Asbury Automotive Group Inc (ABG) 2013 Q3 法說會逐字稿

Good day and welcome to the ABG third-quarter 2013 earnings call. Today's conference is being recorded. And at this time, I would like to turn the conference over to the Treasurer, Mr. Ryan Marsh. Please go ahead.

Thanks, Camille, and good morning to everyone. Welcome to Asbury Automotive Group's third-quarter 2013 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 will open up the call for questions and I will be available for any follow-up questions you might have later in the day.

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 the statements. For further 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 2012, any subsequently filed quarterly reports on Form 10-Q and our earnings release that we issued earlier today. We expressly disclaim any response ability to update forward-looking statements.

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

Good morning, everyone, and thanks for joining us. We are pleased to report record third-quarter results.

Adjusted EPS from continuing operations increased 26% for the third quarter. Our stores continue to maximize sales and service opportunities across all business lines while controlling expenses. Revenues were up 17% and gross profit was up 16%. We improved our cost structure, reducing SG&A as a percentages gross profit by 120 basis points. We achieved record third-quarter income from operations with an adjusted margin of 4.3%, placing us among the leaders in our industry. We acquired and successfully integrated three franchises with approximately $115 million of run rate revenues, and we redeemed the remaining $143 million of our 7 5/8 bonds. Our third-quarter results demonstrate the dedication and determination of our associates across the organization.

With that, I'll turn the call over to Scott.

Thank you Craig. Our third-quarter adjusted EPS of $0.91 reflect the earnings powers of our business. This quarter's adjusted results exclude debt redemption costs of $4.2 million after-tax, or $0.14 per diluted share, and a non-cash real estate related charge resulting from the purchase of a previously leased property of $1.3 million after-tax, or $0.04 per diluted share. The debt costs are related to the redemption of the remaining $143 million 7 5/8 senior sub notes. The real estate charge is reported in the other operating expense line in our income statement. There were no adjustments to last year's third-quarter results.

Our SG&A as a percentage of gross profit continues to improve to 70.9%, 120 basis points lower than the prior-year period. A focus on cost discipline and ongoing productivity improvement continues to be part of our core operating culture. Excluding rent expense, which we view as a financing decision, our SG&A as a percentage of gross profit ratio was 67.3%.

During the third quarter, we spent $14 million on CapEx. We are anticipating CapEx in the range of $45 million to $50 million for all of 2013 as we continue to execute our plan to upgrade our stores, expand service capacity, and invest in technology.

For 2014, we are budgeting CapEx of $60 million. This breaks down to approximately $45 million associated with our existing capital plan, $15 million associated with the acquisitions that we made in July of 2013, and the relocation of one of our franchises from a leased facility into a new owned facility, effectively the same as a lease buyout.

As is our custom, CapEx numbers exclude lease buyouts and real estate investments. In the quarter, we spent $19 million purchasing a property we had previously leased. We anticipate $2 million in annualized rent savings from that transaction.

We continue to evaluate other opportunities to buy out leases. Year-to-date we have spent $33 million in lease buyouts with a cumulative $3.5 million in annualized rent savings. We now own approximately 66% of our dealership facilities.

We have been taking advantage of a low interest rate environment and by the end of 2013, we will have significantly improved our balance sheet. In doing this, we will have accomplished three objectives -- fund our acquisition and lease buyout activities while maintaining our financial flexibility; extend our maturities, the earliest material maturity is now 2020; and lower our overall cost of debt.

To complete our plan, we are in the process of finalizing and expect to close several additional mortgages in the fourth quarter. Including these fourth-quarter mortgages, we expect leverage to be near the lower end of our 2.5 times to 3 times target range, and total debt to be somewhat higher than where we began the year. We estimate our average cost of debt will have fallen from around 7.2% at the beginning of the year to 6.7% at year's end.

During the third quarter, we repurchased $8 million of our common stock, or 160,000 shares. Year-to-date we have repurchased $20 million or approximately 500,000 shares and are on pace to repurchase $25 million to $30 million for the year. We have $30 million remaining under our board authorization and plan to continue returning capital to our shareholders.

Over the last ten months, we have acquired five franchises representing approximately $175 million of annualized revenues, well on track to achieve our previously announced goal of adding $500 million in acquisition revenue by 2015.

We ended the quarter with total liquidity of $272 million, which includes $235 million under our revolving credit lines, $1 million in cash, and $36 million available in floorplan offset accounts.

During our third-quarter earnings call last year, we shared our three-year capital allocation plan through 2015. Today, we would like to update that plan through 2016.

We are planning our business around a slowly improving economy, a favorable financing environment, and a modestly improving SAAR of around 16 million over the course of the next three years. Based on that, we expect core CapEx of $35 million to $45 million per year, excluding future acquisitions, re-up lease buyouts of approximately $10 million per year as we work towards owning 75% of our real estate, acquisition of an additional $500 million of annualized revenue over the next three years. To be clear, this is in addition to the acquisitions we completed in 2013. And finally, return of capital to our shareholders by repurchasing $25 million to $30 million of our common stock per year in an ongoing share repurchase program with additional share repurchases possible on an opportunistic basis.

I'll 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 during the third quarter.

Our new vehicle revenues and gross profit increased 10% and 7% compared to the prior year. Our new vehicle unit sales were up over 7%, basically in line with the industry.

Although our new vehicle margins for the quarter were essentially flat compared to last year at 6.1%, down 10 basis points, the increase in volume more than offset that margin decline. On a sequential basis, our new vehicle margin did improve slightly by 10 basis points. I believe new vehicle PVRs will continue to remain stable at about $2000 a unit.

We ended the third quarter with $574 million of new vehicle inventory, or 77 days supply, on a trailing 30-day basis. We are comfortable with our new vehicle inventory levels. We continue to watch these and our OEM production very closely as we go into the fourth quarter.

We increased used vehicle unit sales 25% over the third quarter of last year, realizing the benefits of Phase II of our Asbury one-to-one program. Although margins decreased 80 basis points to 8.6% compared to the prior-year period, the substantial increase in volume more than offset the margin decline. This resulted in an 18% increase in used vehicle gross profit. Our used-to-new sales ratio was 81% for the quarter as our stores continue to refine their preowned acquisition strategy. We view Asbury's one-to-one program as an important engine for future profit growth as we continue to see the impact on earnings from these gross profits. We are generating increases not only in the used vehicle department but also the F&I and parts and service departments as well. We have expanded our purchasing and preowned acquisition program to ensure that we maintain an adequate supply of these vehicles. We will keep the levels necessary for our continued growth in this sector.

We ended the third quarter with $121 million of used vehicle inventory, or a 37-day supply on a trailing 30 day basis. Our strategy and practice within the F&I segment of our business remains the same. Disciplined execution of F&I sales processes and training create solid reliable growth and results. Third-quarter F&I revenues grew 20% compared to the prior period. F&I per vehicle retail for the quarter was $1305, up 5% year-over-year.

The lending environment remains favorable.

In the third quarter, our parts and service revenue grew 6% and gross profit grew 11% compared to the third quarter of 2012. Parts and service gross margin for the quarter was 60.9%, up 270 basis points compared to the prior year. The year-over-year gross profit improvement continues to be augmented by a 30% increase in reconditioning work. Our customer pay grew 5%, and we experienced a 17% increase in warranty work.

Similar to last quarter, we benefited from a couple of recall campaigns during this quarter, and as I stated in the past, you can never predict recalls. We believe we can grow our parts and service business in the mid-single-digit range while maintaining our current margins through our ongoing customer retention programs.

We closed on the acquisition of three franchises in July. These dealerships are fully integrated into our system and produce in the expected level of sales and profits.

Finally, let me express my appreciation to all of our associates in the field as well as those in our support center. Our company continues to grow in all aspects, and our employees are producing best-in-class results in many areas. This is a direct result of your collective dedication and effort. Again I thank you.

With that I'll hand the call over to Craig to conclude our prepared remarks. Craig?

Thanks Michael. Listening to the execution that Scott and Michael just discussed, you'll understand that we are proud of our accomplishments this quarter. We have a great set of brands in great locations and most of all we have great people who have made these results possible.

Taking stock of the current SAAR environment, we recognize that there has been a flattening in the marketplace over the past few weeks. Whether or not that was driven by the uncertainty in Washington, we can't know. However, in a more stable SAAR environment, we do expect that our business will return to normal seasonality, with the second and third quarters of the year contributing a greater level of profitability than the first and fourth quarters.

Looking at the longer-term, when you consider the current age of the vehicle fleet, the extremely attractive financing rates and the availability of exciting new products, we believe that auto sales will continue to improve over the coming years and that our proven ability to execute will allow us to continue to deliver attractive returns to our shareholders.

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.

Thanks. Good morning. Asking about the used car performance, same-store sales have really accelerated the last couple of quarters. If you could point, Michael, to the drivers there and whether you think that type of growth is sustainable.

This is Michael. So a couple of things that we put in place I guess over a number of months and quarters have really come to fruition. First of all, we put a lot more capital in the inventory itself. We are carrying a lot more product and that spectrum of product we've got out there, we've broadened it dramatically. We have expanded reconditioning hours, whether it's going into evenings or just over the weekends. We are getting our reconditioning work done a lot faster. We've expanded our used car buying teams. We are sending a lot less product to the auctions. We are keeping them at the individual stores. We are transferring them to other stores, so we are saving a lot of fees. We've got just a quicker availability of product, and it's just a continuation of making trade acquisitions more quickly and more effectively at the dealership level. So, I think that's the first part.

The second part, as I discussed many times, it's a very big market. The used car market is essentially, the way I look at it, three times the new car market, so I think there's substantial opportunity. I don't know if we can continue to grow at this pace, but I just think there's a substantial opportunity out there, and we'll keep refining our processes.

F&I per unit also another record there. If you could comment on the sustainability and whether you're seeing any changes has resulted the CFPB.

I'll take a shot at it. Again, as I mentioned, there's always a bottom third. I sound like a broken record, but there's always a bottom third of our business and we have a very, very disciplined and dedicated program to focus on those individuals as well as our internal certification program. We take some of the best off the sales floor, put it through a very rigorous certification and training program to put them in our F&I processes. So we will continue to do that. I think there's always an upside to that. We continue to focus on product sales. We continue to focus on retaining those customers. That way we want to sell products of course that have substantial value to the consumer as well as bring them back to our parts and service department. So I think -- and we will continue to do that, we'll continue to grow that number.

As far as the CFPB, there's not a lot of clarity from our side of the picture. We have not really had any impact to speak of. I think it's a wait and see from our standpoint, but at this point in time, it's of no relevance to us right this moment.

Got you, thank you for that. I'd like to also follow up on the commentary about October, and I'm curious if you've seen sales change since the government went back. I'm sure that did have some impact on consumer confidence.

It's Craig. Maybe I can jump in and take a shot at that. Clearly, the sales slowed down in September. And we started off in October essentially I would say at the same kind of pace. It certainly wasn't the same feeling in the stores that we had as we were working our way through the summer. I think the big question is was that the result of the uncertainty in Washington, or are we as an industry moving back to what we've seen historically where there is a significant seasonality factor in that the first and fourth quarters are typically much slower than the second and third quarters. Maybe it's a combination of the two.

That's the message we wanted to get across, is that we are all aware of the SAAR slowdown in September. And we just wanted to point out that we may just be getting back to what had been normal for the last 10 years other than the recovery since the recession, and maybe that's where we're headed. Michael might have something to add.

Again, I don't want to make a big deal about the governmental issue, but consumer purchasing of hot aisle product is an emotional event, so there can be persuaded one way or another by news and events. But we don't want to put a lot into that. I agree with Craig that I think having been in this for a long, long, long time, we are returning perhaps to some of this seasonality. But I will just finish up by saying October is now running better than September end.

Good to hear. October is a small month, right, within the quarter it's very December heavy for you, particularly for the premium luxury.

As you've seen evolve particularly over the last I would say four years, the luxury brands start their push now middle November. So BMW, Audi, Mercedes-Benz, Lexus, Acura start their big push about November 15. So it's a little back-end weighted for the fourth quarter.

Thanks a lot and good luck.

John Murphy, Bank of America.

Good morning guys. Just a first question to follow up on Rick's question on the October sales numbers and what you are seeing, when you're talking about sort of flattening out, that could mean a lot of things. So I'm just trying to understand it. SAAR last month was 15.2 million but there was a lot of confusion on where Labor Day landed. So if we looked at August and September together, we were sort of a 15.6 million to 15.7 million SAAR. Is that kind of -- to not maybe put an exact fine point on it, are you seeing sort of a mid to high 15 million SAAR or are you seeing a low 15 million SAR for October? Because there's a pretty big difference there between whether it's a low 15 million or mid to high 15 million.

I'll start and maybe Michael can follow up. We are not dialed into trying to quantify the SAAR in any given period. I think what we are saying is the traffic in the stores, the traffic in our websites certainly during the last two weeks, first week in October, we saw a significant slowdown relative to what we had seen in the prior two or three months. Like Michael said, October started slow but has since started to show some improvement. But we are very much in a let's see where it goes from here, like we just said to Rick. The fourth quarter is all about the month of December and we just don't have that much visibility into where we are headed.

Okay. But the statement is relative the last couple of months as opposed to just September itself.

Very much.

Okay, great. Then on the parts and service, we are seeing a broad improvement really across the board in your categories there. I am just curious. As we think about the backlog of cars growing in that business, moving in the right direction even better than it maybe has already, just trying to understand the SG&A dollars that would be tied to the growth in gross profit, sales and gross profit in the parts and service business. Are there a lot of SG&A dollars that come in there or are the SG&A dollars more associated with new and used vehicle sales?

I think we don't quite understand the question. A lot of our SG&A, quite frankly, is fixed, and then there's a very large people component. On the parts and service side, a lot of the people expense is actually recognized before we get to the gross line. So I don't --

So if we were to think about this --

This is Michael. Let me see if I can take a shot at it. If it's on the fixed side of the business, since we don't have a variable sales component to speak of, our flow-through, once we get to a certain level of fixed, is much better. I don't know if that's what you're asking or not.

So, yes, so basically if you look at the Company on average, this quarter you were 70.9% SG&A to gross profit. That actually might be -- as the same-store sales or the gross profit grows on the parts and service side, it would actually be a lot lower than that and the flow-through would be a lot higher than what you're seeing on the corporate average.

That's correct.

Okay, good. And then just a last question on luxury. It outperformed quite significantly for you in the quarter. What are you seeing there from those buyers? They seem to be sort of desensitized to everything that's going on right now. Is that something where you think that you are seeing good showroom traffic and able to close people fairly easily?

This is Michael again. I'll answer in reverse. I don't ever like to say that we close anything easily. It's a lot of effort and a lot of work.

I think there's two parts to the luxury increase in the third quarter. One is, as you know, the luxury brands have expanded their product offering. So, I'll give you perfect example. The CLA with Mercedes has an opening price point of just below $30,000. So, we are bringing in buyers that perhaps two years ago would've never considered or been able to consider a Mercedes. We've got the 1 Series with BMW, and I can go on and on.

But we are seeing an expansion of the product. I think there's been a substantial amount of new product brought along -- Audi, Acura, BMW, Mercedes. The cadence of that product in the last 18 months has been dramatic.

And I think you're right. And the third point I would make, I would agree with you. I think a lot of the buyers that are in the $50,000 to $90,000 MSRP range are somewhat shielded from the vagaries of the press and they're somewhat shielded from ups and downs in the economy. So we are seeing them return. Leasing is very attractive today. So I think all of this put together accounts for the nice increase in the luxury business we saw in the third quarter.

Truly just one last question. Along with that, when you sell a luxury car, almost all the time, they have full lifecycle service contracts for the first four years. Is that correct? And will that help out parts and service going forward? And are you seeing that bleed down much more into the mass market like what we saw at Toyota Care, so that you are sort of really even more naturally capturing a greater portion of really the first three or five years of service from the luxury cars and for maybe even the mass-market cars?

This is Michael again. So, I think, generally speaking, the luxury brands have a much higher customer retention in the service department throughout the lifecycle. I think that is a correct statement. Not all brands supply maintenance to the consumer. But of course we do sell maintenance packages on the brands that -- where it's not included. We do very well with those. But I think, generally speaking, all of the luxury brands have a very much higher retention in the service department than, say, the mid-lines or the domestics. Because of that, yes, we see nice growth, and nice sustainable growth in the parts and service departments with those brands.

Great, thank you very much.

Bill Armstrong, CL King and Associates.

Good morning. I want to talk about parts and service gross margins, up nice and strong. Is that really due to mix or did you see margin improvement in any of the subcategories within parts and services?

This is Michael. As a direct result of the substantial increase in used car business, we've seen a substantial increase in our internal work where the margin is dramatically higher. It's essentially 100%. And it's almost all labor.

Let me -- is not 100% because we charge more. It's 100% because, in the accounting, we eliminate the revenue for the internal works. So as we shift the mix, we've seen the strong growth and the internal reconditioning has improved the overall margin for parts and services.

Okay, got it. And shifting to used vehicles, your gross profit per vehicle was down year-over-year even as volumes were up. What can you point out or call out on that?

This is Michael again. It's a couple of things. One, we've truly expanded the price band of vehicle that we are carrying, and especially in a lot of stores, we are carrying a lot lower priced vehicles in our non-luxury store. So that contributes to part of it.

I think the other part of it is, as we've grown the business and we've accelerated the pace in many of our stores, we have consciously accepted a lower gross profit margin so that we will move the vehicle faster in and out of the inventory. That velocity contributes to the ability to sell more and more cars out of any one particular outlet. So, I think that's a natural part of that growth curve. That is a part that we focus on and we work on. It is something that's a conversation piece every day. But it is not and was not unexpected as we grew the volume.

Okay. And then finally on midline imports, we've been hearing that there have been some gross margin pressures, stair-step incentives. It looks like your gross margins were pretty solid, probably up year-over-year. Are you seeing any of those kind of pressures?

It's Michael again. There's a, particularly throughout the third quarter, which was in the summer time, there were some incentives by the manufacturers, some model changeover incentives. There were some stair steps, nothing -- I wouldn't call them dramatic. But we are seeing from all those brands a push for market share. We grew our market share in all of those brands over the third quarter, but we also focused on the ability to return a fair amount of profit to the stores. So I think the question is there is pressure. There's absolutely pressure for market share out there, but I don't believe there was any excess amount of incentive pressure that we saw in the third quarter.

Got it, okay. Thanks very much.

Brett Hoselton, KeyBanc.

Good morning, gentlemen. First, I just wanted to ask you a quick point of clarification. It's interesting. In talking to a number of clients in recent months, it appears as though there's the impression that warranty business carries with lower margins and therefore as your warranty business grows faster, it may be negative in terms of your margins. But my impression is through our families business that warranty carries with it higher margins and should actually be accretive to your margins as it grows faster. Which is correct? Maybe you could just clarify that for the investment community.

This is Michael. Warranty business carries for us essentially the same margin as our customer pay business, so it does not carry anything less or anything substantially greater. So we do not consider it dilutive to our business at all. I think I look at it the same way on a rate-wise as our customer pay business.

And then as you think about the maintenance programs that John referred to, where are those captured in your business here? Is it under warranty? Is it under customer pay? Again, I'm referring to the maintenance programs from BMW or something along those lines.

It's captured in the warranty piece of the business from the factory programs if it's a factory supply program.

And then as we think about used car gross profit per unit, it sounds like you're making a conscious decision to kind of maybe take a little bit lower gross profit. So therefore, as we think about your gross profit per unit on a go-forward basis, is this kind of a reasonable expectation for where you should be at? This quarter, you were in $1.7 billion -- or $1700 per unit. Is that kind of the new go-forward rate for used car gross profit per unit or is there some expectation that things might get a little worse or things might get a little better?

If you listen to the people that I talk to in our departments, they'll tell you they better not get any lower than this. I think this is something that we are going to stabilize internally. There may be some ups and downs to it, but this is -- we are putting programs in place to try to return to a little bit higher number than what we are seeing today, but we don't want to take any emphasis off of the volume push either.

And then finally, you've got very good exposure to Honda. Honda seemed to outperform the industry in the third quarter quite nicely. And I guess it just seems as though maybe regionally Honda maybe didn't perform as well in your regions and therefore you didn't necessarily benefit from the outperformance that we saw nationwide. Can you maybe speak to that a little bit?

Yes. Our Honda stores did very well in the third quarter. We gained market share in our markets with Honda in the third quarter. We happen to be -- I don't know if it's regionally. I can't tell you about other regions of the country that we don't operate in because I don't look at it. But we grew our Honda business in the third quarter, and we saw market share gains.

Thank you very much, gentlemen.

Rod Lache, Deutsche Bank.

Good morning. It's Dan Galves in for Rod. I wanted to ask about sequential SG&A spending. We notice that gross profit was up about $3.5 million versus Q2, but SG&A was up over $5 million sequentially. Just was there anything specific you can call out that drove kind of an increase in spending? And has there been any change to your view on the level of SG&A spending at kind of this particular gross profit level?

This is Scott. The answer is no, there's nothing particular to call out. We've always said from period to period, that could be a little lumpy, and we're just experiencing some of that. We continue to focus on initiatives within the Company to improve productivity and to keep costs under control. Certainly a higher proportion of the profit coming from areas like parts and service and F&I have helped that number as well. So we would expect something that's more like the year-to-date as opposed to the single quarter here to be sort of the going-forward rate, and we will continue to try and improve that.

Okay. That's perfect, thanks. One other question. Just to clarify on the parts and service margin, I think last quarter when we first saw like a real kind of strong growth in recon and prep, that seemed to drive the margin higher. I think you were talking about that you thought that the gross margin in Q2 was a bit unsustainable as kind the growth rates in different parts of the parts and service business normalized, or kind of come back together a bit. Now you're saying you're expecting mid-single-digit growth with similar margins occurring. So are you now saying that you don't expect the gross margin in parts to normalize downward?

This is Michael. So I think, as I mentioned earlier, the growth rate of used cars was substantial, particularly in the last two quarters. I think we will continue to grow our used car rate which drives a lot of the recommissioning work, but I wouldn't want to sit here and tell you we can grow it at 25% a quarter. So I think that's part of where we come up with the mid-single range growth in the fixed apartment.

How about on the margin side? Do you think this kind of close to 61% level is sustainable?

I think 60%, 61%, yes I do.

Okay, great. Then just maybe one follow-up on the used business. It sounds like most of your incremental units are coming from being a little more aggressive on trades. Are you also seeing better flow of lease returns and auction vehicles? What are you seeing in terms of kind of the used car population and how that is helping your used growth?

This is Michael again. There's no question that, with leasing returning essentially starting to return three years ago, we are seeing more lease turn-ins, and that absolutely helps us. There's also more availability of some product at the auctions, but we are not buying as much at the auctions as we used to because we are taking a much more aggressive stance and buying them at our trade desk. So I think that's where we are seeing the biggest increase in our inventory availability, but there's no question the availability of leases, particularly when we want to get into the certified preowned business, that availability helps us a lot.

Okay. Thanks a lot. That's really helpful.

Jamie Albertine, Stifel Nicolaus.

Great, thanks and good morning guys. And let me add my congratulations on what I think is, quite frankly, a very solid quarter, particularly in the used business.

I wanted to ask you, given your relatively broad portfolio, you've got some stores that are in markets where they were faster to recover. You've got other stores in markets that have been slower to recover. Looking within your portfolio, do you see any key variances in the operating performance first at the stores that are in the kind of faster recover versus slow to recover markets? And separately, do you see any key incentive variances or manufacturer approaches to each of those markets respectively?

This is Mike. I'll take a shot at that question. As far as geography goes, Florida, a very strong quarter, Texas very strong. But I would also point out that the Atlanta markets, because of the growth in used cars, was very strong. Our Mississippi market, very strong. And then the mid-Atlantic once again stable not as a growth rate as strong as Florida, but I would say very stable.

As far as incentives, most of the incentives that we are seeing that we saw in the third quarter are broad-brushed with the exception of perhaps in the Southeast with a couple of brands. Particularly, as you know, Southeast Toyota is dominant in the Southeast and they have their own set of incentives, so they are a little bit different than, say, TMS or Gulf States would have it. That's really the only variances in regional incentives that I can recall.

That's very helpful and I appreciate the additional color. And then one final question. Looking at your longer-term plan out to 2016, could you provide us with any sort of color, even if it's very broad at this stage, what your perspective is on operating margin expansion over that period? Or if you're not willing to sort of put point on that, maybe just by order of magnitude, how much of the expansion that I'm assuming you are budgeting into your forecast are driven by existing stores versus sort of the $500 million in new store sales that you're looking to acquire over that period? Thanks.

It's Craig. I'll give that one a shot. Like Scott said, our long-range plan starts off with an assumption that the SAAR is going to be somewhere in the range of 16 million units over the course of the next three years. So we think our new vehicle growth rate will be at those levels. We think we can continue to grow used vehicles probably somewhat faster than that, but certainly not at the level that you've seen historically, at least over the last couple of quarters.

We talked about we feel we can get good solid single-digit growth in parts and service. We'll continue to work on becoming more and more efficient with the way we run the business. And we still talk about internally wanting to get 40% to 50% flow through on an incremental dollar gross profit. I would say fundamentally that's what we are trying to do at the core business.

And then Scott mentioned what we anticipate doing with the cash, because when we look at our strategic plan, it's essentially got two legs. One is we want to be outstanding operators, and two, we want to be outstanding allocators of capital. And Scott walked you through what we are looking to do there and we think the capital allocation piece can also bring tremendous incremental value. When we put the two together, we get various very excited about our future.

So if I'm hearing you right, just to clarify, the pressure on the business from a profitability perspective seems to be the new vehicle side of it right now. And you are seeing outsized growth in the higher profit, more dynamics parts of the businesses, particularly in used in and in parts and service, which should help to enhance throughput, if I'm hearing you correctly.

I think that's very true.

Very good. Thanks again guys and good luck in the fourth quarter.

Bret Jordan, BB&T Capital Markets.

Good morning. A question on the parts and service gross margin and the pickup. Has there been a benefit? Is there any decreasing focus on tires? I know that had been a strategy in the past that wasn't mentioned on this quarter's call. Is that something that is maybe benefiting growth as a less focused category?

This is Michael. No, actually, to the contrary. We've expanded our tire business. We had a very nice tire contest. We've got a national fixed operations marketing media campaign that starts now with a huge emphasis on tires. What we see and what we've said for two years is that the sale of tires, although it is a very low margin part of the business, brings with it increased service and parts customers and increased service and parts business. And some of that business is very high margin business. Alignments, all wheel alignments, rotation of tires, brake work and maintenance. So we have not backed off the tire program at all. Again, to the contrary, we've expanded it. We expanded the marketing and the push of it. And we view that as a customer retention tool.

Okay, great. And then one question I guess is you talked about September and early October trends. Was it equal sort of softening in new and used, or did you see used remain strong and maybe this is a consumer confidence issue that the buyer is trying to shift to a lower cost option?

This is Michael again. I hate to try to predict what the consumer will do after all these years. I still try and hate to do it. But I will tell you the used car business did not soften to the extent that the new car did.

Okay. And I guess on used pricing then, would your expectation be that if we are seeing a slowing in SAAR that we are going to see pretty sustained high used vehicle pricing?

Our vehicle pricing is more a function of what we put in the car and the marketplace in general, so I don't necessarily think that that will happen, no.

Great, thank you.

Ravi Shanker, Morgan Stanley.

Thanks. Good morning. If I can touch on the F&I business, you guys having mentioned in your last earnings call that you are seeing some banks move to cap rates. Have you seen any movement from the banks this time in the last quarter? And also there's been some media reports about some dealers getting letters from the lenders just pointing out some of the transactions in the past and some of the standards on lending. Have any of your dealers received those letters?

It's Craig. I'll take a shot of that. I would say, historically, the banks have always had different forms of caps on the stores, whether that's interest rate caps or how much money they are willing to provide for the additional products that we sell in the stores. So I don't really feel like there's been any significant change in that part of the business.

We also have internal caps, the same thing, not only on the rates but also on the pricing of the incremental products. Those things have not changed.

We have seen a few letters from banks, very few letters. But broadly speaking, like Michael said earlier, we continue to do business very much along the lines of what we've done in the past. We've always been very careful and very conscious about that piece of the business.

A big part of our audit program is geared towards our F&I offices to make sure that we are in compliance with the law and treating our customers fairly. Where this goes from now, I think we are very much in a wait and see, and we really don't have a lot of clarity on what's next.

Got it. Just moving to the used business, we saw some headlines come across before this call started about you potentially talking about exploring standalone stores for the used car business, much like another dealer announced yesterday. Can you elaborate on that a little bit more, and is that in your capital plan? I'm sorry if you already addressed that.

No, that's a fair question. I guess we look at it this way. I think we've demonstrated that we've got some pretty used good used car people in this industry. You've seen our results. We are also -- we spend a lot of time looking at what our competitors do and where are the opportunities in the market. And obviously the used car business is a very large opportunity that, while, we are taking advantage of part of it, we recognize that there's a 40 million to 45 million unit business out there, and maybe there's an opportunity to do more. So we do explore that; we are exploring it today. I think we've got an obligation, given our availability of capital and expertise, to explore that market, but at this point, we really don't have anything meaningful to say. It's something we are taking a look at.

Understood. Thank you.

I think that wraps up our questions for today. We very much appreciate your questions and look forward to talking to you again next quarter.

That does conclude today's presentation. Thank you for your participation.