Asbury Automotive Group Inc (ABG) 2014 Q3 法說會逐字稿

Please stand by. We are about to begin. Good day and welcome to the Asbury Automotive Group third-quarter 2014 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President and Treasurer, Matt Pettoni. Please go ahead, sir.

Thanks, operator, and good morning everyone. Welcome to Asbury Automotive Group's third-quarter 2014 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 Chief Executive Officer, Michael Kearney, our Executive Vice President and Chief Operating Officer, and Keith Style, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up 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 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 2013, any subsequent we 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 my pleasure to hand the call over to our CEO, Craig Monaghan.

Good morning everyone, and thank you for joining us today.

Earlier this morning, we reported record third-quarter diluted EPS from continuing operations of $1.08, a 19% increase over the prior-year adjusted quarter. I would like to thank all of our associates for achieving these great results.

The overall automotive retail and lending environments remain healthy and going forward, we will continue to execute our two-part strategy -- driving operational excellence and deploying capital to its highest returns. We are investing in our business, pursuing acquisitions, repurchasing stock, and investing in our standalone used vehicle store initiative, Q auto.

Addressing share repurchase, so far this year, we have bought back $70 million of our stock. Last week, our Board of Directors increased our share repurchase authorization to $200 million. This will allow us to be even more aggressive in repatriating capital to our shareholders.

With regard to acquisitions, we entered into agreements to acquire two stores, which should add a combined $250 million in revenue and close later this quarter or early first quarter. Of course, these transactions are subject to manufacturer approvals and customary closing conditions. In addition, we are targeting $500 million in revenue through acquisitions over the next 18 months. We are very excited about our accomplishments and look forward to the opportunities we see ahead of us.

Now I'll hand the call over to Keith to discuss our financial performance. Keith?

Thanks Craig. Good morning everyone. This morning, we reported record third-quarter EPS from continuing operations of $1.08. As Craig mentioned, this represents a 19% increase from last year's adjusted income from continuing operations. There are no adjustments to earnings in the current quarter. However, the prior quarter included a $6.8 million loss on extinguishment of long-term debt, and a $2.1 million real estate charge in connection with the lease buyout, which was reported in the other operating expense line of the income statement. Together, these two charges totaled $5.5 million after-tax, or $0.18 per diluted share.

For the quarter, same-store revenue increased 7% and same-store gross profit was up 8%. Controlling our expenses enabled us to leverage the significant increase in gross profit and resulted in same-store flow-through of 46%. And same-store SG&A as a percent of gross profit decreased 120 basis points from last year to a ratio of 69.5%.

Our Q auto initiative, which is not included in our same-store performance, continues to progress in line with our expectations, resulting in a loss of $0.03 in the third quarter. We estimate this initiative may reduce EPS by $0.04 to $0.06 in the fourth quarter of 2014 with similar losses expected in the first quarter of 2015.

Turning to capital deployment, our 2014 CapEx budget is forecast to be approximately $55 million, and includes approximately $45 million associated with our core annual CapEx plan and $10 million in construction costs primarily to relocate franchises out of currently leased facilities. Year-to-date, we have spent approximately $40 million of the CapEx budget. In addition to our CapEx budget, during the quarter, we invested $5 million to purchase the real estate of a previously leased facility.

For Q auto, we continue to expect capital commitments of approximately $22 million in 2014. To date, we have spent approximately $15 million on our Q auto initiative, and we do not expect any capital commitments for Q auto in the first quarter of 2015.

I'd like to take a few minutes to provide an update on our share repurchase activity. During the quarter, we repurchased 573,000 shares of our common stock for approximately $40 million. And as of yesterday, we have repurchased an additional $10 million of our common stock in October. This brings our total capital repatriation through share repurchases to approximately $80 million year-to-date.

Finally, from a liquidity perspective, we ended the quarter with $11 million in cash, $122 million available in floorplan offset accounts, and $70 million available on our used vehicle line. In addition, we had $160 million available on our revolving credit line.

During the quarter, we entered into 10-year mortgages with one of our captive finance partners totaling $60 million at a fixed rate of 4.25%, and we ended the quarter with a leverage ratio of 2.2 times. Subsequent to quarter end, we entered into a $13 million mortgage and we intend to seek additional mortgage financing as we move forward.

In summary, we have sufficient liquidity, a strong balance sheet, and solid cash flow from operations to support the capital allocation plan that Craig and I outlined. This plan demonstrates our commitment to deploy our available liquidity and achieve our targeted leverage ratio of 2.5 to 3 times by the end of 2015.

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

Thank you, Keith. We are extremely plant proud of our Company's performance this quarter. Our gross profit increased 9% through growth in all of our business lines. This growth helped produce operating margins of 4.4% compared to 4.2% in the prior-year period.

For the balance of my remarks, I would like to remind you that everything I will be covering with respect operational highlights will pertain to same-store retail performance during the third quarter.

New vehicle revenues increased 7% and gross profit increased 4% compared to the prior year. Our new vehicle unit sales were up 6.7% and new vehicle margins for the quarter were 6.0%. Although these margins were down 10 basis points compared to last year and down 30 points on a sequential basis, we grew our market share in essentially all of our regions and for all of our brands in this quarter and year-to-date.

Our new margins were down due primarily to a mix shift and the effects of increased volume-based manufacturer incentives. I believe we can maintain new vehicle gross profit per unit retail in a range of around $2,000 to $2,100 a unit. However, if these types of manufacturer incentives continue, we feel we could see continued pressure on margins. At the pace of sales we saw throughout September and continuing into October, our fourth-quarter 2014 business plan calls for a SAR of $16.5 million. We are currently planning for a SAR in the mid-$16 million range for 2015.

We ended the third quarter with $612 million of new vehicle inventory, or a 73-day supply on a trailing 30-day basis. We are comfortable with our existing overall new vehicle inventory levels in light of the current pace of business we're seeing in our stores, but we will continue to monitor and adjust to reflect changes in the business environment.

Turning to used vehicles, our third-quarter used vehicle gross profit increased 1% over a year ago. This increase came from 2% growth in unit volume partially offset by a 30 basis point margin decline. We face primarily two challenges. First, beginning in the third quarter, with an elevated 41-day supply of used vehicle inventory, and second, a decline in price environment pressure by increased manufacturer new vehicle incentives. Bringing these inventories down $23 million to $130 million for a 35-day supply by the end of the third quarter lowered our margin to 8.2%, a decrease of 30 basis points over the year-ago quarter results. Going forward, we believe we can maintain used vehicle margins equal to the third-quarter year-to-date average of approximately 8.5%.

Facing prior-year fourth quarter strong unit sales comps, we expect our fourth-quarter and ongoing unit growth in used vehicles to continue in the low single digits. As a result of lower new and used vehicle margins for the quarter, our third-quarter 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, decreased $5.00 over the prior-year period to $3,206 and was $126 lower on a sequential basis.

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, sustainable growth and results. Third-quarter F&I revenues grew 7% compared to the prior-year period. F&I PVR for the quarter was $1,337, up $22 on a year-over-year basis, and the lending environment remains favorable.

In the third quarter, our parts and service revenues grew 9% and gross profit grew 12% compared to the third quarter of 2013. Parts and service gross margin for the quarter was 62.5%, up 170 basis points compared to the prior year. The year-over-year gross profit improvement continues to be driven by an 18% increase in reconditioning work, a 25% increase in warranty work and a 7% increase in customer pay. Our parts and service business produced 60% of the incremental gross profit for the quarter, reflecting the flexibility of the retail automotive business model. For 2014, we believe we can continue to grow our customer pay parts and service business in the mid-single-digit range while maintaining our current margins through our ongoing customer retention programs.

In addition to producing these record results, our team was able to open our second Q auto store. After seeing the results of their hard work over the last four months, we continue to remain excited about this opportunity as we launch our third Q auto store next month in Fort Myers, Florida.

Finally, we would 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.

With that, I will now turn the call over to Craig.

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

(Operator Instructions). Rick Nelson, Stephens.

Good morning. Craig or Michael, could you update us on some of the early learnings from the used car format, Q auto? You've stepped up now from two to three stores. Is it still considered a test, or are we in rollout mode, and the opportunity you see ahead there?

This is Michael. I'll give a shot at it, maybe Craig can jump in. So I will kind of answer the question in reverse. We are still in the early stages of development. We are committed to do the third store and we are very excited about the results that we've seen.

I think the major parts of this that we have learned is that there are different ways to sell cars to the consumers. We are learning that we can make that work. We are developing some technology that is different than we use in our other stores that is very promising, and may be expandable in the future. And we are learning that there is, as we know from the other business, a substantial amount of Internet business that is out there. So, it has been a learning experience. We are very pleased with the results so far, and as we said, we are opening up a third store in Fort Myers.

Thank you for that. Also, on the acquisition front, you made a new announcement today, two big stores. If you could comment on the multiples that you're seeing out there, given your recent experience.

It's Craig. I'd happy to address that question. These are stores that we are very happy with the multiples. They are in line with the multiples that we paid on the transactions we've been able to get done over the last I'd say 24 months. They are not closed yet, just have to point that out. I think I mentioned earlier we hope to get them closed either later this year or early next year, but they fall right in line with the type of acquisitions that we target. And fundamentally, we don't want to pay more for an acquisition than where we trade.

Got you. And if I could also ask you about subprime financing, the availability, what you're seeing there, any changes.

This is Michael again. No changes from the last quarter. It is a very healthy subprime market. We have a number of lenders that we have been using for I would say the last two to four years. We see some new entrants into that business as well as some expanded buying in the subprime market by some of our manufacturer captives. So, as I mentioned in the script, I think it's a very favorable lending environment, both on the prime and the subprime side.

Great. Thanks. I'll let others hop on. Thank you.

John Murphy, Bank of America Merrill Lynch.

Good morning. This is Liz Suzuki on for John. Can you talk a little bit more about the two stores? I know you have agreements to acquire. Annualized revenues of $250 million seems pretty big for two stores, and I believe it's the equivalent of all the stores you had acquired for the 18 months prior to this quarter. So I'd love to get some more detail if you can provide it.

This is Craig. It's two stores in our markets, so they are not footprint. They are in two different states. Because they are not closed yet, we are not comfortable giving a lot more detail, but yes, they are large stores. But we think they fit perfectly into the portfolio and we look forward to getting the transactions closed.

Okay, great. Thanks. And just one question regarding used vehicles. After Lithia's preannouncement last Monday specifically citing pressure on used vehicle pricing, I was little surprised to see that your revenue per used vehicle increased over $500 a unit this quarter. Do you think -- was the issue specific to the Company and is it an industrywide trend of pricing pressure, or was there something else going on specifically at Asbury this quarter that helped drive up used pricing?

This is Michael. Our increase in used car pricing was really a function of our acquisition costs as well as, in the second quarter, we are very aggressive in executing our plan to continue to grow the used car business. Consequently, we had just higher inventory. We do have a fair amount of certified pre-owned business in our high lines, and as you can imagine, those are much more expensive cars. So, I think that's the reason that we saw a $400 increase in our pricing.

All right, thanks very much.

Bill Armstrong, CL King and Associates.

Good morning guys. A couple of questions. It looks like luxury underperformed a little bit versus your volume brands. I was wondering if you could just flesh that out for us a little bit.

This is Michael. Yes, that is correct. We had a -- number one I'd say was a seasonally strong growth in the midline, but I would also comment that we are seeing a lot of production by the midline imports, and a lot of inventory that's out there, and there is a wide spectrum availability for the consumer. We saw some increase in what I call volume-based incentives on those brands as, again, an attempt to gain market share. We became very aggressive in going after market share, so yes, I would say we over-performed in the midline segment. On the luxury side, it was a little bit less than we had experienced in the past. Our big luxury selling season is traditionally the fourth quarter, but we did see a much stronger midline import in the third side -- third quarter.

Got it. And moving over to parts and service, your gross margins were up very nicely. I was wondering if you could maybe provide us a little color on what drove that. Was it mix, or was it higher margins within some of these sub-categories?

This is Michael Again. I think there's a couple of factors that are going on there. We had a substantial amount of reconditioning work that is done on our used car side. That's a very high margin business. I also think we are seeing the effect of some of our internal pricing and some of our retention tools that allow us to do a little bit heavier work in some segments. And I don't think it's mix-related. I think it's more of a function of the incentives and the programs that we put in place a number of years ago.

I see, okay. That was all I had. Thank you.

Brett Hoselton, KeyBanc.

Good morning everyone. It's actually Irena Hodakovsky. How are you doing? Congratulations. Nice quarter. I had two questions for you, one on the used and one on your capital allocation. Your used growth was up 2% on a same-store basis and yet you had very difficult comps and your gross profit unit was intact. Are you seeing supply of late-model used vehicles improving and is there any relief in wholesale pricing?

This is Michael. I think the margin pressure that we experienced on the used car side is really a function of two events that occurred, and I alluded to them on the script. The first one was that we ended the quarter with a very high days supply, something that we do not -- does not fit our parameters. And as a result of that, processes were put in place to make sure that inventory was brought down. A lot of that was accomplished through retailing as opposed to sending those vehicles to the auction. That put pressure on the retail side.

The other part of it is that vehicles that were acquired in the latter part of the second quarter were acquired at a historically high level. Those vehicles, pricing on those vehicles did soften a little bit as the summer months came about at the auctions, and because of that, again, we retailed those vehicles at a much lower price and that depressed the margin. So, I think that's the two factors that caused our depressed margins in the third quarter. So I think -- I hope that answered your question.

Yes, somewhat. And on the capital allocation, thank you for that. The share buyback authorization, so you doubled the authorization. You really increased the pace of buybacks in this quarter and year-to-date. How should we think in terms of your prior commitment, $30 million annually? Is that too conservative of an assumption at this point?

This is Craig. I Think that would be a conservative assumption. As we mentioned, we've now got the capacity to get much more aggressive.

I think maybe a better way to think about capital allocation is from a broader perspective. And as we mentioned, we are investing in the business. We've got a capital program that keeps our stores looking great. Q auto requires some capital but as Keith mentioned, going forward, certainly through the next quarter, next two quarters, we don't see a lot of capital needs there. But as a result, it leaves us with plenty of capacity to effectively either go out and buy stores or return that capital to our shareholders, and that's what we intend to do.

Got you, thank you. And then the last part of the capital allocation, the acquisitions, if you can just clarify. You previously targeted $500 million over the next 18 months. You announced this purchase agreement for $250 million, and then you mentioned $500 million again. Does the $500 million exclude this announcement today, or does it include this announcement?

It excludes. What we're hoping to do is close this $250 million in acquisitions and then go out and acquire another $500 million worth of revenue over the next 18 months.

Excellent. Thank you very much.

Rod Lache, Deutsche Bank.

It's Mike Levin in for Rod. I just wanted to ask you sort of as we are starting to see pressure on the new and used margins with pricing kind of starting to come in there, you're really still executing well on parts and service. And I was wondering if you could talk through going forward whether it's a fair assumption that that improvement in profit would actually translate to a higher throughput from EBITDA to EBIT going forward, or you might sort of think that, due to the outperformance in that business, you might reallocate some of that to supporting the used and new businesses on a go-forward basis so it doesn't necessarily actually increase the total throughput.

This is Michael. I'll take a shot at it and then Keith will go from there. You know, the flow-through on the parts and service side is better than the variable or the front side of the business. There's not a variable selling expense component, so as we continue to grow the fixed operations, that gross profit, the incremental gross profit in fixed does flow through at a higher percentage rate than the front side of the business.

This is Keith Style. I'll jump in. We commented that we had flow through of 46% during the quarter, and our target is 40% on an ongoing basis. And that's reflective of the large part of the increase in gross profit being derived from fixed operations.

Got it. Is there any way that you guys could give just maybe a little bit more detail around some of the costs associated with opening a Q auto store, whether that's CapEx, SG&A and inventory maybe comparing a greenfield versus an existing facility that you already have?

I'll jump in. This is Craig, and Michael could give a lot more detail, and Keith as well. But we are trying to control the amount of capital that we tie up in these stores as we work on these prototypes. So the first door that we opened is in a leased facility, so there's a limited amount of capital. We went into that facility. We spent some money to refurbish it, signage, things of that nature. And then the spend there is really on people, advertising. And we are working with our partners, a lot of them being technology partners, to try to bring new technologies to bear in that store that we don't see anywhere else. There's a lot of work that's done on the web. If you go out to the Q auto site on the web, you'll see it looks very different from a traditional site.

There is some spend on technology, but for us that's primarily infrastructure, pipes, networks, things like that we put in place. A lot of the software, like I mentioned, is being done by our partners.

The second store is a facility that we own. We vacated that facility when we moved a Toyota franchise into a new facility. So again, by moving into an existing facility, we are able to minimize both capital and expense. And that's kind of our view of the world. We think that there's a lot to be learned in this space.

One of the things we've learned from others is that it seems to be the smart thing to do is to minimize capital and try to maximize throughput, and that's exactly what we're working on.

Keith, Michael, anything to add?

This is Michael. The only thing I would add to it to try to answer one part of your question is as you said something that it was compared to the greenfield maybe on the new car side. As you would well imagine, when you start up a business from scratch, you have to hire a number of people and they are put into place all at one time. You have to acquire a lot of inventory all at one time. That goes into place all at one time. The big advantage, however, is we don't pay any goodwill to get these started. We just have those costs, and we have our real estate costs, and we move forward from there.

Great. Maybe one quick follow-up. Is there -- how much of a new Q auto stores inventory might go through your recon and prep?

Our inventory on Q goes through their own recon and prep.

And is that booked in the overall recon and prep?

Yes, it is.

Yes, it is, okay. But is there --

It's a very, very small number at this point in time.

Got it, okay, but all of it is going through that line?

That is correct.

Cool. Thank you very much guys.

Jamie Albertine, Stifel.

Thanks for taking my question. Good morning. I wanted to ask you very quickly on the parts and service capacity side. We talked a little bit I think about the scarcity of talent and technicians last quarter. I maybe wanted to get an update, given the trends that you noted in the third quarter, maybe an update on where you stand from a capacity perspective and how it can scale, assuming these trends persist into the fourth quarter and beyond.

This is Michael. I'll start out with that. As you know, from a facility standpoint, I don't see any hurdles for capacity, even in those facilities that we have reached maximum capacity on a standard 10-hour day. In a lot of those cases, we have extended hours. In some cases, we have gone and expanded our dream service concept, which is two full shifts, and we will continue to explore that on an as needed basis.

In terms of technicians, as we talked about last time, we feel -- and we have been able to hire as we need them. We started a project in Atlanta a number of months ago, our own training center. We graduated our first group of technicians, 14 technicians, about 45 days ago. The second class is in place. We've got another one of those schools getting ready to start, so we believe that we are out on the edge in terms of being able to produce our own technicians, and at this point in time don't feel that is a limiting factor for us to continue to grow our business.

Very good. And just a quick follow-up to some of the prior questions on Q auto. I just wanted to get sort of caught up here. Versus your initial expectations for headwinds in the second, third and fourth quarter, where do you stand? Are you adding sort of incremental headwind as you sort of learn from your first two stores and now are planning a third store, or is it more a reiteration of what you thought initially? Thanks.

This is Keith. I'll jump in on this. When we first launched the Q auto initiative back at the end of the first quarter there, we talked about an $0.08 to $0.12 loss for the year. That's what we expected for the year. And very much in line with what we saw in the third quarter, a $0.03 loss is right in the middle of what we expected. And we are expecting potentially a $0.04 to $0.06 loss here in the fourth quarter, and then that loss pattern continuing into the first quarter next year.

Had you thought about continuing into 2015 before?

(multiple speakers) directly, so we think, this year, with the $0.04 to $0.06 plus the $0.03 we've lost so far, we are in the, what, $0.07 to $0.09 range. So it's a little lighter than what we thought.

Did you anticipate it continuing into 2015 initially?

Yes. The way we look at this is we're going to learn as we go. That's why we're giving projections essentially out through the next two quarters, because we will learn a lot between now and even February when we get on the call next time. Then we will update you on where we are and what we see from there. But we are not in a position to give long-term projections because there is so much learning that's going on every day.

And do you anticipate ever splitting that business out in your results?

I think we have a long way to go before we get there. We only have three stores. I think we just need to keep working on this and see where it goes.

Very good. Thank you so much and good luck in the fourth quarter.

Bret Jordan, BB&T Capital Markets.

Good morning. A question on parts and service, the 25% growth in warranty. Could you give us a feeling for where we are in this warranty cycle, what inning we are, sort of catching up on those historic recalls? And then maybe did the customer-pay growth benefit from these warranty vehicles being in and being sold customer-pay services at the same time?

This is Michael. So, as I've mentioned on I think every call for the last five years or so, it's very difficult to predict warranty business. We are in the middle, as you mentioned, of a seemingly historic amount of recalls. They are across the board; they are across all manufacturers. I cannot predict, I won't even try to predict whether that will continue or not. But we do handle that business, and we move it through our shops as quickly as we can, as effectively as we can.

To answer your second question, yes, there is some customer pay associated when a customer brings a car in. We of course want to take care of their maintenance needs or any other repair needs. That applies particularly to recalls of older vehicles. On a standard warranty inside the first 12 months to 36 months, we don't see as much of that customer pay being added to a repair for that point in time. But to answer your question directly, yes, you will see some benefit to the customer pay side when you have that kind of warranty work done, assuming you have capacity and technicians, which we do.

Okay. And then one question on the used vehicle inventories. You commented that Q2 ending quarter inventories were pretty high. There might be some pricing pressure given new vehicle incentives. Is your bias to hold less used inventory perhaps passing through off-lease were trade-ins to option more than you were a quarter or two ago, given maybe some deflation in that inventory, or will you generally hold those vehicles for resale?

This is Michael again. We generally hold our vehicles for retail. We have an active program in place and have had it for a number of years to continually drive down the number of vehicles that make its way to the auction.

Our aggressiveness in the second quarter, particularly in the month of May, resulted in owning a lot more trades than we could get rid of. We saw a little bit of seasonality softening in vehicle sales because of the increase in volume in new sales. But again, because of our internal practice and our internal process, we don't keep excess amounts of inventory. So we've retailed out a substantial amount of it. We did have to take some to the auction and wholesale them, but we drove our inventory down to be much more efficient. We like to keep in that 30-day to 35-day range. That keeps the pricing efficient. That keeps what we call the velocity theory efficient. It allows us to maximize our inventory. But again, we have an ongoing program. We prefer to take as few vehicles as possible to the auction as we can.

All right. Thank you.

Ravi Shanker, Morgan Stanley.

Good morning everyone. This is [Pari Sienne] in for Ravi Shanker. I had a couple of questions on used. Your used inventory has obviously come down a bit versus 2Q. But how do you feel about your mix today? Is it still a bit more CPO-heavy or would you say it's more balanced than 2Q?

This is Michael. It is a much more balanced inventory today. We did a lot of work throughout the summer months, and yes, it is a much more balanced inventory than we had at the end of June.

Thanks. And as a follow-up, did you feel at any point in the quarter that either used unit sales or margins, especially for CPOs, came under pressure from affordability of new vehicles?

I think what we saw in July and August particularly is an uptick in volume-based incentives on the new car side, which lowers the transaction price on those vehicles, which brings it closer to the transaction price of the used that we had in inventory at that time because we had acquired those in a period prior to that where we paid more for them. And as one would expect, naturally that has to drive the pressure down on the used side so that we can move the inventory. So, I think the answer to your question is yes.

Okay. And if I may, one housekeeping question on Q auto store. I'm not sure if you mentioned this in the previous call, but how much inventory can these stores hold once it's fully ramped up, and is the turnover going to be similar to your existing stores?

The inventory of each one -- I think the question was how much inventory can these stores take? We have an internal model that works on the same day supply as our other brands do, our other entities do, so you could expect that we would keep somewhere in the 30 to 35-day supply of used cars. So that's the kind of inventory that we would maintain. Again, as I mentioned earlier, when you open one from the beginning, the first one or two months, you may see something a little higher than that because we have to acquire all at one time. But on an ongoing basis, you could expect that Q auto will keep the same disciplines and days supplies as our other brands.

Thank you. Got it.

David Whiston, Morningstar.

Thanks. Good morning. Keith, this first question on CapEx probably for you. I think you normally give that guidance excluding real estate purchases, but I was just wondering what are your thoughts on CapEx dollars spending, including real estate, in a typical year.

We have our core CapEx program which I mentioned, which is $45 million for the year. We have one, actually two properties that we're constructing additional real estate projects for that are to move dealerships out of leased facilities, so that's up to $55 million. Then we have the incremental CapEx associated with our Q auto, which is a property purchase during the quarter that you'll see will show up in our Q. That is for future expansion of Q auto.

Okay. And following up, a little bit different version of an earlier question. What percent of your used vehicle inventory comes from trades, and then what portion of those trade-ins are wholesale? It sounds like very little.

This is Michael. So in aggregate, because it is a franchise-dependent and dealership-size dependent answer -- but in aggregate, north of 60% to 65% of our inventory comes from trade-ins. That is our best source of product and that is what we focus on.

Again, in aggregate, I can give you a number, but it's somewhere in the very low single digits of those cars actually make their way to auctions. It varies franchise by franchise and market by market, depending on the size of the store, but low single digits.

Okay, thanks. And on used with the CPO, generally I assume a CPO vehicle is going to have a higher ASP relative to a non-CPO used retail vehicle. But what about gross dollar profit and gross margin?

CPOs generally carry a slightly higher margin on them and of course with a -- and a higher gross profit dollar. There is, however, as you would expect, a higher cost of acquisition not only from the fact that you would pay more at an auction for those or a lease trade-in, you have certification fees, and the standard reconditioning costs that go on it. So yes, you are correct. They do have I would say actually a significantly higher cost of acquisition.

Okay, thanks. Very helpful.

Thank you, everyone, for joining us. We appreciate your participation and look forward to talking to you again at the end of the fourth quarter.

This concludes today's conference. Thank you for your participation.