Asbury Automotive Group Inc (ABG) 2012 Q4 法說會逐字稿

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

Thanks Vicki, good morning to everybody. Welcome to Asbury Automotive Group's fourth-quarter and year-end 2012 earnings 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 Senior Vice President and CFO. At the conclusion of our remarks, we will open up the call for questions and I will be available later 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 other risks that may cause actual results to differ, please see our filings with the SEC from time to time including our Form 10-Q for the year ended December 2011, any subsequently filed Quarterly Reports on Form 10-Q and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements.

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

Good morning, everyone. Thanks for joining us. We are pleased to report record fourth-quarter and full-year results.

EPS from continuing operations increased 31% for the quarter and adjusted EPS from continuing operations increased 49% for the year. Over the last three years, we have grown our adjusted EPS at a compound annual growth rate of over 50%. The investments we have been making in our business are clearly paying off.

Our new vehicle unit sales significantly outperformed the industry, increasing 21% due to the strength of our brand portfolio and excellent sales execution. Revenues were up 15% and gross profit was up 11%. We improved our cost structure, reducing SG&A as a percentage of gross profit by 230 basis points and we achieved record income from operations with a margin of 4%, placing us among the leaders of our industry.

In light of where we were just a few short years ago, I could not be more proud of what our team has achieved. Now I'll turn it over to Scott.

Thank you, Craig.

Our fourth-quarter results of $0.72 demonstrate the strong operating leverage we have built into the Company. The quarter's results again include no adjustments for non-core items.

We continue to make progress with our cost structure and continue to focus on future productivity enhancements. SG&A to gross profit margin was 72.2% for the quarter, a 230 basis point improvement compared to the prior period. Excluding rent expense which we view as a financing decision, our 2012 SG&A as a percentage of gross profit ratio was 67.7%.

Our cash flow generation during the fourth quarter allowed us to continue investing in our business and to support our ongoing share repurchase program. During the fourth quarter, we spent approximately $47 million investing in our business, buying out leases and repurchasing our common stock. For all of 2012, we invested approximately $111 million in CapEx, lease buyouts or real estate investments and share repurchases while still decreasing our leverage levels.

With respect to CapEx, we spent $57 million for the year. We are budgeting in approximately $45 million of CapEx for 2013, as we continue to upgrade our stores, expand service capacity and invest in important technology enhancements. As always, our CapEx numbers exclude lease buyouts and real estate investments.

With respect to real estate, we purchased $13 million of real estate during the year in anticipation of future lease maturities. And we have acquired $18 million of previously leased properties. We are making excellent progress towards our goal of owning 75% of our facilities as we now own approximately 60%.

During the year, we raised $66 million through mortgages primarily with our captive finance partners. To take advantage of the current low rate environment, and given the amount of unencumbered real estate on our balance sheet, we will consider mortgaging more of our properties during 2013.

We ended the year with a total debt to adjusted EBITDA leverage level of 2.4 times. This puts us at the low end of our peers and provides us with significant financial flexibility.

During the fourth quarter we repurchased $8 million of our common stock or 249,000 shares. For the full year, we spent $23 million to repurchase 836,000 shares of our common stock. This represents around 3% of our outstanding shares. We have $50 million remaining under our authorization and will continue returning capital to our shareholders in 2013.

We ended the year with total liquidity of $233 million, which includes $214 million under our revolving credit lines, $6 million in cash, and $13 million available in floorplan offset accounts. We continue to execute our plan of allocating capital in a balanced and disciplined manner to improve our operations, increase ownership of our facilities, grow our company, and return capital to shareholders on an ongoing basis.

I will 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 revenues and gross profit increased 20% and 11% compared to the prior year. Our new vehicle sales were up over 21%, easily outpacing the industry growth rate of 12%. Our new vehicle margins for the quarter were 6.2%, down 50 basis points, reflecting both increased competition and rising inventory levels with our midline imports.

On a sequential basis, our new vehicle margins were essentially flat compared to the third quarter. We do not anticipate significant new vehicle margin erosion from current levels in 2013, but we are closely watching our new inventory levels.

Before moving on to our used vehicle sales performance, I want to highlight the fact that our total front and gross profit yield, that is new and used vehicle gross profit per vehicle sold plus our [F&I] profit per vehicle sold of $3,170 for the full year 2012 has been increasing since 2009 and is $3 shy of our all-time high of $3,173 we set in 2007. We have offset the effect of deteriorating new margins by enhancing our F&I production. We increased used vehicle revenues 5% over the fourth quarter last year as we continue to resign our Asbury one-to-one program. Margins improved 10 basis points to 9.1% compared to the prior year period as a result of greater supply of trading vehicles as our new sales volume grew 21%.

Our used to new sales ratio was 67% for the quarter as the market reacted favorably to both increased availability of new product, competitive pricing and marketing, and growing consumer and dealer incentives. We believe the supply of attractive preowned vehicles will improve throughout 2013 as we move further away from the collapse of new vehicle sales in 2009 and 2010 time period, and the increase in leasing we saw in late 2010.

We ended the fourth quarter with $95 million of used vehicle inventory or a 35-day supply on a trailing 30-day basis. Our finance and insurance business remains strong and remains a strong source of earnings growth for us.

Our consistent message and practice is that the disciplined execution of F&I sales processes and training creates solid reliable growth and results. Fourth-quarter F&I revenues grew 22% compared to the prior period. F&I per vehicle retailed for the quarter of $1,251, up 9% year-over-year.

In the fourth quarter our parts and service revenues grew 2% and gross profit grew 6% compared to the fourth quarter of 2011. Parts and service gross margin for the quarter was 58.2%, up 190 basis points compared to the prior year. The year-over-year gross profit improvement was driven primarily by the 11% increase in reconditioning work as well as the 5% increase in customer pay.

I would also like to highlight that our gross profit from warranty work increased 4% over the prior period. This is due in part to recent recall volumes in some of our major brands as well as the recovery of our units in operation from 2010, 2011 and 2012. We believe we can continue to grow our parts and service business in a mid single-digit range while maintaining our current margins through our ongoing customer retention programs.

We made great progress on the national tire sales program we launched last year, growing our tile sales by 70% in 2012. Again, this program is designed to retain our current customers and provide an incentive to all of our customers to return to our dealerships. Our tire sales goals for 2013 are aggressive and point to our commitment to long-term customer retention.

Considering the increasing average age of vehicles in the US, the attractive financing rates and terms available to consumers and a strong pipeline of new products coming from all of our manufacturing partners, we believe we are well positioned as we enter 2013.

Finally I want to extend my appreciation to all of our associates in the field. You do an outstanding job adapting to the constantly changing retail environment. To balance energy and innovation are inspiring, I can't thank you enough.

With that I will hand the call back to Craig to conclude our prepared remarks.

Thanks, Michael.

Continuing Michael's thoughts regarding 2013, we expect the recovery of automotive sales to continue in 2013 due to the current age of the vehicle fleet, extremely attractive financing rates and the availability of exciting new products. Our planning assumptions for 2013 [SAR] is 15 million to 15.5 million units which represents a continued recovery from the 2012's 14.5 million units.

Taking these factors into account, we are targeting 10% EPS growth for 2013. As a result of the dedication and innovation of everyone at Asbury throughout the financial crisis and recovery, we believe we have positioned our Company to outperform the industry. We believe our strong brand portfolio, attractive geographic locations and proven ability to execute will allow us to grow across all business lines.

In addition to our organic growth opportunities, our strong operating performance will allow us to fund other incremental growth opportunities as well as return capital to our shareholders. Let me reiterate our three-year capital allocation outlook that I shared with you at the conclusion of our third-quarter earnings call which is based on a modestly improving economy, favorable interest rates and a SAR approaching approximately 16 million units by 2015.

CapEx of $35 million to $45 million per year, a significant reduction from our 2012 CapEx spend. Lease buyouts of $10 million to $20 million per year as we approach our goal of owning 75% of our stores. 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'm excited about Asbury's future and remain encouraged by the recent positive momentum from three consecutive quarters as well as full year of record profits in what is still an uncertain economy.

In closing, I want to thank each of our employees. Our record results and momentum are a direct result of your dedication and hard work. I would now like to turn the call back to the operator and we would be happy to take your questions. Operator?

(Operator Instructions). Rick Nelson, Stephens.

Good morning, congratulations. Just to be clear on the 10% EPS growth target, that does not incorporate acquisitions or share buybacks.

Good morning right, no it does not. It does incorporate the share buybacks that we committed to and I just spoke about a moment ago, the $25 million to $30 million a year. So does contemplate that. But we are not dependent on acquisitions in order to hit that 10% target.

We are looking for acquisitions, don't get me wrong. We've got a number of things, conversations that are ongoing. But we think we've got a number of different levers we can pull to get to that 10%.

Got you. I know it was a year ago you were targeting 200 basis points in SG&A leverage over two years, which you achieved in a year. And curious if you have SG&A targets for 2013 over the next couple of years.

I'll jump in there. Scott may want to follow up. But I think we are very happy with what we have achieved. There's still a lot of work to be done, I feel like we've got our core infrastructure in place with the DMS, the CRM, we've got some very good reporting tools in place now as well. But there's still a lot of work to be done on shared services. Our shared service operations are just coming to life. I think this is a very important year for us in that regard. It will ultimately drive even more savings, but I don't think we are at a point right now to quantify that.

I think you said it well, Craig. We never let up on this, Rick. In our environment, you're constantly vigilant about costs, we've made it part of our day-to-day life. I think we've changed it from being a project which it was originally, to being just part of our day-to-day fabric in this Company and we are constantly focused on driving down costs, and as Craig says, we can always see more to come. There's always improvements we can make and we will continue to focus on it.

Now that your SAR forecast 15 to 15.5, as you look at the three segments of your business, luxury, midline import and domestic, where would you see the fastest year-over-year growth in 2013?

I think if you look at our portfolio, I think the midline import will be the biggest piece of that. Again, if you look at those particular manufacturers in a reaction from the post-tsunami or the tsunami recovery, you will see that they are expanding their lineup of product as well as the substantial marketing push, and you can see it in the gains and market share in the last 12 months.

So I would say with this Company in particular you'll see that most of that from the midline imports.

Thanks a lot and good luck.

John Murphy, Bank of America Merrill Lynch.

Good morning. Just to follow up on the SG&A, as we look at the flow through to operating income of the gross profit increase in 2012 was about 85% and, obviously, that was a lot of cost-cutting that you guys were really focused on but it dropped to about 36% in the fourth quarter. And sort of the rule of thumb we've thought about is 30% 40% flow-through of gross increase to the operating income line.

Is that something you think is a reasonable range as we think about our estimates for 2013?

We target internally and I think we've said consistently that we target something around 40% to 50% flow-through, and that continues to be where we focus ourselves. We have been tending to be at the high end of that range, which is -- we feel good about and will continue to try and do that but that 40% to 50% is really what you should think about over the long-term.

And that's on a same-store basis. (multiple speakers)

Great. Then the second question on the UIOs, you increased your parts and service by about 2% in the fourth quarter but it sounds like you're expecting -- and this does make sense the backlog of UIOs will increase and that will drive parts and service same-store comps into the -- I think you were saying the mid single-digit range. Is that the kind of phenomenon you think is really going to begin in the first half of 2013, or is it going to be more second half of 2013? And it does sound like this will probably run for a couple of years. I just wanted to get your perspective on that.

This is Michael. The way I look at it, and going back to the '08, '09 time period, I think you're probably pretty close on that. I don't think this is a first-quarter happening, although we are seeing more people come into our shops than we have in prior months. But I think it ramps up over the next few years. I think the age of vehicles are reflected in the trade-ins we are seeing. I think that adds more of the units in operation and I think some of the internal work we have done, our tire and wiper program which is really geared to retain customers and to go back and get some of our orphan customers. I think when you put all those together we feel confident about this growth rate we have projected, and I think we will see this run up nicely over the next 24, 36 months.

That's helpful. Just lastly, as you are transitioning to more real estate ownership and you're using captive finance subsidies to underwrite the mortgages, just curious. What kind of rates are you getting on those mortgages? Are those significantly below market and what is the term, meaning the duration of the years of those mortgages?

This is Craig, I'll take the first shot. What I would like to do is speak to the relationship with our captive finance partners. When the downturn hit us in late '08, our captive finance partners really stepped up and were tremendously helpful to us. And we are continuing that relationship today. I would point out that our revolver is the majority controlled by our captive finance partners. And they've got a very strong appetite for these properties today, and we are happy to move in that direction. Scott can give you some details.

I would underscore that. Our captive finance partners, the manufacturing partners in general, have been extremely supportive of our business. This is just one area where they've been supportive of it. They continue, we benchmarked this, they offer very competitive rates with the market. Those rates will vary by the manufacturer and by the properties involved, so it's hard to pin down one. But they are very competitive rates, this is a low rate environment. We've seen tenure on these things anywhere from 10 years to 20 years. In some cases, and to us it just -- this is the area where as we try and lock in this low rate environment that we are currently in, it makes the most sense to be a little more aggressive in what we are doing.

Great. (multiple speakers).

Can I just come back on that a second? To us this is a no-brainer. We can take out leases that are in the high single-digits, double-digit rates and refinance them with mortgages that are much longer duration, as Scott said, in the mid- and below mid single-digit rates. So -- and it's with our partners. So it's something we feel very strongly about and we are very aggressive in going after these.

That sounds like it makes a lot of sense. One follow-up on that, though. The relationship with the automakers that you have, it sounds like it's getting a little bit stronger and broader, relative to sort of the skeptical relationship that may have existed five to 10 years ago. Do you agree with that? And does that open up more opportunities as far as acquisitions getting larger, maybe a loosening of the framework agreements?

I'm trying to understand because it does seem like there is a tightening of the relationship that is getting better and better with the larger public groups.

This is Craig again. I would say, as an industry, and certainly speaking to Asbury as well, I do think these relationships have dramatically improved over time. I think our manufacturing partners really do view us as partners. It's -- we all understand that if we want to continue to grow we have to do a good job for the manufacturers. We've got to have great GSI, we've got to do a good job on the market share side, we've got to have facilities that are attractive to our customers. And we've been making -- as an industry we've been making those commitments. I think we have been rewarded for making those commitments, and it's, I think it's turning more into a win-win relationship than what it may have been in the past.

Could you go so far as to loosen some of the framework agreements or that hasn't been in the discussions at all more recently?

I think what we are seeing is -- let me put it this way. We haven't we written any framework agreements. But I think the manufacturers are willing to make exceptions, if I could, and give us a little more leeway than what might be strictly written into framework agreement, enabling us to get things done.

Okay, that's very helpful. Thank you very much.

Scott Stember, Sidoti & Company.

Good morning. Could you guys talk about on the used side, I think one of the reasons for the gross profit advance or at least gross margin advance in that segment was for better self-sufficiency of product. Could you talk about how that could improve even more as we see more cars coming off the lease in the supply at auctions continue to improve?

This is Michael. I think as we saw particularly in December with a very large increase in our new volume, we started to see quite a bit more trade-ins coming in. And as we pointed out earlier, with the improving sales over the last 24 months, we are seeing quite a bit more trades come into the stores. When you couple that with the program that we put in place a few years ago, the way we handled those trades and how we moved those amongst our stores, how we value them, I think we will continue to see a little more product out there.

I think we have got more leases coming off, off cycle, we've got some more daily rental product coming off cycle, so our view is that margins are stable at the present time. Availability of product is a lot better and we think that will continue as long as the new car sales continue to grow at the rate at which they have been growing.

Just going back on the new car side, it sounds as if on a sequential basis that things have at least stabilized. In the 10% growth target that you have in 2013, what are your assumptions for the new car side as far as gross profit?

It's great, I'll jump in. I think what Michael said earlier is we think new vehicle margins should be stable from this point forward, and that's what we've got baked into our plans.

Got you. And lastly, could you talk about how sales have been so far in the first quarter?

This is Michael. SAR was up, obviously, in January and the word out from the experts is that it is the same in February. I would say that we have product available for us to sell, and for the most part Mother Nature has been cooperating. So it's turning into be a decent way to start 2013.

Got you, that's all I have. Thank you.

Bill Armstrong, CL King and Associates.

Good morning. With the units in the operation growth industrywide, would that have more of a positive impact on your warranty business or your customer paid business? Would there be any major difference between the two?

It should have and I think it will have a larger impact on the customer pay side. But I think what you will see in the industry that we've experienced a little bit of is the slowing of the rate of decline of warranty work. The cars are made so much better than they used to be, all the manufacturers have substantial quality programs out there, so I think it will slow down the rate of the decline and warranty and we never can predict recalls. We deal with them as they occur.

But I think the biggest impact on those cars coming out of the warranty periods and into the true maintenance period is from the customer pay side. Both parts and labor.

Got it. Okay. And also in the fourth quarter, you had very strong 21% new unit comp. Used unit comps were only 1%. I was wondering if you could flush out why there was such a big disparity?

This is Michael again. If you go back to the fourth quarter of '11, particularly with our portfolio, we were very much constrained on the inventory side. A number of our J3 -- J6 brands had not fully recovered yet from the tsunami so that we were very tight on inventory. And if we go full cycle one year, we had adequate product, we had new product, we have, of course, what we think are great locations anyway and we are able to capitalize with a number of our brands with substantial volume increases when you compare those two periods.

Thank you.

Rod Lache, Deutsche Bank.

Good morning, everybody. I have just one near-term question and one kind of longer-term. Just near-term, I was hoping you could elaborate on what's giving you the confidence in the flattening of margins in the new business. And on a longer term basis, at some point interest rates start to move up and I was hoping you might be able to take a minute and talk about how that affects your business, specifically maybe in the F&I area. If rates pick up in the next year or so, do you face pressure on markups and additional product sales? Or is there enough room for improvement in underperforming stores so that it would not be that noticeable?

This is Michael, I'll take the short-term problem -- short-term question. So what gives us confidence is that it's really two pieces to that. I think we all experienced a substantial push in market share grab this last 18-month period. And I think that we are seeing a little bit of that stabilization at least from our portfolio. We had substantial market share gains throughout '12. And from our point of view we are outperforming national growth in a number of our brands.

So I feel as if we are seeing a little bit of stabilization from that side of it. The other part is there some fundamental economics that we all have to address as there has to be a margin level at which we all feel comfortable that we can maintain profitability at the store, pay our associates, and at the same time show return to everyone. So I think we are all there in my view.

And I think that's why I feel more confident about the stabilization of that.

To the longer term problem about -- question I'll turn that over to Craig and let him answer that one.

Thank you, Michael. Glad you raised a great point with interest rates. Interest rates over the long term will impact us in two different ways. Our floor plan is floating rate, so as rates go up we will see the pressure on floor plan. They can go up somewhat before we hit our floor plan floors, so we pay rates that are already above the rates obviously, the trade in market today. So we will feel an impact there. And our customers are going to feel an impact. And it could create some pressure for us in our F&I offices, very difficult for us to quantify that.

But what I would point out is the same point that we talked about a little earlier is there's quite a bit of disparity between what our best stores do in F&I and what our opportunity stores do in F&I. And those spreads can be well in excess of $500 to $600 per vehicle retail on average. And that's what we just keep coming back to. How do we get the people who are the lower quartile back to the median. If we can do that, there's still plenty of opportunity to go.

Okay. Can you just elaborate, on the first part you mentioned, the floor plan, there's also reimbursement from the automakers. Does that typically correlate perfectly with the rates that you are paying?

No, it does not necessarily. And we can let Ryan Marsh jump in here with a little more color, I'll give the big picture but the manufacturers traditionally have had very varying programs. There were some manufacturers who would tie the floorplan offset to rate, there are others who would just give you a fixed dollar amount. The imports tended to be more on the fixed dollar amount program, and as you know we are much -- we are heavy import. Ryan, do you have anything you want to add to that?

You got it right. It's a dollar amount, head note linkage to our actual floorplan facility and to the independent animals.

So part of the answer to the question of rising rates is you've got to turn your inventory even faster. That's what it will force and that's what you'll see happen.

One last point on this question. Can you just give us a sense of when you are doing $1,250 -- or over $1,200 a vehicle in F&I, what percentages of that is the markups that you are allowed to get? Is that the bulk of it, or is that -- how does that work exactly? And is that a part that moves up and down over time?

This is Michael. So the biggest impact on our PVR is the sale of mechanical breakdown and the sale of prepaid maintenance. So that is the pricing, and the margin on those is very much vehicle-dependent. As you can imagine, it would be a different price and spread on a $22,000 car as opposed to a $75,000 car. We have internal policies where we cap rate spreads and so the vast majority of our income comes from the sale of products.

Okay. So you would probably see the rate spreads would stay the same, but it might be a little more challenging in other words to sell some additional products and maintain relatively consistent monthly payments. Is that sort of the message?

I think that's a fair -- as rates go up and retail rates seem to have always lagged the wholesale rates, but as they do go up, it impacts the monthly payment which, in fact, is -- that's the single identifier of moving product out.

Okay. Great, thank you. Appreciate it.

James Alberton, Stifel Nicolaus.

Rate, thanks for taking my question and congratulations on a solid quarter. I wanted to take a quick step back here on used very quickly. Overall, the metrics are actually pretty sound, I think, and your revenue per unit went up, gross profit is down a little bit less than we expected.

But if we look back at the wholesale business there and you think about your long-term outlook, the -- I think it was 27% increase in same-store used vehicle wholesale revenues. Do you look at that as an opportunity or is that just a function of the market and sort of what's coming in off trade at this point?

That's a good question. I'll answer it in the opportunity part of it, and I said I think a number of times on a number of calls, even the SAR in the 14, 15 and 16 range there's about 40 plus million used cars retailed in the United States. And the dealer body, the franchised dealer body accounts for about one third of those sales. So I always look at the opportunity that there is a lot more business for all of us to get out there and put under our umbrella as opposed to the other two thirds. That's part of the answer.

I think the other answer again is that as we continue to refine our internal program, the way that we hold on to trades, the way that we market trades, do our trade walks, I think we get better and better at that, we have Phase II going in this year and I think we will continue to capitalize on the age of the product that's coming out, the new product is out there and the improving economy will take more trades, have to buy less at auctions and have more and better product available at a nice price band in all of our stores.

I appreciate the detail on that. And just moving to one of the comments you made on the service side, I think I heard you correct the talked about expanding service capacity as one of your opportunities and, I think, the uses of CapEx in the year ahead. Can you elaborate on that a little bit? Is that fundamentally expanding bays, expanding diagnostic systems investments in bays or is it personnel or technology-driven? Wanted to get some more color there.

I'll just jump in. That is part of our ongoing capital program. We're going to spend about $45 million this year. We spent about $60 million last year upgrading our stores. And those upgrades will typically include an expansion of our service base.

I'll give you an example. We are just in the process of completing a very significant rebuild of a Hyundai store in Florida. And that includes not only a redesigned showroom, but a -- I want to say I don't have the exact number but we are essentially doubling the number of service bays in that store. When Scott was talking about that expansion that's really what we are speaking to.

If I could sneak one more in very quickly, just -- I know you've talked about it before. It sounds like from an M&A standpoint it makes more sense to think about building up the scale that you have. So expanding within existing markets or maybe contiguous markets.

Just wanted to get your sense of is the market more or less sort of rational now from a seller standpoint, maybe by brand. If you can get into that level of granularity, whether it's luxury, midline import, midline domestic, what you're seeing from that side of it. And then I'll leave it to the next caller, thanks.

That's a great question. First of all I would say that our footprint is pretty big. We consider a store anywhere from -- the southeastern United States gain, so that covers us from as you know we are in New Jersey all the way through Florida and all the way out to Texas. We've got a lot of ground where we can go hunting.

I would say broadly speaking that the -- I think sellers are feeling pretty good about the recent run they have had, I wouldn't even consider it in any sense of the imagination a hot market for car stores. But that said, there are people who are willing to talk. I feel like a lot of the transactions that the people that we are talking to today are more relationship-type opportunities. And we're talking to people that we've known for some time, who may be reaching a point in their career and realize where they think it might be time to sell.

And those things move at whatever pace the seller wants them to move, we can't force them. But we have a number of those conversations that are underway right now. Some of them are luxury, some of them are midline import, I'd say primarily. And we just need to see where they go.

One thing I will say though is and maybe come back to, we were very happy with the Volkswagen Bentley store that we bought in December. Those stores are performing above our expectation, and we set some pretty steep hurdles there. So those seem to be going well, and we are optimistic that we'll be able to get others done as well.

Appreciate the detail, congratulations and best of luck in 2013.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. I wanted to circle back to the SG&A, and so your throughput obviously has been very good this year, so congratulations, well done there. It sounds like your longer-term target is that 40% 50% range, you kind of did 59% based on my calculation. I know that's not same store, but 59% fourth quarter is a very good --.

How do you find that trending over the next two, three, four quarters? Do you see a kind of a slow one-year reversion to that 40% 50% range or do you see --? We're probably going to be in that 40% 50% range because of difficult comps in the first quarter.

A lot of people things can impacted on a short-term period to period basis. And we tend to just wash that over long-term and think of that 40% to 50% range, we've been running and certainly closer to the 50% than 40%, and we try harder to stay there. But predicting a period to period is really difficult because single large one-time events often get in there; and so we just smoothe that out in our thinking and I would urge everybody else to do that and just think in terms of that 40% to 50% over the long-term.

It's Craig. I'll just jump on in and say we have to work at that, we have to -- it doesn't happen all by itself, probably the natural rate I think is somewhat lower. So we've got to be out identifying ways to be more productive, and it's the combination of, if you would, leverage just doing more business, combined with some of the initiatives that we have underway to be more productive that enable us to get to that 40% 50%. Like Scott said, I think it's more likely to be lumpy then any type of smooth projection.

And then you obviously went through a significant amount of change in terms of in that you've seen very nice improvement in your SG&A leverage and so forth. My question here is as I look at some of your opportunities, you've already talked about F&I a bit, but I'm wondering also on the used-car side, I think those are kind of two areas you are targeting F&I and used cars.

Can you talk a little more on the used car side, how do you see yourselves improving maybe your performance on the used-car side? Just in terms of unit sales, gross profit, that sort of thing.

It's Craig. Let me start and maybe Michael can take over. And you referenced where we have been, and I think if I could, I'd say that the organization has spent a lot of energy in building out basic systems and basic processes infrastructure. And that's consumed a lot our energies. It was only a year or so ago that we finished getting all these stores on a common DNS.

I would argue that we are just really learning to be pretty good at using a rather sophisticated CRM. But now that we are -- if you would, we've played a lot of defense and I feel like we are starting to play some offense. And as we play offense and we get better with these tools, as we get better online, as we get better with the web, as we get more sophisticated in understanding the value of our customers, where they come from, how we communicate with them, as we start to actually track activities with the customers, I think it gives us an opportunity to be more aggressive in pursuing organic growth within the stores.

With that I'll give it to Michael.

Just to add on to that, if you take our philosophy in use which is same philosophy on F&I, we always have a bottom third, and we've already identified a number of stores that are not facility-constrained, and they are not location-constrained. It's more a matter of individual philosophy that needs to be adjusted in those stores. We just take those stores and bring them up to the median of our other stores, we add a substantial amount of used-car volume throughout 2013.

So again, there's no magic potion, no magic bullets on this. It's applying our developed processes and applying them perhaps a little more intensely to the bottom third, maintaining what the rest of the stores doing and, I think from that, we get the used-car volume lift we are anticipating.

And let me maybe delve down into a little bit deeper. As you look at your bottom third and you compare them to your top third, let's say, can you give us some examples of maybe the one, two or three best practices that the top third is doing that you think you can implement at the bottom third to see that improvement?

I'll give you one of them just real quick. So in the very best of the best, the trade walks are done religiously every day. Those involved not only the used-car manager but all of the sales associates as well as the service department, those trades are evaluated and within an hour, 1.5 hour time period the decisions are whether to keep the trade, to put it through the shop or to wholesale trade right there on the spot.

The stores that perhaps have a little more learning to do don't do that -- that religiously, they may do them four days out of the week, they may only do it with a smaller amount of staff, but we have proven to ourselves over and over again that when that particular practice occurs, the buy in becomes deeper. The enthusiasm becomes larger within that dealership, and we have a better, cleaner inventory, we have more sales staff excited about that inventory and then we just sell more cars out of that process.

So that's one of them right there. Without getting into a whole lot more detail, another one is truly the practice of how the trades themselves are evaluated on a dollar basis. We have a scoring system and we talked about how we actually -- what you would call purchase the trade from the consumer. The smarter you are at doing that and the more aggressive you are within specific brands, the better your buying ability if you will becomes and our best stores do an outstanding job of that. In the bottom third again are and a little more education mode, but it's my job to educate them, and that's again why we feel very confident about the next 24 months.

Thanks you very much, gentlemen.

Ravi Shanker, Morgan Stanley.

Good morning, everyone. I had a couple of follow-ups, one on new and one on parts and services. You cited earlier that you are seeing increased competition on the new site. I'm assuming this was the grab for market share that you referenced at some point in the call. Just wanted to take a minute, what makes you believe or what gives the confidence has going to recede in 2013? Especially is it because the OEMs are getting more involved, or is it more a realization from the dealers that is not healthy or what's driving that?

This is Michael. I think the point I was trying to make is that as the midline imports recovered from the tsunami, there was a substantial -- they had to substantially gain market share again. And that availability of product and the push for market share causes a very competitive pricing environment. I think they will all continue to go after more and more market share, but the rate at which they are, my belief is the rate at which they think they can obtain that market share has become more rational. I think some of the pricing practices are being looked at by a number of the manufacturers.

They deemed that some of those pricing practices were not helpful to the dealer body. And I think that they are being reevaluated, so that gives me the confidence that we will be able to hold that margin a little bit. So I think that the competitiveness is never going to go away, but I think there's also some view amongst the dealer body that there is a margin level at which we have to maintain to continue to support again our sales associates and maintain the inventory levels the manufacturers want us to carry.

Very helpful. On the parts and services side, you touched upon this a couple of times on the call, but can you just help summarize when you look at getting to a mid single-digit growth rate in partner services from the levels you currently are at, while still holding margins, can you talk about the big -- moving pieces there that's going to get you there?

Let me give you without giving away all our secrets, let me give you a philosophical point of view that we are embracing and have been embracing and Craig touched on a little bit in terms of technology, and on process. We have in our industry and within our Company have for a number of years a very strong disciplined process involved in the selling and the marketing and the follow-up of new and used cars. We are just now embracing sophisticated technology and training with our people to enable us to do that same type of marketing and follow-up with our parts and service customers.

We have not done this, I don't think we've done it as an industry but I can tell you how specifically we have not done nearly the work in that area that we have in the front end. So, I feel confident as that expands and as we continue to put in those programs, that we will see the results we've seen in the new and used-car side of the business.

So mostly it's cars and parts-driven stuff, not so much a mix of the business (multiple speakers).

That's correct.

Brett Jordan, BB&T Capital Markets.

Good morning, this is actually David Kelly for Brett. Thanks for taking my questions this morning. I think most have been answered. Just a quick follow-up on the parts and service side. If you look at the reconditioning segment, solid growth really the last two years, and just wanted to get your thoughts on where we could be headed on reconditioning, heading into 2013, given rebounding volumes on the used side but possible decelerating growth on the new site.

This is Michael. I would say the majority of our reconditioning work occurs on the used-car side. We of course do internal work and prep work on the new cars, we add accessories to them. Most of the reconditioning service parts and service business is on the used-car side.

As we continue to emphasize continued growth in used cars, I think you'll see that business remain very healthy for us. I think as a new car volume continues to grow at the rate that it is growing, again, we will have more availability for trades with more availability for trades that falls into what we can do in terms of the reconditioning work. So I feel very comfortable with the reconditioning levels that are out there and as we grow our used-car business we can continue having a substantial piece of our business in the reconditioning area.

Okay, great. Thank you. Just one quick more granular question on the parts and service side as well. You mentioned the tire sales, strong year 2012 of a small basis you guys continue to ramp that category. Do you have any longer-term goals whether it be on the sales or the unit side in your entire segment?

Let me see if I understand your question. So we had a 70% increase last year and we have an aggressive number for this year. We believe that there was, again, areas of our industry -- -- our geographies that we didn't do as good a job. I think, as we became better at selling tires and marketing tires, we just get better at it. We do more of it.

I don't want to discuss a specific number for 2013, but it is an aggressive number and we believe that it is a retention program. It's not necessarily that we want to sell tires just to sell tires, but as we've mentioned on some previous calls that for every dollar sales of tires we get long-term, we get a fair amount of increased business both in parts and labor and other products, and we are beginning to see some of that.

Thanks for taking my question.

David Whiston, Morningstar.

Good morning, one question on your comment, too, that you wanted to increase your mortgages on your own stores throughout this year. Obviously we don't need to worry about a recession in this industry anytime soon but eventually we will have one. So, would your goal be to have all of your stores encumbered over the next few years or do you want to leave a little flexibly and leave them in the downturn?

Our goal as we said is 75%. So not obviously it's not 100% of our stores. And it has less, if you would, flexibility. We are doing this because it's a very competitive source of financing and a low rate environment, and by doing it principally with our captive manufacturing partners, when a cycle changes and cycles inevitably do change, we are now financed by people who are, we are very much aligned with in terms of what we want to do with the business. They have as much interest in keeping the store open as we do, and it makes the whole relationship much stronger and much easier to manage in those sorts of an environment which is one of the other reasons we are doing it principally with mortgages.

I just hopped in, we've talked a lot about our capital finance partners. I think it's important to say that we've got some very good relationships with our banking partners as well. Those, the revolvers managed by our banking relationships, and those are equally important to us. And they've also been with us for quite some time.

With that said we don't have any more questions. I'd like to thank you for your patience and spending the time with us today, I think this is the longest call that we've had in quite some time. We are thrilled to talk to you, we enjoy the questions, we enjoy the interaction and, hopefully, we will get see some of you on the road in the not-too-distant future and for those of you who don't catch-up with, we look forward to talking to you again next quarter. Thanks again for your time.

Thank you very much. That does conclude our conference. I would like to thank you for your participation, and you may now disconnect.