Asbury Automotive Group Inc (ABG) 2012 Q3 法說會逐字稿

Good day and welcome to the Asbury Automotive third-quarter 2012 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to the treasurer, Mr. Ryan Marsh. Please go ahead.

Thank you, Katie, and good morning to everybody. Welcome to Asbury Automotive Group's third-quarter 2012 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's third-quarter 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 Senior Vice President and CFO. At the conclusion of our remarks, we'll open the call up for your questions and I will be available later today for any follow up questions you might have.

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 these 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 2011, and the subsequently filed quarterly reports on Form 10-Q, and our earnings release that was issued earlier today. We expressly disclaim any responsibility to update forward looking statements.

With that said it's now my pleasure to hand the call over to our CEO, Craig Monaghan.

Good morning, everyone, and thank you for joining us. We are pleased to report all time record results for the quarter with EPS from continuing operations increasing 71%. Operational excellence combined with disciplined spending produced these record results. Following our usual format, Scott will provide more detail on our financials and Michael will provide an overview of our operating results. But I would like to provide a few highlights from the quarter. Revenues improved 14% and gross profit was up 9%. We continue to improve our cost structure reducing SG&A as a percent of gross profit by 480 basis points. Our operating leverage resulted in a flow through of 80% of our incremental gross profit. And with our adjusted leverage of 2.3 times, we believe we have one of the strongest balance sheets among the publicly traded automotive retailers.

Before I turn it over to Scott, I'd like to acknowledge and congratulate our Michael Kearney on his recent appointment to Asbury's Board of Directors. Michael brings a tremendous amount of operational experience and perspective to the board that we lost with the untimely passing of Jeff Wooly. Michael has been instrumental in navigating Asbury through the recent financial crisis and producing the operational results you see today. We look forward to his expanded leadership as a member of our board.

Now, I'll turn it over to Scott.

Thank you, Craig. Our record third-quarter results of $0.72 reflect the improved operating leverage we have built into the Company. This quarter's results include no adjustments for non-core items. The one item I would call to your attention is the increase in our discontinued operations line. The increase is primarily the result of a real estate impairment of a property we are planning to sell. Our cost structure continues to improve. Our SG&A to gross profit ratio was 72.3 for the quarter, a 480 basis point improvement compared to the prior period. With rent adjusted SG&A to gross profit ratio of 67.6%, Asbury's operating leverage is now apparent and among the best in class. We continue to focus on future productivity enhancements.

Additionally, we will continue to target opportunities to purchase real estate we are currently leasing. We could close on additional lease buy outs by year end. During the third quarter, we spent approximately $6 million repurchasing 232,000 shares under our continuing share repurchase program. Year to date, we have spent approximately $17 million repurchasing 637,000 shares. At the end of the quarter we had $32 million remaining under our board of authorization. As capital expenditures, in the third quarter we spent $15 million bringing our year to date total to $34 million. For 2012, we are targeting CapEx spend of $55 million to $60 million and anticipate 2013 capital expenditures declining to approximately $45 million. Our CapEx numbers exclude lease buy outs and real estate investments.

During the third quarter, we spent approximately $15 million to retire our remaining convertible debt. During the quarter, we completed $34 million in new mortgages with one of our Captive Finance partners, resulting in a total debt to adjusted EBITDA ratio of 2.3 times at the end of the quarter. We anticipate closing on another $50 million of mortgages in the next month or two. These additional mortgages will also be with our Captive Finance partners. Taking this all into account, we expect to end the year with leverage ratio of approximately 2.5 times adjusted EBITDA. As we have previously stated, this is a level with which we are comfortable.

We ended the quarter with total liquidity of $265 million. This includes $210 million available under our on drawn committed revolving credit lines, $6 million in cash, and $49 million available in floor plan offset accounts. I am excited by this financial strength Asbury has achieved, as well as the technology and improved cost structure we now have in place. Both support Asbury's move from defense to offense. Craig will preview our plans in his closing remarks.

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

Thank you, 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. Our new vehicle revenues increased 22% and our unit volume increased 24% compared to the same period in the prior year. Our new vehicle margin for this quarter were 6.1%, down 90 basis points compared to the same period in the prior year, a period of constrained supply for many of our import brands. As sales of the Japanese brands have recovered and availability of other brands has increased, we are seeing continued pressure on new vehicle margins. Some of this margin drop has been offset by the increase in our F&I per vehicle retail. We ended the quarter with 64 day supply of inventory on a trailing 30 day basis.

We anticipate having more than adequate luxury inventory to match the anticipated marketing push by those manufacturers in the fourth quarter. We have expanded our Preferred Selling Program, which we launched in January 2011, to a second market and now have the program in four luxury stores. The program has been extremely well received by both our customers and our employees. We are very encouraged by the results we have seen so far and will continue to evaluate future markets and brands participation. In these dealerships, we have experienced a reduction in marketing expense, a substantial increase in dealer rater scores and participation, and an overall drop in our sales staff turn over.

We continue to grow our used car business increasing used unit sales 4% over the third quarter of last year. Margins have stabilized compared to the prior year period at 9.5% and are up 30 basis points sequentially from the 9.2% in the second quarter. Our used to new sales ratio was 72% for the third quarter and we ended the quarter with approximately $91 million of used vehicle inventory or 34 day supply on a trailing 30 day basis.

Our F&I business continues to remain strong for us as our stores broke all time Company records for both F&I revenues and profit per vehicle sold. Third quarter F&I revenues grew 22% compared to the same period in the prior year. F&I profit per vehicle sold for the quarter was $1242, up 6% year over year. Our F&I process has continued to enhance production and field execution continues to validate our continuous improvement training program. As part of this process, we are creating a more effective customer facing experience while increasing productivity. We continue to be the beneficiaries of the much improved lending environment, higher advanced rates, consistent application of lender requirements, and aggressive lease terms.

Our parts of service operations also continue to grow. Gross profit grew 4% compared to the third quarter of 2011. Parts and service gross margin for the quarter was 58%, up 170 basis points compared to the same period in the prior year. The year-over-year gross profit improvement, driven primarily by the17% increase in reconditioning work and 3% increase in customer pay, more than offset the decrease in the gross profit from warranty work down 7% over the prior period. Several large recalls have been announced recently, but it is too early to speak to the potential benefit to our warranty business for the fourth quarter.

Our national tire initiative continues to provide us with additional parts and service revenue and greater opportunity to retain both current and previous customers. Our tire sales are on pace to grow approximately 70% by the end of the year. We recently introduced our Clear View Advantage program as another service to our customers and touch point to help with customer retention. Under the program, we offer free windshield wiper blades every six months to customers that visit our service lanes.

Finally, I want to extend my appreciation and thanks to all of our associates in the field. Your collective efforts are reflected in these record breaking results.

With that I'll turn the call back to Craig to conclude our prepared remarks. Craig?

Thanks, Michael. We have worked hard over the past three years to manage through the recession, while building our infrastructure, systems and processes. Our record performance demonstrates the success of these efforts and our Company is now on the offensive. We have the financial strength and operational systems to selectively add dealerships as opportunities arise. This flexibility, as well as our building liquidity position, also allows us to reaffirm our commitment to repatriate capital to our shareholders.

Let me share our thoughts for the next three years. We are planning our business around a modestly improving economy. Favorable interest rates and a SAAR approaching approximately 16 million units by 2015. Under this scenario, we anticipate the following -- CapEx, $35 million to $45 million per year, a significant reduction from our 2012 CapEx spend; lease buy outs of 10 million to 20 million per year as we approach our goal of owning 75% of our real estate; share repurchases of 25 million to 30 million per year in our ongoing share repurchase program, with additional amounts on an opportunistic basis; and finally, the acquisition of 400 million to 600 million of additional revenues.

I am very optimistic about Asbury's future and encouraged by the recent positive momentum from two consecutive quarters of record profits in what is still a very uncertain economy.

I would now like to turn the call back to the operator and we would be happy to take your questions. Operator?

Thank you.

(Operator Instructions)

Rick Nelson with Stephens Inc.

Good morning. That's Stephens. I would like to ask you about the sales industry statistics certainly indicate that the business accelerated into September. I'm curious what you're seeing in October?

Rick, this is Michael. Yes, September of course, I think all of us saw a nice finish to September. October is October. I think we're seeing decent floor traffic, very good internet traffic. As you know, there is a lot of new product that's really starting to hit a lot of our showrooms particularly with our brand. So as I was alluding to in the script, we have adequate inventory for all those brands. And we anticipate that, you know, what we have seen is pretty much in line with what Craig alluded to, a modestly growing SAAR environment.

And a question about the growth per unit on new cars. I realize the inventory normalized and we are seeing pressures there, particularly with Japan. But can you talk about some of the other brands, maybe in the premium luxury segment, as to what you're seeing with gross per unit? Are there the same sort of pressures there and your expectation as we look forward I think new car growth was just under 2000 a unit. Would you expect that would improvement as the mix shifts toward luxury here in the 4th quarter.

Rick, this is Michael again. That's a good question. Again, with inventories normalizing we did see pressure in the mid-lines. We have seen stabilization in the luxury segment. We anticipate with the new product that's coming out though that we will be able to hold those margins. Domestic margins have come down a little bit, but it doesn't impact us because we don't have that kind of exposure with the domestics.

I'll also point out to you, as you alluded to, we had a little brand shift throughout the first three quarters that we expect movement more towards what we normally would see with our mix which is a little more luxury business in the fourth quarter. The other thing, Rick, I would like to point out to you is that although the margins, we have seen pressure particularly in mid-line imports. When we look at our total yield which is the new gross, the F&I gross and our internal gross, we are actually up sequentially and essentially flat quarter over quarter. So I think that bodes well for the way that the industry handles pressure in one area, we get it in another. We are comfortable with our total yield margins particularly as we head into the 4th quarter.

Okay. And just a follow up on the three year plan, Craig, that you enumerated on. 2015, 16 million units, do you have an interim targets there in terms of SAAR expectation?

Yes. Rick, this is Craig. We have just come off our three year planning process. We reviewed that with the board. That's what we are sharing with you today. But we don't have a crystal ball. We'll be first to admit it. For planning purposes what we've got here is a very gradually improving SAAR over that time frame.

Got you. If I could just ask on the acquisition front 400 to 600 million in revenue how the pipe line might look at this point in pricing and acquisitions?

Rick, acquisitions are expensive but there are sellers out there who are talking. I had a call yesterday about a store for example. So I think things might be softening in a sense that buyers' expectations may be softening just a little. But I feel like there is more conversation within the last 30 days than there has been in the last three months. We see a couple things out in the pipeline that we think could be interesting, but we think over time there will be more to come.

Great. Thanks a lot. And good luck.

Thank you.

John Murphy with Bank of America Merrill Lynch.

Good morning this is Elizabeth Lane on for John. The operating leverage this quarter was really impressive at 72.3% SG&A growth. Do you think that number could get below 70% in the next two or three years, simply through improved operational efficiency? Or do you think the rent expense could come out if you are buying up leases and drive down that SG&A?

Well certainly if we buy up leases we'll drive that down. We tend to look at X rent, which we think is a fair way of looking at the true operational efficiency in a company. And there were just tad over 67%. We think that's an awfully good result. We set a target back at the end of 2011. And at that time it was to take about 200 basis points out of our SG&A as a percentage of gross at that level of SAAR. To be honest, we probably surprised ourselves a little bit with the success we've had in creating a much more leveragable environment. You know, obviously, the results have been extremely good. We continue to look at other improvements. I think this is a continuous process. But at the time I think we are comfortable saying that we think the level we're at given the volumes is a sustainable level and that we truly have created a much more leveragable infrastructure within this company.

Great. Thanks. You stated that your goal is to own 75% of the real estate. Can you tell us what percentage you currently own?

Sure Elizabeth. This is Craig. We own about 60%. If we continue, we can continue to buy out 10 to 20 million like I was saying, that will give us around that 75% that we're targeting.

Great. Thanks. And just one more quick one. At what point next year do you think the comps will become more normalized for Toyota and Honda since we still had some negative impact early in 2012 from the low supply.

Elizabeth, this is Michael. I think first quarter of next year we'll be looking at where we started to see a rationalization, normalization of inventory so probably first quarter of next year.

Okay. Great. Thanks and congrats on the good quarter.

Thank you.

Scott Stember with Sidoti & Company.

Good morning.

Good morning Scott.

You guys talk about on the new side if you go back to the second quarter I think you guys pointed to a little bit of a mix issue going up against some of the brand new models of Toyota and Honda which were being heavily incentivized. Was there any of the same pressure in the third quarter that maybe crimped sales somewhat?

Scott, this is Michael. Traditionally third quarter is a very big push in the new side. I think what we saw this particular third quarter was the fact that we absolutely had inventory, and particularly in Honda, Toyota, Nissan, that we didn't have last year. So I think it's fair to say that the third quarter was a little bit out of our normal sequence of the programs we are putting in place to accelerate used car growth. We saw substantial push with a number of manufacturers for model year change over as well as anticipation of the inventories building. So I think we'll see inventories stabilize a little bit more, and I think you will see the continuation of our used car program efforts.

On the parts and service side referring to the warranty, excluding any potential Toyota recall work that comes in the next quarter or two, when would you expect warranty comparisons to become more favorable?

Scott, this is Michael. That couple answers to that question. I think the rate of warranty drop has stabilized. I think we are all in the industry looking at cars that are built much better. They're lasting longer. I think we're all looking at leveling of that rate. We can never predict recall so there is always going to be a bump one side or the other. And we can't anticipate whether warranty business would grow or not grow. But I do think again with the quality of the cars across all manufacturers, the way that they're assembled and put together, I think that we have seen the greatest drop in the warranty and we just have to monitor that business from quarter to quarter as we go along.

Great. And last question just referring to your acquisition plan over the next two years. Is there any brand or type of vehicle that you would be willing to look at more than the other?

Scott, it's Craig. We want to maintain a balanced portfolio. We like the geography that we're in but we would be willing to expand that somewhat. We like stores that are relatively close proximity to one another. We have learned that, that's much easier to manage. And obviously we want to make acquisitions that make economic sense. So if we can find stores that fit those criteria, we are after them.

So domestic brands could be included in there as well?

Absolutely, absolutely.

Great. Sorry, just one last question. Could you just maybe talk about the Preferred Selling Program one more time and some of the nuts and bolts behind it?

Sure, Scott, this is Michael again. It is a program we initiated in early '11 in one of our markets; Richmond, Virginia. We call preferred selling because it is a non-negotiating selling system. However prices are changed weekly to reflect market conditions, availability and supply. Our sales consultants are paid a salary and then they are given bonuses based upon CSI and owner loyalty and retention. They are not paid on commissions.

All of our used car appraisals are done online in conjunction with the customer right there on the spot. We offer, of course, to buy their trade in even if they choose not to buy a new car from us. And it's essentially carried--that practice is carried in throughout the dealership. So that is why it is called preferred selling. As I noted in the script we have expanded it into the Atlanta market with another franchise. We will continue to evaluate the progress that we've seen. And evaluate more markets and other brands.

Got you. That's all I have. Thank you.

We'll take our next question from Rod Lache with Deutsche Bank.

Good morning. It's Dan Gallatin for Rod. Good quarter and thanks for the mid-term targets you guys gave out. I had a question on sub prime credit availability. I'm wondering if you could give us any data on how much of your new and used units are financed by sub-prime customers now verses sometime in the past, maybe a year ago or pre-crisis.

Dan, this is Michael. So I think we have to go to pre-crisis because the market was different, as was a little bit of our portfolio mix, and a little bit of philosophy. At one time, we were approaching, particularly on the used car side, 25% of our business being sub prime, something less than that of course on the new car side. Today it is a very much more difficult number to get a hold of because our prime lenders, particularly a number of our Captive's, do what we traditionally would call sub-prime financing. They're very difficult to say this is a sub-prime customer or sub-prime deal. Having said that, it is substantially less than it was in the peak of '06. There is availability, not only through lenders, the Captive lenders, but also through other traditional lenders, Capital One, Regions Bank, et cetera. We can get the detail information but it is much more difficult to get the exact detail again because of the way the Captives now lend in that sub-prime business.

Okay. That's interesting. And how does that play into F&I per unit earnings on let's say a lower credit customer verses a higher credit customer? I think at one point third parties were charging dealers to take sub prime loans, but I think that's changed.

Yes, Dan, that's essentially correct. There are still lenders out there today that charge, you know, a fee for that. But with the advent of our manufactured partners there is no fee associated with that. We are, of course, in the environment with the rates they are today, we can sell products to all of our customers and we do push product sales more so than rate by large margin. So I think it's not a negative for us for the sub-prime business. We don't pursue it like we used to. A lot of that has to do with the brands that we have in the markets that we're in today. But there is no negative on our PVR, whether we do a sub-prime business or not.

Okay. Thanks. I mean, so it sounds like, you know, maybe any kind of year-over-year increases in sub-prime availability hasn't really been a material positive to your business? Would you agree with that?

I think that's a fair statement.

Okay. And then if I could ask another question on the recon and prep business in parts and service. I just wanted to get more color on kind of what's driving the growth there. I mean, if I look at a $2.5 million increase in gross profit on only 500 incremental used units in the quarter, that's $5000 a piece. Obviously there must be something else going on in there. If you could give us more color on what's causing the growth there and whether further growth going forward is sustainable.

Dan, this is Michael again. So we go back to two years ago when we introduced the Asbury One to One program which was our effort to get our used to new ratio of 100% of the new car sales. Part of that philosophy and program is a broadening of the type of cars that we inventory for used side and broadening of the price bands. Going along with that in a number of cases can be an increase in amount of the reconditioning work that we do on those cars to bring them up to our standards. Part of our tire initiative, one of our internal parts of the tire initiative, is to expand the availability of tires internally. There has been a very big push on that.

So as you see, it expands and it grows. Not only with the volume but philosophically in the stores. Any one store can grow that business year over year with only a nominal amount of unit growth as we create the philosophy internally. So I think we have seen substantial increases. I'm not sure we can maintain the level of growth with the level of used car growth. But as we continue to push more used car growth in some quarters, I think you can expect that the reconditioning and internal business will remain very strong for us.

Do you have available, just to follow up, what do you spend on reconditioning per unit this year verses last year? You know, reconditioning per used unit, is there any sense of that?

Dan, we don't disclose that. I don't have that at the tip of my tongue either way we but we don't disclose those numbers.

Thank you.

We'll take our next question from James Albertine with Stifel Nicolaus.

Thanks and good morning. Everyone congratulations on a very exciting quarter especially on the operating expense leverage front. I have two quick questions if I may. First, on the incentives side, I want to get a sense of what you are seeing on the new vehicle front. The balance between direct consumer incentives verses more traditional dealer incentives. What are you seeing for the manufacturers and how does that vary across the three buckets you report on luxury, mid-line imports, and domestic.

James, this is Michael. As you know, there was a very long what we would call a model change over incentive put out by Honda that started in March that ran through the end of August. So that was a dealer cash incentive type of program. We continually see in a number of our import brands the more of the cash incentive to the dealer as opposed direct to the consumer. I think a number of the manufacturers have found out that they can get, I guess, for lack of a better word, most bang for the buck by doing that.

We are also starting to see more sub-ended leases that comes from both the luxury and the mid-line imports with the cost of money where it is today and with a--let's call it a very aggressive residual value, the manufacturers are able to put monthly payments back in line to what consumers were seeing three or four years ago on vehicles that not only have a higher MSRP but a substantial improvement in fuel economy, technology and content. I think we are seeing that across in the mid-lines and in the luxuries. I would anticipate that in the fourth quarter there will be a number of programs to the dealers from the luxury manufacturers. There is a substantial push in tier one marketing efforts right after the election. I would expect we will see a variety of incentives. I can't ponder those, I'd be guessing, but suffice to say I think we will see a lot of dealer type of incentives in the fourth quarter from those brands.

Very helpful. Thank you. Then lastly, I apologize if I missed it, I dialed in a few minutes late. I wanted to dig a little bit deeper into SG&A,maybe by line item if you are willing to provide it. Where the big surprises as you mention on the leverage front originated from and then where do you see -- is there a shift in where you are budgeting leverage opportunities going forward? Thanks.

I don't think -- the surprise is we got there a little more quickly. We had originally targeted two years and seemed to have made progress a little more quickly than we expected. We are finding what we expected to find. Most of it is obviously coming out of leverage around personnel and creating by giving tools and training and all the various things we do. We are creating a more leveragable environment because personnel costs are the vast, vast majority of the SG&A expenses.

We continue to look at other areas where we can leverage technology. I think there are still a lot of opportunities to us, both in the back office and the support we can give to the stores in terms of leveraging technology. That will bring again continuing efficiency. It really is about creating an environment which is leveragable now whereas volumes go up, costs do not have to go up in lock step with them, that we can create more efficiency as the business expands here. And creating an infrastructure which can support the other activities that the Company is undertaking here and we are comfortable it's something we can replicate in other stores.

Great. I appreciate your answering the questions, and good luck next quarter.

Thanks James.

We'll take our next question from Brett Hoselton with KeyBanc.

Good morning, gentlemen.

Good morning.

I want to start out with new vehicle gross profit per unit. I would typically expect to see a seasonal bump due to some luxury sales and so forth into the fourth quarter, maybe about $100 or something along those lines. It sounds like you are saying you should expect gross profit to improve into the fourth quarter. First I want to make sure my understanding is clear on that. Is that kind of essentially correct?

Yes. I think that's essentially correct. I don't know if I can be as precise down to the $100 piece but I think directionally fourth quarter we'll have more available luxury inventory as well as new product in the luxury market. So I think with our mix and what I know from a marketing spend is going to start occurring in November. I think it will be a big push for luxury business, and we would expect an increased market.

As I kind of look through the year, you know, 2012 and kind of out through the remainder of this year, it seems like you guys are going to kind of being around that $2100 range for this year. Is there any reason to believe that might materially change in 2013 and forward? Or is that given your current brand mix and so forth probably a reasonable range to work within?

Again, this is Michael. Again, to allude to what Craig said earlier the crystal ball is a little tough to see through. Based upon history, what our brand mix is currently today, what we see in terms of production from the manufacturer because a lot of this is incentive driven. So as long as production stays in step with demand I would say that's a reasonable assumption. All bets are off if production gets carried away by one or more of the manufacturers and inventories build up, then incentives build up and then we get into a different situation. Assuming the environment we're in today, I would say that's a reasonable assumption.

Thank you, Michael. Scott, on the SG&A leverage when you introduced the program a while ago you kind of talked about improvements in 2012 and then some incremental improvements kind of as you move into 2013. So for the past couple of quarters we have been in the low 72% range, SG&A is a percentage of sales. It sounds like you feel comfortable with those levels. I guess my question is have you seen all of the improvements that you anticipated or is there still an incremental benefit you're expecting as you move into 2013?

Yes, constantly, this is a business about continuous improvement so we're constantly looking to things to improvement the operations here. What we have seen to date I guess I would say are the things that are relatively easy to get at. I say that cautiously because none of this has been easy. But relatively easy. A lot of the things we are looking at now are more complex. They're process related. They're systems related and just take longer to implement there. Again, the focus is on efficiency. The focus is on creating an environment where we can actually do more work with what we've got. And that's where our focus is on going forward. We'll see how they play out. I think this is a never ending game of constantly looking for how to become more efficient.

So I guess if I would interpret that I would say that in a flat SAAR environment you might anticipate some improvement in your SG&A gross profit but it may not necessarily be the step function significant change that you've seen over the past year. Is that kind of a fair characterization?

I think that's fair. We're not looking for step function. We're looking for continuous improvement here in a flat SAAR environment.

Craig, you were very specific on your uses of free cash, I mean, very specific. I guess my question is you kind of think about that list that you provided us with and the dollar amounts that you provided us with, do you see -- is that a fairly flexible list? In other words, if your share price were to decline significantly, would you move in the direction of repurchasing more shares or if acquisitions prices came down significantly, would you move in the direction of acquisitions? Or are those ranges that you provided kind of like this is kind of where we're going to stick for a while here?

That's a great point. No, I guess I'd say there are parts of it that are pretty specific and parts of it that are very flexible. The fact of the matter is this business generates a lot of cash. We have driven our leverage to what we think are very reasonable levels. Scott mentioned, and we've got mortgages coming online, so there is refinancing coming at us as well. So we are accumulating cash. We felt it's only fair to you and to our shareholders to understand broadly speaking what our plans are to utilize that cash. If I went back to CapEx, $35 million to $45 million a year, that's pretty specific over the next two to three years. We intend to be in that range. That will leave, it will get us to the point where 90% of our stores will have been either rebuilt or gone through some form of major renovation.

So our portfolio of our stores will be in great shape. Lease buy outs, we feel that's a good return. Typically when we buy back a lease we're effectively paying down debt that's got somewhere around an 8% to 10% interest rate on it. We think that makes sense and we want to control that operating asset. That 10 million to 20 million a year, that's pretty specific. We think that's essentially what's going to mature and what we can go after. Share repurchase, think there is more flexibility around that.

The 25 million to 30 million that I called out, we consider that to be an ongoing program. You have seen us buying back around 6 million to 7 million a quarter. That's in line with what we are seeing there. I think to a certain extent you can view that as an implied dividend. We like the share repurchase approach as opposed to the dividend because it's more flexible and we think given the uncertainty in the tax environment it's more shareholder friendly. If the stock were to come under pressure, we would consider a more aggressive share repurchase program. So that's where there would be some flexibility, absolutely. We've got the capacity do that within our restricted covenants basket.

Finally acquisitions. We set out a target. I think the key thing on that acquisition target is with the systems and processes in place, liquidity that we have today, we believe we've got the capability to go out and do some meaningful acquisitions and we're looking. That's just a broad based target, 400 million to 600 million of what we think we could potentially get over the next three years.

Great. Thank you very much, gentlemen.

You're welcome.

We'll take our next question from Bill Armstrong with CL King and Associates.

Good morning, I had a question about market share. Any sense for what your market share shifts were during the quarter within your local market? Do you think you gained share?

Yes, this is Michael. Yes, in the quarter we gained. We measured against local our competitors from a standpoint of national numbers don't really apply to us but we gained market share in our mid-line imports. We gained market share in most of our luxury brands, and we held our market share in all but one of our domestics in the third quarter.

Okay. Thanks. That's helpful. Were any franchises closed or sold during the third quarter?

Yes. We had some activity. We're constantly looking at fine tuning the portfolio here. But there is nothing of significance. It was, you know, just the little changes around the edges but nothing which is going to materially impact our numbers at all. In fact, some of the moves we made were to free up real estate which we actually think will be a net benefit to the company because it allows us to showcase some of our hot brands a little better.

I see. Okay. Thank you.

We'll take our next question from Ravi Shankar with Morgan Stanley.

Thanks. Good morning. Back to the medium term targets, I apologize if I missed this but did you also give SG&A to gross targets for the period?

We did not specifically give that number. What we did say or what I did say was that the level we have achieved now is a level we're comfortable with being able to maintain at this volume level in this SAAR environment.

Okay. Understood. And the acquisition target, the 400, 600 million, you always said that you think that investing in your own stock is a better deal than acquisitions. I suspect you still feel that way. But has something changed with your outlook towards acquisitions? Have you decided to get more aggressive and go out there and make more acquisitions than you maybe thought even a few quarters ago? If you can just help us with what's changed there, that would be great.

This is Craig. We still believe that investing in our own stock is a very attractive alternative for us. I mentioned just a moment ago and we retain flexibility around that. I come back to one of the foundations of this plan is we will spend $25 million to $35 million a year investing in our own stock if you would essentially buying back our stores. But we do think that with the platforms that we now have in place that there will be opportunities to acquire stores and roll them into the portfolio as well.

I mention we're not just going to buy stores for the sake of buying stores. We want stores that make economic sense. We have seen there are advantages that we bring to play. We look at our acquisition in Greenville where we essentially doubled F&I PVR's versus when we bought that store. We have seen significant growth in the parts and service business there. We have seen a pick up in market share. So we think there are times when a company like ourselves can bring advantages to bear verses what someone can do, especially someone whose got one or two stores. They just don't have the resources to bring to bear that we do.

So there are opportunities there, and we're looking for those opportunities. But we like the flexibility that we can move back and forth between share repurchase and acquisitions and what ever makes the most sense. We can also be patient. I think you see that today. We have a tremendous amount of liquidity. We are not letting it burn a hole in our pocket. But if the right opportunity comes along we are certainly in a position to move.

Understood. Thank you.

Most welcome.

Please go ahead Mr. Marsh.

Operator, do we have another question?

There are no additional questions in the queue.

Very good. Well we certainly appreciate you taking this time with us this morning. As you can see we are very happy with our quarter but we look forward to many good things to come. Thank you very much.

That concludes today's conference. We appreciate your participation.