Asbury Automotive Group Inc (ABG) 2013 Q4 法說會逐字稿

Good day and welcome to the ABG fourth-quarter year-end 2013 earnings 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 sir.

Thank you Whitney, and good morning to everyone. Welcome to Asbury Automotive Group's fourth-quarter 2013 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 issued earlier this morning is posted on our website at Asburyauto.com.

Participating with us today our Craig Monaghan, our President and CEO, Michael Kearney, our Executive Vice President and COO, and Keith Style, our Senior Vice President and CFO. At the conclusion of our remarks, we will open up the call for any questions you may have, 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 the 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 2012, any subsequent filed quarterly reports on Form 10-Q and our earnings release issued earlier this morning. We expressly disclaim any responsibility to update forward-looking statements.

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

Good morning, everyone, and thank you for joining us. 2013 was a great year for Asbury, and we are excited about 2014. 2013 revenues were up 15% to $5.3 billion, and adjusted full-year EPS of $3.53 was up 34% compared to the prior year.

For the fourth quarter, we are also reporting record results. EPS from continuing operations of $0.88 is an increase of 22% compared to the prior-year period.

Our stores continue to produce excellent operating results by maximizing new and used vehicle sales opportunities, improving F&I penetration, pursuing incremental service opportunities, and controlling expenses. Revenues were up 13%, and gross profit was up 14%. And we achieved record fourth-quarter income from operations with a margin of 4.2%, placing us among the leaders of our industry.

Looking forward to 2014, we believe automotive sales will remain healthy as customers take advantage of extremely attractive financing options and a breadth of exciting new models to replace their aging vehicles. For 2014, we are planning our business around a SAAR of 16.2 million.

Joining us on our call today in his new role as CFO is Keith Style. Keith has been with Asbury for 10 years, serving most recently as our VP of Finance where he was overseeing our operational finance functions, management reporting, and our process improvement initiatives. Keith has earned the full confidence of the board, management, as well as his associates. We look forward to his continued contributions. With that introduction, I'll now turn the call over to Keith.

Good morning, everyone, and thank you for your kind remarks, Craig. As you know, I consider it a privilege to serve our employees, the board, and Asbury shareholders in this new role.

As Craig mentioned, our fourth-quarter EPS of $0.88 was driven through business growth and continued expense discipline. Total gross profit for the quarter was up $28 million, or 14%, with over 80% of our incremental gross profit coming from used vehicles, finance and insurance, and parts and service. At the same time, we kept our focus on expenses, driving our SG&A as a percentage of gross profit down to 70.7%, 140 basis points lower than the fourth quarter of 2012. Our results this quarter once again demonstrate that cost discipline and productivity improvement is a part of our core operating culture.

Turning to capital deployment, during 2013, we acquired $115 million in revenue from acquisitions. Last week, we acquired a Range Rover franchise in Greenville, South Carolina with annual revenues of about $20 million. We are on target to meet our three-year goal of acquiring $500 million in revenues through acquisitions.

During the fourth quarter, we spent $21 million on CapEx to upgrade our stores, expand our service capacity, and invest in technology. For 2014, we are budgeting $60 million of CapEx. This includes $45 million associated with our annual capital plan, $5 million related to recent franchise acquisitions, and $10 million to repair owned properties for franchises that currently operate in leased facilities. We view this essentially as a lease buyout.

For 2013, our lease buyout activity totaled $36 million. Going forward, we will continue to buy back leased property on an opportunistic basis. These transactions provide an excellent rate of return and enable us to control our operating assets.

During the fourth quarter, we repurchased $10 million of our common stock or 197,000 shares. For the full year, we repurchased 697,000 shares for $30 million. Heading into 2014, we have board authorization to repurchase $70 million our common stock, which includes $20 million remaining under our former authorization, plus a new additional $50 million authorization from our board. In 2014, we plan to continue returning capital to our shareholders targeting repurchases of $30 million. In addition, our new authorization allows us to do more on an opportunistic basis.

Taking a look at our balance sheet, we continue to take advantage of the low interest rate environment. During the quarter, we raised another $36 million in mortgages and ended the year with a debt to adjusted EBITDA ratio of 2.3 times. Ryan and team have done an excellent job on our debt structure this past year, pushing out our first meaningful maturity to 2020.

Looking forward to 2014, we will continue to evaluate additional mortgage opportunities in order to take full advantage of the favorable rates and terms we are seeing in the marketplace.

From a liquidity perspective, we ended the year with total liquidity of $281 million, which includes $5 million in cash, $44 million available in floor plan offset accounts, $72 million available on our used vehicle line, and $160 million available on our revolving credit line. In short, we are in great shape to support our capital allocation plans into 2014.

Now I'll hand the call over to Michael to discuss our operational performance. Michael?

Thank you Keith. I too would like to welcome Keith on this call and congratulate him on his recent promotion.

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 fourth quarter.

New vehicle revenues and gross profit increased 7% compared to the prior year. Our new vehicle unit sales were up over 4%, basically in line with the industry. New vehicle margins for the quarter were flat compared to last year at 6.2%. However, on a sequential basis, our new vehicle margin improved slightly by 10 basis points. As stated in the past, I believe we can maintain our current new vehicle margins, resulting in a per-vehicle retail that should remain stable at around $2000 to $2100 a unit.

We ended the fourth quarter with $585 million of new vehicle inventory, or a 62 day supply based on a trailing 30 day basis. We are comfortable with our current overall new vehicle inventory levels as December sales provided substantial movement of that inventory. We continue to watch some of our individual brands very closely as we continue into 2014.

Used vehicle unit sales increased 18% over the fourth quarter of last year as we continue to realize the benefits of our ongoing Asbury 121 program. Although our margins decreased 60 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 a 13% increase in used vehicle gross profit. On a sequential basis, our used vehicle margins were flat.

Strong growth we have produced in used vehicle unit sales resulted in a used-to-new sales ratio of 75% for the quarter, and provided an additional source of attractive trade-in vehicles. Our used vehicle sales continue to grow faster than that of new vehicles and will be an important source of future profit growth. Bear in mind, each used vehicle we sell generally results in incremental F&I and parts and service growth as well.

I want to highlight the fact that we set a new record for total front end gross profit yield. That is new and used vehicle gross profit per vehicle sold, plus our F&I profit per vehicle sold of $3268 for the full year of 2013. This is almost $30 more per vehicle than we produced during the same period in 2012.

We continue to refine our purchasing and preowned acquisition program to ensure that we maintain an adequate supply of preowned vehicles. We will keep the inventory levels necessary for our continued growth in this sector.

We ended the fourth quarter with $127 million of used vehicle inventory, or 38 days supply on a trailing 30 day basis. This level of inventory, although higher than previous quarters, should allow us to take advantage of the traditional spike in preowned sales we've seen in the first quarter.

Our strategy and practice within the F&I segment of our business remains unchanged. Disciplined execution of F&I sales processes and training create solid, reliable growth and results. Fourth-quarter F&I revenues grew 16% compared to the prior period. F&I PVR for the quarter was $1328, up 6% year-over-year. The lending environment remains favorable.

In the fourth quarter, our parts and service revenues grew 8% and gross profit grew 11% compared to the fourth quarter of 2012. Parts and service gross margin for the quarter was 59.7%, up 160 basis points compared to the prior year. The year-over-year gross profit improvement continues to be augmented by a 22% increase in reconditioning work, a 36% increase in warranty work, and a 3% increase in customer pay. Similar to last quarter, we benefited from a couple of recall campaigns during the quarter, and as I have stated in the past, you can never predict recalls.

For 2014, we believe we can grow our parts and service business in a mid-single-digit range while maintaining our current margins through our ongoing customer retention programs. We are in the early phases of two important retention pilot programs designed to enhance the customer experience as well as take advantage of the changing requirements of a younger generation of vehicle owners.

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

I'll now turn it back to Craig.

Thank you Michael. We will now be happy to take your questions. Operator?

(Operator Instructions). Rick Nelson, Stephens.

Good morning. Nice quarter and year performance. I'd like to ask you about inventory levels. I see new is up 17%, used up 29%. I missed the days supply if you provided that, but if you could comment on inventory and how you see that affecting margins on a go-forward basis.

This is Michael. New inventory was a 62 days supply. Used was 38. We are quite comfortable with the 62 in used. As I mentioned in the script, the December sales moved out a lot of product. Used inventory, 38 days, a little bit higher than in previous quarters. But, again, we took a lot of trades at the very end of the month. And as you know, the first quarter traditionally can be a very strong used car market, so again we are comfortable with that.

In terms of our inventories overall, they are in line what we are -- our plan is they are in line with what we are comfortable with right now. We are keeping an eye on a number of different brands just to keep an eye on production. And again, as we've said in the past, I believe we are comfortable with the new car margin that we've got sitting out there today.

Great, good to hear. Can you provide some color on January sales trends? I know we've had some weather disruptions in a lot of the country. Does it alter your view at all on the first quarter, or do you think can be made up in February and March?

It's Craig. Let me just kind of big-picture that question and then maybe Michael can provide some more color. But I would just say that January is traditionally one of the slower months of the year. There's been a lot of weather disruption in the markets where we do business, but because of those disruptions, because of the relative -- of the lower significance of this month, we don't feel that there is any reason for us to change our plan. And like we said in the script, we are planning on a 16.2 million SAAR.

Then I would also add that a lot of our business happens outside of new vehicles. We've got expectations to grow our used vehicle business faster than we do our new. We think there's opportunity in parts and service as well that significant, and we feel like we are on track. Michael, can you add to that?

Yes, just one piece of that. As Craig said, January is a very early part of the year. The month was not outside of our range of expectations, and despite some weather disruptions, preowned business and parts business and service business was where we thought it would be.

All right. Good to hear. Also I'd like to ask you about the expense control, the gross profit flow-through. We are calculating it at 34%, 35% ex-rent, very strong levels. Do you think that is a level that can be maintained as we look forward?

This is Keith. Obviously, this year overall, we delivered 210 basis points of improvement in the quarter, 130 basis points of improvement. We're obviously really happy with those results. Obviously, looking into next year, we will need to leverage our expense structure. So depending on the gross profit we can generate from the business lines that Craig just spoke of will determine what we are able to accomplish. We are targeting in the 40% range or so, which overall we had 38% for the quarter. So right about what we had this quarter we are looking at for 2014.

All right. Got you. And those levels, just to be clear, that includes rent?

That would include rent, correct.

Okay. Thanks a lot, and good luck.

John Murphy, Bank of America Merrill Lynch.

Good morning guys. Maybe you give a -- just get a follow-up on Rick's last question on SG&A. It seems now like you've got all your common dealer management systems in place, so you've got a common set of accounts. You kind of work through a lot of the lower-hanging fruit. I know you always focus on improving. But is there any expectation that you could have sort of a step function improvement in SG&A, or now are you at a point where you kind of have all the ducks in a row here and it's really just execution of what you put in place?

This is Keith again. There's no doubt that, at the end of the year, we were working through some low-hanging fruit. 2013, really we got everything in place DMS-wise. We got a lot of stuff in place in the shared service side of things. We have a lot of work to do in that area still. I would say at the end of the year here, we are at about 25% of our way through that process and we're going to be working ourselves through that process through the end of the year. As you know, that takes additional investment in technology, it takes additional software work and consulting work that we are working through. So as we are saving here, we are also spending. And then I'd look for a better run rate into 2015. But back to the 40% target, that's what we're targeting. And we can deliver that, including the additional investment we are making this year.

Okay, so that's including the investments. So in 2015, you could potentially see something better than that if the market cooperates.

That's correct. That's correct. In a stable environment, we'd look for another step down.

Okay, that's great. But just the second question, sort of along the same lines. As we look at the growth in parts and service, do you guys do any calculations or could you sort of allude to what the SG&A dollar attach rate is to a gross profit dollar for parts and service? Is it much lower than what you would see for other parts of the business?

This is Michael. No. Actually, at the level of fixed that we are producing today and what we believe we can continue to produce, we believe the flow-through -- we know the flow-throughs are much higher rate than in the variable side of the business as there's no real variable component to that part of the business. So once we cover our fixed expenses and our semi-fixed expenses, the flow-through goes up pretty quickly.

Okay. And then on the new vehicle gross margins, they were flat on a percentage basis but they ticked up a little bit on a dollar basis year-over-year. Is that a function of mix or are you seeing some better gross in the market in general and maybe the automakers not being quite as aggressive and consumers maybe not being quite as aggressive as well?

This is Michael. I believe, in the fourth quarter, it's a function of mix. As you know, we are fairly high in the luxury segment, and it's now becoming clear that the season to remember is the season to remember for luxury now in the last part of the year. So there's a substantial marketing emphasis on luxury brands, and we fall in that of course with the brands that we have. So I think it's really more a function of our brand mix in the fourth quarter.

Okay, great. Then just one last one on CFPB, there's a lot of stuff that was coming out of the NADA convention. Any comments you guys have on that or practices or things that you may change in your business, just general comments on that? I know there's no specific answers yet.

It's Craig. I would say that, on the big picture, we love clarity and we don't feel like our industry has yet given us clarity like we would very much like to have.

Turning to NADA, I would say that we very much support the direction that they are going and trying to nail down something that's a little more concrete for all of us. I'd also add that many of the elements that they are proposing we already have in place. We're just going to continue to watch how this plays out. I think the bottom line for us is we feel very confident that, no matter what comes, we will be able to manage through it.

Great. Thank you very much.

Scott Stember, Sidoti and Company.

Can you maybe talk about, on the gross margin on the new side, what you experience on midline imports? Obviously, it looks like the luxury more than offset any negative impact. Could you just talk about the trendline you're seeing there heading into 2014?

This is Michael. Yes. We are seeing it's reasonably stable on the midline import side. We actually had some fairly nice increases in the fourth quarter in two of our midline brands. So we think that the market, if it behaves the way it has been in the last part of last year, that our margins will remain about where they are. There are a couple incentives that are sitting out there in the first quarter this year. It's very early in the year. We won't know how they'll play out of course until the next 60 days expire, but we believe them to be fairly stable right now.

Okay. And going to the SG&A side, can you maybe give a little bit more color on the shared services unit, where you are with that, and, again, maybe a timeline for the rest of the year on expectations?

This is Keith again. So, we look at it by component of what we are working on. Those go by fundamentals, so everything across the board from Accounts Payable to receivables to inventory. We have all of those processes underway. We've piloted those programs and had them in about 25% of our stores at the end of last year. And really there's some heavy lifting this year behind the scenes. And by the end of the year, we are targeting full completion.

Okay, got you. And maybe just big picture on the parts and service side. I know it's very difficult to forecast warranty work, but here we are a couple of quarters in a row that we've seen some pretty big recalls. And I'm just wondering what you guys thoughts are on with the level of new models being continually upped every single year, possibly if that could lead to just increased recall activity, just given the fact that the OEMs could be stretched on the R&D side.

This is Michael. I'll take a shot at that. As I stated, it's virtually impossible for us to predict recalls, so we work through them of course as they come up. I think a little bit broader view, as the volume of new car sales has recovered in the last two to three years, I think we would all assume that warranty would increase some. Although the products are made so much better and the reliability is so much more than it's ever been in the past, just sheer volume of new product will create some additional warranty. I wouldn't want to venture a guess as to what it would be, but I think that would be a logical assumption we could all make.

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

Bill Armstrong, CL King and Associates.

Good morning gentlemen. To follow up on that last question, so your same-store warranty revenues were up 36%. If we strip out recalls, what would that increase have been?

I don't have that answer. I can get back to you on that. I don't look at it that way particularly, but if you want to follow up with Ryan, maybe we can get you a shot at that.

Okay. In general, again, stripping out recalls, you're looking for about a mid-single-digit parts and service increase this year. What do you see as being the main drivers of further increases?

I think the biggest part of that is just the sheer volume of cars that are out there that we are just all selling. If you remember back in 2009, the SAAR was 9 million, and 10 million and 11 million. Now we in are 15 million to near floating around 16 million. There's just a lot of new product that's out there, sheer volume. I think that they are mechanical devices and they do break down. The warranty coverage for almost all the manufacturers is a little bit longer than it used to be in the past, so I think that's another piece of it. But from my view, I believe it's just sheer numbers of more vehicles that are out there.

Okay. And customer pay, your comps are up about 3%, a little bit less than we've seen for the last few quarters. Anything to call out there, why that might have slowed down a little bit?

Nothing that's alarming to us at all. We've got some retention programs that we put into place two years ago that are falling cycle through. We are seeing some increase and returning of customers from our tire program. We've got some retention pilot programs that we are setting out there today. So I think it's just a little bit of the lumpiness we see in that sometimes, nothing in it trend-wise that that bothers us at all.

Okay, great. Thank you very much.

Brett Hoselton, KeyBanc.

Good morning. I wanted to start off on the used car side and talk a little bit about units and then gross profit. As I look at your comparisons, obviously they're going to get much more difficult as we move through the remainder of -- as we move through 2014. Last year, you were up 7% in the first quarter, up 19% in the second, and up 28% in the third quarter. So I'm kind of wondering how do you think about unit volume as you move through 2014? Do you believe that you can continue to grow in the double-digit range or do you see that slowing down significantly? What are your thoughts there?

This is Michael. I think, on the last earnings call, we got a similar question. But I'll take a shot at it again. I would love to see those kind of double-digit numbers, but I don't think that that's a realistic expectation. We do believe that we have high single-digit expectations of growth in the used car volume. There is -- I sound like a broken record but I'll say it over and over and over. There are roughly 40-plus million used vehicles sold in this country every year, and franchise dealers account for about a third of those. We are just putting programs and processes in place to see how much more of the other two-thirds we can get. So, incrementally, we believe we can continue to grow it in that single-digit pace. We think the inventory is available. We know the consumers are available, the rates are very attractive. So, we think that's a realistic growth expectation.

And then if you think about gross profit per unit, you've kind of been in around that $1700, $1800 range for a while now. Is that, in your opinion, kind of a consistent expectation or an expectation we should think about going forward?

I think you can think on that. We always strive to get all that we can, but, again, as I mentioned on the call, the total yield is up about $30 a car. So some of that obviously is on the used car side; some of that is on the new car side. But if we can continue to grow that number a little bit or maintain it, volume increases more than offsets our reduction in margin. And then we have the fixed side of that also. But I think, to answer your direct question, the margin that we've got today we can maintain.

And Keith, congratulations.

As we think about gross profit throughput moving out into the out years, 2015, 2016, what are you thinking in terms of a target expectation? Obviously, higher than a 40% it sounds like if you could kind of move back up into that 50% range, or what are your general thoughts there?

Yes, I think we are at the 40% now. I think, into 2015, we could move that a little higher. At the beginning of this year, we were printing about 44% flow-through, -- excuse me, back to the mid-40% target. But that's, as you know, that's a long way away, and it really takes the business growth to get there still. So we will kind of jump that fence when we get to it.

Okay. And Craig, Just kind of one kind of longer-term conceptual question taking a long step back. We've seen a number of your competitors taking on I guess I would call it various initiatives which required significant incremental spending, whether it be AutoNation with the branding strategy, or Sonic anticipating doing the CarMax thing, or something along those lines. How do we -- as you are kind of talking with your management team, is this something that -- are you contemplating anything along those lines over the next one, two, three years?

We are constantly taking on different initiatives. We tend not to call them out. We just feel like they are part of our day-to-day responsibilities and part of our operating objectives.

The success that you see that Michael and team have had in used vehicles is because there was some money spent on the front end and some programs put in place to make that work. I think we will get the same thing happening in parts and service, whether it's wiper initiatives, tire initiatives, technologies. There's a lot of technology invested in what's going on.

Keith mentioned that 25% of the stores are already in shared service centers. Those 25% didn't get into those shared service centers without a lot of investments. And we have ongoing investments today. There's still a lot -- Keith mentioned there's more to be done in the back offices. We think there's -- we are spending on technology. We think the way that consumers buy a car in the future is going to change dramatically. There's a lot of energies being spent on mobile applications right now. What we can do to expand our CRM and improve not only the customer experience but the way we sell the car in the store, we've got a lot of energy invested in that. So while we don't call them out to you as big one-off programs, I would say our philosophy here is it's pretty much one of continuous improvement, and that is nonstop.

Thank you very much, gentlemen.

Rod Lache, Deutsche Bank.

Morning guys. It's actually Mike Levin in for Rod. Congrats on the great quarter. Maybe just to talk about the used growth another way, looking out over the next year or two, the zero to three rolled used population should be growing, which has kind of usually been your sweet spot in terms of used. Is there any risk that the focus on sort of older vehicles, retailing those, gets kind of lost in the excitement of seeing that population come up, or is there sort of a cultural shift at this point that's been pretty established?

This is Michael. It's a great question, by the way. So, we, as Craig mentioned just a second ago, a number of years ago, put in what we call our Asbury 121 program. And that indeed is a, within dealership, cultural shift. So we don't abandon a particular segment of vehicles just because there's more of another segment. So, I don't think there's the risk to that part of it.

We actually are looking at some wonderful opportunities with more product in that sweet spot coming online. But I will tell you that, again, the internal process that we put into place two and three years ago, which broadened our price band and broadened our mileage that we sell, we will not abandon that just because there's a prettier girl on the block right now.

Now, in terms of F&I per unit, as we sort of watch this come up from $1100 to over $1300, has there been any introduction of new products within that, or is it just sort of better execution and moreover maybe just better pricing from low rates? I'm just trying to gauge, if rates are to rise, is that sort of directly going to hit your ability to sell certain products to customers, or is there any reason why we shouldn't see this continuing to trend up from here?

This is Michael again. I'll take a shot at that one. I think we are all benefiting from a low interest environment. There's no question about that.

We've not introduced any, really any new products recently. I think it is a function of execution, it's a function of training, and it's a function of emphasis that we put on those particular pieces. It is a constant training program within our company, a constant certification program that goes on within our company.

Does a higher interest rate environment impact us? I think there's always the risk that it will impact business. But as long as banks will finance the products, which they have been willing to do within the parameters that the customers qualify for, I think we can maintain the F&I numbers that we're putting out there today.

There's always a bottom part that we can focus on, but I'll also admit to you, as we talk about it constantly, the higher the number gets, the hurdle gets a little bit harder to jump over, but it's not something that we are terribly concerned about right now.

Maybe I could just jump in. It's Craig. I would add that essentially two-thirds of the F&I PVR comes from product sales, so that product sales gets a lot of attention from our people. I think one thing that probably we have seen over the last few years is a shift of those product sales more towards maintenance and extended warranty. Those bring us the added benefit of bringing your customer back into the store and driving incremental parts and service business down the road, and it's very much the direction we want to continue to head.

What products does that shift away from?

Credit, life, accident, health insurance, those products are not really sold that much anymore. Maybe a little bit less gap. But as Craig said, maintenance and extended service contracts is really the emphasis.

Maybe one just last quick one. Is there any way you could sort of put some brackets around what kind of retention in your parts business you get from used customers now that you have 121 in place versus previously -- versus sort of historical levels? Just any rough framework to think about that?

This is Michael. I'll give you a very rough framework in that traditionally, in our business, retention of used car owners, preowned customers, in our service department is the worst retention that we all have. It's an industry issue.

But again, we've got some pilot programs in place today that we believe will address that, more to come as the quarters evolve. So rough brackets is that it's the worst retention segment that we have. It's -- I won't call it low-hanging fruit, but it's a tremendous opportunity not only for us but the entire industry in that it is one of our initiatives for this year.

Great. Thanks, guys.

James Albertine, Stifel.

Great. Thanks for taking the question. Congratulations to the team on a great quarter, and as well to Keith on the promotion and the first call as CFO.

If I may, just very quickly a housekeeping item on used as well. Can you give us some sense of your certified preowned mix as it stood at the end of the fourth quarter?

This is Michael. I can give you a percentage number which is -- it doesn't mean a whole lot because it's so different by brand. Our percentage of certified preowned in the European luxury brands is substantially higher than it is in our domestic product. It is -- somewhere in between the two is our Honda and our Nissan in our midline import business. Roughly, again, I'll give you the overall number but I'm not sure it means anything, so I'll just tell you that it runs from a high of 60% to a low of 10% depending on the brand.

Okay, so 60% for the euro if I heard it right and then sort of 10% for the domestics?

That's essentially correct, yes.

Okay. Penetration rate on the F&I side for the use products as you've noticed the ramp and retail sales, just wanted to get a sense of how many of those customers versus the traditional new vehicle customer are opting for financing versus bringing in their own either former financing or paying cash.

Broadly speaking, if -- if you count credit unions of course in that, we are probably in that somewhere around 80% financed penetration number.

Okay. And how has that changed sort of over time? Maybe year-over-year fourth quarter?

Not much. It's a fairly consistent number. I will tell you where the difference we are seeing is not necessarily the penetration of the finance rate, but in the down payment, there's not been as much down payment has been required as in prior years.

Great. And then if I may very quickly on acquisitions just get an update on your view of the environment and sort of the potential pipeline of sellers. Arguably, you've gotten more reasonable in terms of their outlook for exit multiples. Just given that while SAAR has continued to improve, it seems like month-to-month, it is quite choppy with the whole bunch of different volume-based incentive programs and, again, some exogenous factors, as you called out, whether it's weather related or government shutdown or so on and so forth. I just wanted to get a sense there as well.

It's Craig. I think what we have learned is that every seller is unique. There's always a market out there. It doesn't necessarily behave the way you would think it would behave. I look back, what was it, two years ago when the tax laws were changing, we thought that year we would have a rush to sellers, and it never materialized.

I think the age of the seller and their estate planning is sometimes one of the biggest drivers. So wind that all up, where are we today? We are constantly talking to potential sellers. As Keith mentioned, we got a number of deals done last year that we were happy with. We've got Volkswagen and Bentley stores the December before that that we are happy with. We just closed this Land Rover deal. We've got a couple of folks we're talking to today. They may or may not come to fruition.

I think the bottom line is it is something that we cannot control. We will not overpay to get a deal done. We can always buy back our own store; it would be a share repurchase. So we just take what the market brings us.

I appreciate that. If I may, one quick follow-up on the first question on used I forgot to ask you. Do you have a sense for what the market was up, at least in your addressable areas? I saw the 18% at Asbury, but do you know where, again, where kind of the baseline is based on where you compete?

This is Michael. I do not know that number. We could probably get with you, maybe get with Ryan, but we don't -- it's a little more difficult number to get your hands around, but I don't know which it is.

Okay. Listen, I appreciate it. Thanks again, and good luck in the quarters ahead.

Bret Jordan, BB&T Capital Markets.

Good morning. A quick question on how we should think about the increase in off-lease vehicles in 2014 I guess as it impacts used vehicle gross margins. Either you're driving down acquisition costs of used vehicles or higher penetration CPO this year. But could you give us some feeling how we should think about that?

This is Michael. I think we all look at it as a positive to have some off-lease vehicles come in. We had a shortage of them for a number of years there. We look at it as just another acquisition potential. I'm not sure that it impacts our gross margin a whole lot one way or the other. I think what it does do is allows us to have a bigger variety of product. And with that bigger variety of product, I think we can sell more of them, so I look at that as a way we can supplant the volume and get to the single-digit number that I talked about earlier.

Okay, great. And on the parts and service business, the 3% growth in customer take, could you give us an idea sort of how much of that is tied to or associated with a sale around the tire program? And then maybe some more granularity on the timing of customer pay. Have you've seen that business improving as you've seen the weather deteriorate, or are some of these extreme conditions driving failure rate that's benefiting your traffic?

This is Michael again. I will tell you that we are still gathering a lot of the data on the tire initiative, but I will tell you, in the month of November, our tire sales increased 17% over the prior November and in December 18%. Of that business, we are seeing -- it's a number of factors that are bringing them in, but we are seeing the second group come through that are now spending more money in our shops. I don't have any other data. Again, we are developing that and as time goes on, we will have more granularity to that. But we are definitely seeing customers come back in, and we think, long-term, that is exactly what the tire program is. It is a retention tool.

To your other question about the weather, we anticipate that the very difficult weather we've had in a number of our cities is very good for the collision business. That's a 30 and 60 day out type business, but we believe we will reap the benefits of that. As far as the other part of it, I have not seen any other direct impact because of the bad weather.

Okay. And one last question. In your 16.2 million SAR forecast, what do you assume for lease penetration?

We don't plan to that level of granularity.

Okay. Thank you.

We don't have an estimate.

Ravi Shanker, Morgan Stanley.

Good morning everyone. This is E.J. in for Ravi. I wanted to dig into the parts and services business a bit more. And I know you guys gave a gross profit breakdown and I apologize if I missed this. But could you also break down for us the same-store parts and service revenue growth just in terms of customer pay, reconditioning, etc.?

If you've got another question (multiple speakers) you got the number?

Yes, 8% parts and service same-store revenue.

In terms of -- I was looking for the breakdown, like customer pay, reconditioning.

We only break down the gross profit that way.

Okay, got it. So just one more question on the parts and service. We were a bit surprised to see the gross margin decline so much sequentially versus the third quarter since, historically speaking, it seems it's been fairly flat between 3Q and 4Q. Could you talk a bit more about what drove that?

This is Michael. A teeny bit of that was just some accounting, the way that we handle some of the accounting, reserves and charges for that. There's a little bit, not, much a little bit of impact on increase in tire sales that we saw, but I would say the two of those together account for that. There's nothing structurally that we have changed.

Understood. And finally, the last question if I could on pricing and incentives. Have you seen any significant changes in terms of OEM attitude or on maybe stairstep incentives, especially given the relatively slower growth in import and domestic?

This is Michael again. I don't know if I have seen any attitude change. I would tell you there are a couple fairly large programs in place that started literally right after the close of December that are running through March particularly with the Japanese import brands. So, we will see how that plays out over the next 60 days.

Is that a big change from last year? Were those programs in place in 2013 as well?

There's always a program. So I would say there is not a big change. There are some subtleties to it that are a little bit different, but not dramatically different, no.

Okay, great. Thank you very much.

David Whiston, Morningstar.

Good morning. Keith, first just a quick easy one for you since it's your first call. I missed, in your prepared remarks, your estimates on 2014 CapEx and total liquidity.

Yes, from a CapEx perspective, we are looking at $60 million in total. That is our $45 million annual plan. Then we have an additional CapEx of $5 million associated with the recent transactions, acquisitions that we talked about today, and another $10 million which is just really readying property for what is effectively lease buyouts. We went from a lease facility and an own facility.

Okay. And total liquidity?

In total liquidity, we are in great shape. End of the year, we had $281 million in total liquidity. We will have our revolver still in place throughout the year, and we are beginning the year with -- to include the floor plan lines somewhere in the $50 million in cash.

Okay. Back to the earlier question on NADA, it sounds like you are not right away implementing their dealer reserve proposal. Is that correct?

Well, their proposal -- one of the things their proposal calls for is documenting why any given transaction is not at a fixed cap. We have fixed cap programs in place, but we don't document when we offer a consumer price below that cap. So that's the fundamental difference between what they are doing and where we are today.

Okay. That's helpful. With the Japanese OEM partners, are you seeing any kind of more aggressive pricing with them due to the yen weakening?

I wouldn't say we are seeing more aggressive pricing. I think one thing that we actually know is much better content. A lot of these midline import vehicles have the features that -- many of the features as defined in a premium luxury car. Other than that, I don't think there's really any significant changes we see from the Japanese OEMs.

Okay. Craig, I think, at the investor conference in Detroit, you had talked about how, when you acquire a store, they may have a used-to-new ratio of 0.5 and you can get it to 0.8. I'm just wondering. Can you share just one or two specific examples of what you do to revamp a store to get to that ratio?

I guess the way to answer that question, it's not just used. But I'm happy to speak to that. Michael might jump in with more detail. But fundamentally, the way we run the stores is the general managers, we look to them to be the captains of the ships and very much entrepreneurs, but we do have a regional structure that sits above them that offers help. And that can be healthy in getting their F&I PVRs closer to where we are or getting their used-to-new ratio close to where we are. And these helpers, if you would, are truly experts in their fields and essentially they are trainers. And they parachute into these stores and do a tremendous amount of training, point to other stores, like brands typically, show them what they're able to do, how they do it, and we have been very successful in getting the results that you're seeing in these numbers. Mike, do you have anything to add?

Yes, just real quick just a couple of examples. Most places that we would go in, we would immediately evaluate the volume of cars that were sent to auctions and the reasons why. We would expand in almost every case the price band of product that we offer the consumer, and then we would also evaluate how we do reconditioning and the pricing that we do reconditioning on different price bands of cars. It's all part of our process that we've put into place. You do those, then you culturally shift the mindset in the store, and you provide more product to the consumer at a more attractive price, and your used volume goes up when it goes with that.

Okay. Last question, Craig, you and I talked about the popularity of the Mercedes CLA. But are there any, one or two, three other models for 2014 that you are really excited about from a volume perspective across your brands?

I think, when you walk through Detroit, the thing that struck me more than anything else was that so many of the manufacturers have so much good product. CLA is obviously -- just look at Mercedes -- is a great vehicle. We've got the new S Class in the luxury stores. BMW has got everything from a 1 Series now all the way up to an 8 Series. It's going to be a very, very competitive marketplace. We've got a lot -- there's a lot more production capacity in the US now than there has been in quite some time. So, I go back to our original comments. We think -- we know January started off somewhat slower than people expected. We think we believe a lot of that was weather-related, but we think the fundamentals are in place for 2014 to be another good year in the car business.

Okay, great. Thanks a lot.

That's it. I think that was the last questions that we had. We appreciate your joining us today and look forward to seeing you again next quarter.

This now concludes the presentation. Thank you for your participation.