program can grow, I will highlight the success we have experienced at our Crown Honda store in Durham, Carolina. With respect to tire sales, this store is now the number four Honda store in the nation and the number one in the Atlantic region. The performance of this store highlights the potential this program has to significantly boost our customer pay business. Considering the increasing number of consumers looking for more fuel-efficient vehicles, the continued improvement in availability of consumer credit and the strong pipeline of new products coming from all of our manufacturing partners, we believe we are well positioned as we enter 2012.

Finally, I want to extend my appreciation to all of our associates in the field. You are doing an outstanding job during a challenging retail environment. Your boundless energy and innovation are inspiring. I can't thank you enough.

With that, I'll hand the call back to Craig to conclude our prepared remarks.

Thanks Michael.

2011 was a pivotal year for Asbury. We are entering 2012 as a very different company. For the past three years, Asbury has been playing defense. With strong operational and financial foundation in place, we look forward to 2012. There will be challenges ahead, but we are confident we are in a position to handle them. In closing, I want to thank each of our employees for their dedication and innovation.

I would now like to turn the call back to the operator and we'd be happy to answer any questions you might have.

(Operator Instructions). Rick Nelson, Stephens.

Thank you and good morning. Nice quarter. I'd like to ask about the DMS rollout expenses that you incurred in the fourth quarter and full year. Just to be clear, those expenses go away in 2012 and some of the benefits may be that we should expect to see from the DMS.

This is Scott. Good morning to you. As we talked before, really our estimates haven't changed. We do have expenses going away. We completed this. As I think we've mentioned in the past, somewhere between $2 million and $3 million of expenses that were incurred in 2011 will disappear in 2012. These are principally things that are related to consultants and people we had in helping us with the conversions. So there is some uplift from that.

As I think you and I have discussed in the past though, the real benefit of this isn't just the dollars going away. It's the fact we now are all looking at a common set of numbers, common definitions, and it really provides the tools which -- much better tools for Craig and Michael to manage the business going forward. That really is where our focus is now going to be in 2012 is on we have done it, we've put the systems in place, now we really need to use them and benefit from them. So it's hard to quantify that number, but it's certainly part of the 200 basis points of additional savings in SG&A which we are targeting over the next 24 months will come from that visibility and our ability to better manage the Company.

Thank you for that. What sort of SAR are you planning for 2012? Your brands heavy Japan, Honda, Nissan, Toyota, if you could comment there what you see in terms of unit growth for 2012?

I'll take that one. It's Craig. I'll just jump in. We like to be a little conservative as you are well aware. We for planning purposes are looking at a SAR somewhere between $13.5 million and $14 million. Our view is always if we plan low and things come in a little stronger, we've just got upside.

With respect to the Japanese brands, clearly we were somewhat at a disadvantage in 2011. Even through the end of the year, a lot of our stores were light on inventory. So we think we may have some tailwind into next year, but it's very difficult for us to quantify that. It will be a function of how quickly those inventories come back online. I will say they are coming back very quickly here in the current quarter. But I think it's also going to be a function of how some of the new product that we will see from our J6 partners is received in the market. All in all though, I think we feel like we are in a good place.

If you could also comment on the new vehicle gross margins. Do you think you can maintain those in the 22.50% area as inventories normalize, or do we start turning back to the pre-earthquake levels?

This is Michael. I think the 22.50% number is sustainable. When I look at the pipeline of products that are coming out, there's a fair amount of new product sequencing over the next 12 months. As you all know, the newer product commands a little bit better margin on it. We are seeing a little bit return of the incentives in a variety of different ways. So, I think all of that together will allow us to hold onto the margin. I don't think we will see the new car margins that we saw May, June and July, but I think period prior to that we should be able to maintain what we've carried throughout the fourth quarter.

Thanks a lot and good luck.

Elizabeth Lane, Bank of America Merrill Lynch.

Good morning and congrats on the good quarter. Apologies if you already went through this. Can you give a day supply on inventory for both new and used and where your target levels are? Do you expect to get back to normal in the first quarter, or is it more of the second-quarter story for the Japanese brands?

Maybe we'll - we can - -Elizabeth, we'll break that into two parts. Michael can talk a little bit about where we are now, and Scott can take a minute and dig out where the inventory levels were DSI based at the end of the quarter.

This is Michael. I'll answer it a little bit in reverse. We were at 31 days used. We generally target somewhere between 30 and 35 days used cars. We stay in that range; we're very comfortable in that. So on a go-forward basis, I think the 31 to 32, 33 days is fine on that.

While we're getting into specifics on the new, I will tell you that we are, as we speak, rebuilding some of the J6 inventory. We had a, as you can see, a good fourth quarter. We were inventory constrained throughout the second half of the year. We brought the inventories down to some fairly low levels in December. Those inventories are rebuilding now and we would expect, as we noted earlier, that particularly the J6 brands will normalize out by the end of the first quarter.

Your other question was just asking where the DS -- the day sales of inventory were?

Yes.

We are returning here to a more inventory -- a more normalized level here. On the new fourth quarter this year, we are running about 53 days, which is just in line with where we were a year from now, which is just slightly higher than that. So that's pretty healthy.

On the new -- and Michael has already been talking about the used, so -- I think the bottom line as we look at the inventories, we've seen a steady recovery from the period we had sort of mid this last year. We are approaching what we consider to be normalized levels in this quarter. I think Michael has pretty much covered the rest of it.

Great. The SAR in January was very strong but the retail data today suggests that retail auto sales were weak. Without commenting specifically on what your numbers for January looked like, can you give any sense of what the overall retail environment is like? Do you think fleet was driving most of the strength in the SAR, or is that just a function of volatility and the seasonal factors or something else is going on there?

It's Craig. I'll just jump in there a little bit. I think we have -- and I'll speak to Asbury. We've got two things that are happening here as we begin 2012. Clearly, we started off with a very strong SAR in January up in the about $14 million, but there was a lot of fleet there. we saw the domestic fleet numbers all in the 30% range, and so that created somewhat of a misleading SAR number because the retail SAR is certainly below that level.

On the other hand, from our perspective, we are starting to see inventory build back into the J6 stores. So that makes things in some ways feel a little better for us. I think we are in somewhat of a unique situation given our heavy J6 mix in the portfolio, but all in all, I would say that we believe 2012 will be a good year and we are looking forward to it.

Great, thanks very much.

James Albertine, Stifel Nicolaus.

Good morning and thanks for my question and congratulations on the solid quarter. I wanted to dig in a little bit if I may on the DMS rollout now that it's complete, it's across all your stores. I wanted to understand -- I guess you pointed to a 200 basis point leverage opportunity over the course of the next 24 months -- sort of how you are thinking about that cadence of that leverage opportunity that's relatively evenly spread over that period of time, or is it going to be more front, middle or back-end weighted?

Then separately, sort of a qualitative look at what the milestones look like from here. Now that it's rolled out, is personnel training still an important next step, or is it adoption or is it optimization? Where will we see the flow-through? Is it going to be first in the new or used or P&S businesses? I just want to understand all that.

Okay. Did you get this question from my boss, Craig? He asked me the same thing.

In terms of the timing of this, it's certainly not going to all be at the back-end. We'll achieve it as we go along in the period. The exact timing of it is real tough, because there's some investment and training to be done upfront. It's not inconceivable I'd back up a little bit because of some training dollars and stuff before we get the full benefits on this. But you know, it's not going to be even, but it should be relatively well spread out over the next 24 months as we achieve it.

Next steps, now that it's rolled out, is utilize it. We still have identified gaps in training. Our CIO was chatting with Craig and I the other day and saying a lot of the complaints -- well, the system won't do this. There is really a lack of understanding of what the system can do. So we are inventorying that right now with the intent of going back and catching those spots where we do need to do some additional training.

We are also now looking at how do we utilize this? A lot of it is ability to get the data which we now have available to us out of the system and organize in a form where it's information, where it helps to predict where we are going and it helps our managers, our general managers at the stores, our retail managers, our other operating people, to make good decisions here. That is an ongoing process. I think every month which goes by, we see better information and people having access to it on a more timely basis.

How it plays out and where you see it manifest itself, a lot of it is going to be in SG&A where we take just basic cost out. It allows us to take a much more aggressive look at productivity across all of our stores and make improvements there. So it may well come out in the gross of the cars as it gets us better visibility on inventory and a better ability to manage that, although Michael and his team do a great job with that already. I think, as Michael always reminds me, we can always improve, and I think we will have better information there. So it will be in a lot of places, but the vast majority -- I think obviously the 200 basis points is all SG&A, but I think there will be benefits elsewhere in the Company as well that we'll see. I don't know. Does that answer your question?

Absolutely. I appreciate the additional detail. One quick follow-up if I may. It may be early to tell just in terms of your acquisition cadence obviously is at zero. Before you start to think about the next steps in the acquisition and acquiring to build out the portfolio, what do you think this rollout will do with respect to sort of new store productivity, IRR metrics, length of time it takes to sort of pay back from the initial acquisition stage relative to ABG historically? Thanks again.

It's Craig. I'll jump in here on that one. We are working very hard and have been working very hard over the last year to make Asbury a stronger company and a better operator. Obviously, to the extent that we've made progress doing that, it makes it that much easier to integrate an acquisition.

I would point out that about a year ago we did make a fairly significant acquisition for us, and we are very pleased with the performance of that store. But we learned that it takes time to integrate something of that size. You can go out and find stores in the marketplace that have a lot of upside potential, but there's no lay-outs. So which brings us back to when we spend time making the stores that we have better, we think those are great return on investments as well.

Great. Thanks so much.

Steve Dyer, Craig-Hallum.

Thanks. Good morning guys. A couple of things, some of them might have been answered. But I don't have sort of the cadence of the new product launch in front of me. How should we think about that? Is it mostly back half of the year weighted in terms of some of the new things we are seeing from Honda, Nissan, Toyota, etc.?

This is Michael. It's not all back weighted. It's actually fairly good cadence throughout the entire year. We've got the new 3 series that's just coming out. We had a new CRV that came out in December. The Accord was previewed at the Detroit Auto Show; that's a little bit later this year. The Civic relaunch a little bit later on this year. Camry came out in the fourth quarter; Camry hybrid is out now. The Prius rebranding, the whole different product (inaudible) throughout this year. Lexus GS is out now. We've got some other Lexus product with some new skin and some little bit different faces scheduled throughout the second half, in the third and fourth quarter. But we just saw a new Audi 7, a new 6. There's a new product coming out with that. Mercedes, new S later on in the year. We got a new as SL that's come out. The C Class came out late last year. So we could go on and on and on, we can provide the detail, but we think the true cadence of this product starts last quarter and goes through at least another five quarters for us. I think our brand mix is well-positioned to take advantage of all that new product.

Okay. Then I was wondering. If you sort of net out all of the different I guess you'd call them somewhat one-time items in the year-over-year lower floor plan financing, rent savings, etc., any way of quantifying sort of the relief you get on a year-over-year basis in dollar terms?

It's Craig. I'll jump in there. I think, if you look at our SG&A year-over-year, there were a lot of things going on last year, a lot of things going on this year as well. I would say, roughly speaking, we probably saw about a 100 basis point improvement in SG&A over the last 12 months. Like Scott mentioned earlier, we are targeting another 200 basis points on top of that as we move forward over the course of the next two years.

Okay. That's helpful. Thank you.

Scott Stember, Sidoti & Co.

Good morning. Your Parts and Service business gross margin has certainly benefited from the higher reconditioning work. Going forward, as you increase your tire business, can you talk about what the net impact would be to your gross margins throughout the year?

This is Michael. I think, if you were just in the tire business and that was the only reason we would get into it, I think you would see an impact, a negative impact, on the overall margin as tires are relatively low-margin product. We are not doing it just for that; we are doing it to retain the customer, to bring customers back that we had abandoned over the years. I think it's a reasonably well-documented fact that for every dollar of tire sales you get an additional $1.50 in other sales. Those other sales are at the margins that we have today. So, I think, just as a very broad gauge, there might be some slight impact, but I think the offset to that is the growth and the increased growth on the overall customer pay side of the business.

Okay. If you could just maybe remind us what the margin profile is, customer pay versus reconditioning?

The way we account for reconditioning I think is somewhere close to 100% margin on the labor side. Customer pay is in the 70% margin range on the labor side.

Okay. Going to the expense front, you guys did a great job of leveraging your G&A versus your gross profit. Could you talk about some of the buckets that you were able to draw from in the fourth quarter?

I think there is a lot of -- clearly -- let me back up here. The biggest piece of SG&A is always salaries. We are a people company. We saw a lot of improvement in the non-commission salaries, and that's the payoff for a lot of work people have done around here in terms of becoming more efficient and headcounts down in some places. So that was one big bucket it came from.

Another one you mentioned is rents. We've been working very hard to bring our rent expense down. That has benefited us a lot throughout the period. Beyond that, it's into a lot of other markets that we look at. Outside Professional Services we are always looking at, and always looking at how we can do better in that area. Contractors, we tend to now use contractors where we know that we've got a burst of work and then it's not going to persist and they can go away afterwards. We made some progress on that in bringing that level down in the fourth quarter. So it's a lot of things.

Like most businesses, and ours is no different, bringing SG&A down is attention to detail. It's not one big thing. It is thousands of things and it's creating a culture, where everybody is looking at those and everybody is looking at those small things and they add up.

Got you. Just a follow-up, Scott. In your comments, you made some -- you referred to the $0.03 of benefit in the quarter. I think one of them related to a legal reversal or something like that. Could you go over that one more time?

Yes, I mean, I don't want to get too deeply into it, but we did -- we just thought, in fairness, we need to let people know that we did have a tailwind from two sort of one-time events in the quarter. One was we brought successfully to a conclusion a matter we had here, a legal matter, and what we had reserved previously for that was slightly more than what we needed at the end, and that came into the quarter. Then we were looking at some of our benefit plans for all of our people and found that there were some which were not being widely used, and we did some fine-tuning there and that benefited us a little as well.

So in total, it's $1.5 million pretax, which helped the quarter, which ends up being about $0.03 on a per-share basis. So, we just wanted to be absolutely upfront that, as good as the quarter was and we're very proud of the quarter, it wasn't all hard work, some of it was just stuff which happened.

Got you. That's great. Thank you so much.

Rod Lache, Deutsche Bank.

Good morning. It's Dan Galves in for Rob. I apologize if I jumped on a little late. I just wanted to ask about the used business a bit. The unit comes are really strong against a tough comp from last year's fourth quarter, but margins are kind of on the weaker side. Can you give us some color on what's going on in that business? There's definitely less -- a lower pool of young used vehicles out there. Is that pushing up acquisition prices and kind of how do you see that market looking going forward?

This is Michael. I'll take a shot at that. The growth on the unit side is a direct result of a program we had started as a pilot in '09 and rolled out to all the stores in 2010 we called Asbury 121. It's a stated goal of trying to sell one used for every new. It's a process; it's a process at the dealership level whereby we do tradewalks, we evaluate trades. The goal at every dealership is to broaden the price band of cars that we will take in trade, recondition those cars, and then sell those cars. So traditionally what happens at the initial phases of that one or two years is that you will see a little deterioration in margin in that you're working with cars that you're having to spend a little bit more money on. Then we try to broaden the price bands that we can get financed with those vehicles.

We did see a little bit of margin deterioration in the fourth quarter as a result of an inventory buildup that we had in the second and third quarter to supply our Japanese branded dealerships with product that they did not have on the new car side. We did run the inventories up a little bit. If you look back and see, our third-quarter inventory levels were higher than our fourth-quarter. As we knew the inventories would return to normal, we started moving that inventory down. Our preference is to retail those units, not necessarily wholesale them. When you retail an over-aged vehicle, you will generally take a lighter margin. So we saw couple of things that hit the pressure on that.

I would say, on a go-forward, basis we will continue the program, obviously, to sell more and more used. We are not seeing, as of today, a dramatic increase in the cost of the car; it's gone up a little bit but it's not a dramatic increase.

Our program focuses on taking in trades, not necessarily going to the auctions to buy them. We will of course buy cars at the auction, but the biggest single source of our vehicles are trade-ins. So we are seeing a little bit of shortage of late-model luxuries. Particularly as you know, that business disappeared in '08 and '09 and particularly on the lease side. We are seeing some shortages of that, but we continually take trades, so we don't anticipate that being a problem for us.

So kind of a long-winded answer, hopefully I touched on all the points that you asked.

Yes. Actually a great answer. It sounds really favorable actually.

Then I guess related on the parts side, the recon and prep line, I'm just wondering was -- gross profit was up 30%. Was revenue up that high? I was wondering. It sounds like definitely you're getting some benefit from this 121 program. But is there any kind of catch-up benefit from the growth in inventory, the new vehicles on the prep side or kind of increased inventory on the used side and recon? Just looking to see kind of what you would expect for an ongoing run rate for that business.

Kind of conversely on the warranty side, I think that the fourth quarter 2010 was a tough comp for recalls. Should we be looking at this run rate from the fourth quarter this year as the ongoing, or looking to grow back towards where you were the prior year?

I'll take a shot at it, so hopefully I understood the question. I think that the revenue was up, I think it's 30%, something of that nature. But what we are seeing is the real force behind the increase in the internal prep -- reconditioning work is the fact that we are selling much more used cars. The lion's share of the growth comes from used car business, not the prep on the new cars. Our new car inventories are actually, as you know, were constrained throughout the second half of last year, so almost all of the growth comes from the increase in used car sales. So as we anticipate more and more used car sales, as we anticipate keeping our ratios in line with new car growth, we anticipate that we will continue to grow the reconditioning business. I don't know whether that answers your question.

It does. If you could help us just to understand kind of when you started getting this benefit from this 121 program. I think you said you rolled it out Company-wide in 2010. So is this -- did you get kind of a benefit in the full year of 2011 in that -- from the program?

We had all of our stores installed on the system throughout 2011. So yes, that part is correct. We started installing it and got them all done late in 2010. There is constant retraining down on this, so we have people that are constantly in the stores. We actually put the last group on, went on in very early '11. That would've been the Greenville acquisition that we did in December of '10. So for the most part though, we had the benefit of all stores being on it throughout '11.

Thanks a lot. I appreciate the answers.

Brett Hoselton, KeyBanc.

Good morning gentlemen. I apologize. I joined the conference call a little late. I had another conference call conflicting here. But -- so if I ask this -- or this question was discussed earlier, then we can move on to the second one. But can you give us a sense of where your Toyota inventory is today versus where you would like it to be, and then where your Honda inventory is today versus where you would like it to be. And then if we are not at full inventory levels, what's the outlook there?

This is Michael. Very broadly speaking, we are getting close to where we would like to be with both Toyota and Honda. We had a very good sales rate in December, particularly on [SIM] inventory. In a number of those dealerships, we were in very low days supply at the end of December and going into the first two weeks of January. As we sit here in the middle of February, those inventories are rebuilding. I would say, as we said earlier in the statements, by the end of the first quarter, we believe the inventories in those brands will be normalized, we would be -- that would be where we would want to be with those.

Now, as you go into that second-quarter time frame with healthier inventories, what are your expectations? There are some who believe there is a second significant amount of pent-up demand, Toyota buyers or Honda buyers who only want to buy Toyotas or Hondas. What's your sense of the pent-up demand out there for Toyota and Hondas in particular? Then secondly, what are your expectations in terms of possible promotion activity or incentive activity from the manufacturer to try to improve their market share?

I'll take a shot at this first. There are a lot of views on the pent-up demand. There are very many loyal owners of Toyota and Honda products. However, when someone needed a car last year because their Altima broke down and they could not buy a Honda or Toyota, they may have purchased a pre-owned. They may have gone with another brand. I think there is some pent-up demand, but I would not anticipate a wave of that pent-up demand. We are still, for the most part, in the need buyer, seeing more of the want buyer of course, but for the most part still a need buyer that they would purchase a car when they just needed to have a new vehicle.

In terms of incentives, I think there has been a subtle but increasing wave of incentives throughout the fourth quarter of last year. We are seeing them continue into the first quarter. Again, it is subtle but nonetheless increasing.

I think the amount in the incentive level will be almost entirely dependent on the manufacturers in two ways. One is their drive to regain market share, or their desire to keep their production as at a specific level. We will of course react to that as we do with each incentive level and with each manufacturing level, so we would just -- it's hard for us to predict what they will be because every manufacturer has -- that information essentially comes out to us when it happens that day. So my answer is that we would anticipate a continuation of subtle inventory increase and we'll see how that plays out with all the manufacturers.

Thank you. Then switching gears to Parts and Service, specifically on the margin front, the margin surprised us. From some of your recent comments here, I'm going to guess, and I could be wrong here, that the reconditioning work on your used cars potentially is bolstering your margins to some extent.

My real question is, as we think about your Service and Parts margins, do you feel that we are at a point where margins have bottomed and we're going to start to see some improvement? Where are we at in terms of warranty work and a potential inflection in terms of the amount of warranty work that you're at? Is it possible that we could start to see warranty work increase in the back half of 2012 and into 2013? What are your thoughts there?

This is Michael again. I'll answer it kind of in reverse.

Cars are made so much better. There's obviously a lot less new cars went into the system over the last few years.

With one caveat, I would say I don't anticipate -- we don't anticipate a growth in warranty business in the second half of the year. The caveat is that there are always recalls. We can't predict them; nobody can predict them. We had substantial recall in the fourth quarter of '10, very much lower rate of recalls in the fourth quarter of '11. So that caveat is out there. I don't anticipate a large growth in warranty business.

To your first question on the margins, our margins I think are very strong in the Parts and Service business. I don't anticipate anything we're doing would grow that margin. I mentioned earlier in an earlier question one of our programs that we have out there with tires, a national tire program. I would expect we might see a slight erosion in the overall margin, but I don't see any growth in that.

Okay. Thank you very much gentlemen.

David Whiston, Morningstar.

Good morning. A question I believe for Craig on your SAR commentary earlier for 2012. You said anything above $14 million is upside. If the retail component of that really starts driving a lot of consumers back to the show room and we start getting a SAR of $14.3 million, $14.5 million, will you guys have to add a material amount of headcount or is that all upside to you?

I think a small movement in SAR like we're talking -- like you're about at those numbers is really will require virtually no change in our staffing levels. There could be some additional salesforce, but it would be immaterial. I think one of the ways to look at that is (technical difficulty) clunkers. We saw a massive spike in SAR, and we saw virtually no change in our stacking levels of the stores. So I'd say we're pretty comfortable where we are. I would argue we've got the capacity to expand the business in the 5% to 10% range without any significant increase in fixed costs.

Okay, that's helpful. A follow-up on the Honda inventory, you're saying J6 will normalize by the end of first quarter. With Honda in particular though, do you think they will be completely back to normal by the end of March, or just close to normal?

This is Michael. I think close to normal. It's -- Honda has just launched a brand-new CRV. So we are still very short supply. That's a very popular product, so we're trying to build CRV levels. They'll relaunch the Civic at some point in time this year, so we won't know where that inventory level will be. There's a new Accord of course coming out, so we'll have to see that inventory. So it will be a little bit of an unusual year with Honda. But definitely barring any horrible natural tragedies again, much better inventory levels in the second quarter than we saw in the second quarter last year.

Lastly, what are your customers saying about the new Civic? Are they as pleased with it as Consumer Reports was?

This is Michael again. I think it's well-known that Honda has announced a relaunch of the Civic in response to the consumers' perhaps not as enthusiastic acceptance of that. We applaud Honda as one of our partners. They reacted very professionally and very quickly and said we hear what the consumer is saying and we will change the body style, we'll change the content on that car. That's anticipated at some time during -- I don't know the exact dates yet. We are selling Honda Civics. We do not have an overloaded day supply of them whatsoever. It's an outstanding product, and the relaunch will make it an even better product.

Okay, thank you.

We have no further questions in the queue. At this time, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you very much. This is Craig. We'd just like to thank everyone for being patient with us, working through what was for us a challenging 2011. Like I said when we started, we are looking for 2012. With the conclusion of the call, ready to go back to work. Thanks for your time.

Thank you for your participation in today's conference. As a reminder, there will be a replay available for this call beginning later this afternoon through February 21. You may access the replay by dialing 888-203-1112. Once again, that number is 888-203-1112, or you may dial 719-457-0820. Once again, that number is 719-457-0820, and entering the replay passcode -- and that's 5486961. Once again, that passcode is 5486961 followed by the # key. That does conclude today's conference.