AutoNation Inc (AN) 2011 Q4 法說會逐字稿

Thank you for standing by and welcome to AutoNation's fourth quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator instructions). Now I will turn the call over to Ms. Cheryl Scully, Treasurer and Vice President of Investor Relations for AutoNation.

Good morning, and welcome to AutoNation's fourth quarter and full-year 2011 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our Chief Financial Officer. Following their remarks, we will open up the call for questions. Kate Keyser-Pearlman and I will also be available by phone following the call to address any additional questions that you may have. Before we begin, let me read our restatement regarding forward-looking comments and the use of non-GAAP measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks which may cause the actual results or performance to differ materially from expectations. Additional discussions and factors that could cause actual results to differ materially are contained in our SEC filings. Certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. Reconciliations are available on our investor relations website at investor.autonation.com under financials.

And now I will turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Good morning, thank you for joining us. Today, we reported an all-time record adjusted quarterly EPS from continuing operations of $0.51 for the fourth quarter, a 13% increase on a per-share basis as compared to $0.45 for the same period in the prior year. Fourth-quarter 2011 revenue totaled $3.7 billion compared to $3.2 billion in the year-ago period, an increase of 13%, driven primarily by stronger new and used vehicle revenue. We also reported an increase of 7% in operating income to $144 million.

In the fourth quarter total US industry new vehicle retail sales increased 7% based on CNW Research data. In comparison, during the same period AutoNation's new vehicle unit sales increased 13% or 10% on a same-store sales basis.

For the full year, adjusted EPS from continuing operations of $1.94 was a record, up 24% over prior year. Revenue for the full year was up 11% over prior year. In 2011 we repurchased 17.1 million shares or $583 million, average price of $34.14. From January 1 to January 25, 2012, we have repurchased an additional 3.5 million shares for $122 million at an average price per share of $34.74. Since the year I arrived in 1999, we have bought back 395 million shares for $6.5 billion at an average price of $16.44 per share.

Today we also announced that our Board of Directors authorized the repurchase of an additional $250 million of AutoNation common stock. AutoNation has to $278 million remaining Board authorization for share repurchase. AutoNation has an optimal brand and market mix that position us well for strong performance and new vehicle sales, and as the market rebounds, as we look at 2012 we believe that the improvements in new vehicle sales will continue. The recovery has three drivers. The first is the age of fleet on the road, which is now approaching 11 years old. The second is the accelerated pace of new products being launched by the manufacturers, and finally is the availability of credit financing to our customers.

Our planning assumption for 2012 industry new vehicle light sales is 14 million units, which would be around a 10% improvement over 2011. We have been consistently demonstrating our ability to perform in what we expect to be a multi-year recovery in auto retail.

I will now turn the call over to our Chief Financial Officer, Mike Short.

Thank you, Mike, and good morning, ladies and gentlemen. For the fourth quarter we reported adjusted net income from continuing operations of $71 million, or $0.51 per share, versus $68 million or $0.45 per share during the fourth quarter of 2010, a 13% improvement on a per-share basis. Our fourth-quarter results for this year exclude $1.4 million, which is $0.01 per share, of debt refinancing cost. There were no adjustments to net income in the prior-year period. Adjustments to net income are included in the reconciliations provided in our press release.

Last quarter we indicated that we expected to receive the remaining incentives under the Premium Luxury program during the fourth quarter. Gross profit was favorably impacted by $2 million this quarter due to these incentives. This compares to gross profit of $13 million from incentives recognized in the fourth quarter of 2010. In the fourth quarter revenue increased $432 million or 13% compared to the prior year and gross profit improved by $35 million or 6%. SG&A as a percentage of gross profit was 71.3% for the quarter, which represents an 80-basis-point improvement compared to the year-ago period. Excluding the benefit from the additional incentives in both quarters, SG&A as a percentage of gross profit improved by 220 basis points.

In December, we entered into a new five-year unsecured credit agreement with a $500 million term loan facility and a $1.2 billion revolving credit facility. This refinancing extended our debt maturities, lowered our borrowing costs and increased our available liquidity, better aligning capacity with our growing EBITDA in a rising SAAR environment. In the new facility, the maximum leverage ratio increased from 3.25 times to 3.75 times, and the maximum capitalization ratio increased from 60% to 65%. We also decreased the pricing from LIBOR plus 225 basis points to LIBOR plus 175 basis points. We believe that the favorable refinancing terms reflect the market's confidence in AutoNation's operating strength, disciplined financial management solid cash flow generation.

Returning to fourth-quarter results, net new vehicle floor plans continue to be a benefit for the quarter. It was a benefit of $6 million, an improvement of $3.2 million from the fourth quarter of 2010, primarily due to lower credit spreads compared to the year-ago period. Floor plan debt was approximately $1.9 billion at quarter end, an increase of approximately $388 million from September 30, 2011, in line with inventory levels. Non-vehicle interest expense was $17.4 million for the quarter, an increase of $1.1 million compared to $16.3 million we recorded in the fourth quarter of 2010 due to higher debt levels.

During the quarter we borrowed $195 million under our revolving credit facility, resulting in $495 million of outstanding borrowings under the facility at the end of December. Our fourth-quarter non-vehicle debt balance was $1.6 billion, an increase of $298 million compared to the fourth quarter of 2010. The provision for income tax in the quarter was $43 million, or 38%.

From October 1, 2011 through January 25, 2012, we repurchased 9.8 million shares for $339.9 million at an average price of $34.67 per share. For the full year 2011, we repurchased 17.1 million shares for $583.4 million at an average price of $34.14 per share. Today we announced that our Board authorized the repurchase of up to an additional $250 million of AutoNation common stock. AutoNation has $278 million remaining in Board authorization for share repurchase. As of January 25, there were approximately 132 million shares outstanding.

Capital expenditures were $45 million for the quarter and $144 million for the full year 2011. For 2012 we expect CapEx to be approximately $145 million. Capital expenditures are on an accrual basis excluding operating lease buyouts and related asset sales. We remain within the limits of our financial covenants. Our leverage ratio at December 31 was 2.59 times or 2.34 times on a net debt basis, including used floor plan plant availability compared to the limit of 3.75 times.

Our quarter end cash balance was $87 million, which, combined with our additional borrowing capacity, resulted in total liquidity of approximately $810 million at the end of December. This provides us with substantial flexibility in a rising SAAR environment. Our cash flow generation combined with our strong balance sheet and disciplined cost structure position the Company to continue to benefit from the improving SAAR and to maximize the value of the Company and shareholder returns.

Now, let me turn you over to our President Chief Operating Officer, Mike Maroone.

Thanks, Mike, and good morning. In addition to delivering the best-ever EPS in the Company's history for both a quarter and a full year, I am pleased to report that for the fourth quarter and the full year, AutoNation achieved solid increases in both new and used unit volume, revenue growth across all areas of our business and double-digit gross profit growth for new vehicles and finance and insurance. In addition, we delivered a solid operating margin of 3.9% for the quarter and 4.1% for the full year, illustrating the resiliency of our business model and our ability to navigate changes in the marketplace.

Fourth-quarter total segment income of $133 million grew 8% or $10 million compared to the period a year ago with increases across all three segments. At $44 million, Domestic segment income increased $8 million or 21%, Import segment income of $53 million grew $7 million, or 15%, while Luxury segment income of $70 million grew by $4 million or 6%.

As I continue, my comments will be on a same-store basis compared to the quarter a year ago, unless noted otherwise.

In the quarter AutoNation delivered 59,000 new vehicles on a same-store basis, an increase of 10%, comparing favorably to industry retail sales, which were up 7% according to CNW Research. On a total store basis we recognized increases across all three segments with Domestic new unit sales up 21%, Premium Luxury new unit sales up 28% and Imports up 3% as supply continues to rebuild. Relative to geography, Texas was exceptionally strong in the quarter and our Florida and California markets showed solid improvement.

At $2 billion, new vehicle revenue increased $257 million or 14% with revenue increases across all three segments driven by increased volume. Revenue per vehicle retail went up $1200 or 4% to $34,700. Gross profit per new vehicle retail improved $54 or 2% compared to the fourth quarter of 2010. Excluding the benefit from the additional performance-based manufacture incentives in both quarters, gross profit per new vehicle retailed improved $267 or 12% on a same-store basis. We attribute our progress in improving new vehicle PVRs to the use of our proprietary pricing tool and tight supply in some import brands. Our ongoing goal is to increase market share while maintaining or expanding margins compared to pre-disruption levels.

New vehicle gross profit as a percent of revenue in the quarter was 7.1%, off 10 basis points. Excluding the benefit from the incentives in both quarters, new vehicle gross profit as a percent of revenue improved 60 basis points on a same-store basis. At December 31, new vehicle day supply was 50 days or 44,000 units compared to 63 days or 48,500 units a year earlier. Looking ahead, our new vehicle inventory is in great shape and we intend to buy aggressively for the spring selling season.

Today we are pleased with the inventory levels for our Domestic and Premium Luxury segments. For imports, Nissan is in very good shape. We expect our Toyota inventory to be closer to normalized by the end of the current quarter, and our Honda inventory will be slower to rebuild as they were more impacted by the Thai flooding.

Turning to used vehicles, AutoNation retailed 41,000 used vehicles on a same-store basis in the quarter, up 5% compared to a year ago. Same-store retail used vehicle revenue of $740 million increased $54 million or 8% year-over-year. Revenue per used vehicle retailed of $17,950 was up 2% as industry used vehicle prices remained strong in the quarter due to consumer demand and tight inventory availability. Same-store retail used vehicle gross profit of $61 million was in line with the period a year ago, and gross profit per used vehicle retailed at $1,487 was down $78 or 5%.

Effective with the fourth quarter, we changed our used day supply calculation to better reflect our operating metrics and practices. This includes a shift from dollar day supply to unit day supply. Using the new calculation on December 31, our used vehicle day supply was 31 days compared to 34 days a year ago and 30 days at September 30. Our investor relations teams will be available after the call to discuss the methodology changes in more detail. At end of the spring selling season our used vehicle inventory is in good shape relative to both supply and mix.

Next, parts, service and collision were same-store revenue of $566 million, increased $6 million or 1% compared to the quarter a year ago and $193 million customer pay revenue was up $9 million or 5%, marking the sixth consecutive quarter of year-over-year increases. We also saw a strong lift in internal driven by volume and a 3% increase in collision revenue. Warranty revenue declined 17% attributable in part to the decline in the recall activity compared to the fourth quarter of 2010. In 2010 there was a surge in recall activity in the US with the highest levels since 2004. Fewer units in operation over the past several years, along with improved vehicle quality, are also factors in the reduction in the warranty revenue.

Gross profit of $235 million declined $7 million or 3% compared to the quarter a year ago. Customer pay gross profit grew 2%, up for the sixth consecutive quarter year-over-year. A decline in warranty gross profit more than offset gross profit gains in other areas, including internal and collision.

Finance and insurance total gross profit in the quarter was $122 million, an increase of $15 million or 14% compared to a year ago. Same-store gross profit per vehicle retail was $1223 per vehicle, up $63 or 5% in the quarter. For the full year, same-store F&I gross profit per vehicle retailed was $1204, up $61 or 5%. This is a full-year record and marks the first full year result above $1200. We continue to be very pleased with our industry-leading results and finance and insurance.

Crisp execution of our best practice processes drove both improved rate and product commission. We experienced solid product penetration and our strong preferred lender network for prime, non-prime and sub-prime continues to be a benefit. We added non-prime and sub-prime lenders to our network during Q4, a further indication of the continued healthy credit environment.

At December 31 our store portfolio numbered 215 stores and 258 franchises, represented 32 brands in 15 states. In the quarter we opened Power Fiat in North Phoenix. We came into the year with an aggressive plan to build new facilities and undertake several major facility renovations. In the fourth quarter we completed three more significant ground-up construction projects for BMW Tucson, Champion Toyota Gulf Freeway and Champion Honda in Corpus Christi. We also completed the extensive renovation and expansion of another six stores in the quarter. Looking ahead, we will continue to invest in our facilities and seek acquisition opportunities that meet our market brand and return on investment criteria.

Before I close my remarks, I would like to share that David Koehler has been appointed Senior Vice President of Variable Operations with responsibility for new and used vehicle operations in finance and insurance. Prior to this, David served as a market President in our Florida region.

Additionally, Alan McLaren has joined the Company as Senior Vice President of Customer Care responsible for parts, service and collision. Prior to this, Alan served as a senior executive with Mercedes-Benz USA.

This marks a change to the reporting structure in our operations team. For some time, all store operations reported to me through a senior -- through a single senior executive. Dividing the structure distinctly between sales and service provides increased expertise and focus for each area. I will also note that to advance the customer experience post-vehicle acquisition and grow customer retention, parts, service and collision will now be known as customer care at AutoNation. We are pleased to expand our operations teams with the addition of these two seasoned automotive executives who both have a proven track record of driving results.

In closing, the fourth quarter was a record-breaking EPS performance at AutoNation. I want to thank each of our associates, who share our passion for delighting customers and delivering results. With that, I will turn it over to Mike Jackson.

Thanks, Mike. Over the next several years we will continue to see all the OEMs accelerate the new product launches with an industry average of over 40 launches per year through 2015. The industry replacement each year has historically averaged about 15%. This will increase to an average of 25% through 2015. This, along with an improving economy, a genuine replacement need, great financing will drive new vehicle sales back to 16 million units. As we look at 2012, we believe that the improvement in new vehicle sales will continue. Our planning assumption for 2012 industry new vehicle unit sales is 14 million units, which will be a 10% improvement over 2011. We will now take questions.

(Operator instructions) Rick Nelson, Stevens.

I'd like to ask you, Mike, about the 14-million unit SAAR forecast, what you are assuming about incentives, I guess particularly from Toyota and Honda as their inventories normalize. Do you think domestics follow suit?

Rick, I do not see any dramatic change in the incentive gain. There could be some moves here and there. Maybe the Japanese do something as their product availability comes online. But I really don't think that's the game today that I see in the marketplace.

I can't describe to you how much closer production is aligned with consumers than five years ago, and -- both in quantity, type and configuration. And therefore, where you have to use extreme incentives to bridge the gap between what the consumer wants and what has been produced has been narrowed dramatically. Now, there will always be tactical incentives, but I do not see the disconnect that existed in the past.

Also I believe the Japanese will regain share simply by having further improvement in availability, and they have a pretty good product cadence also to help them. Now, I see the share shaking out probably a 45-45 split between the Asians and the Detroit and with the Europeans taking the balance. And going forward, I don't see massive shares achieved through massive incentive programs. I really believe those days are behind us.

I'd like to ask you about the margin also on the new car; the gross was in the $2450 area. As inventories more fully recover, do you think we backtrack back to the first quarter, where we were at $2200 a unit? Where do you see the growth shaking out?

Rick, it's Mike Maroone. We are optimistic about our ability to manage margins. Obviously, it's subject to supply. Our goal is to take market share while maintaining or improving our margins. If you take out the one-time manufacturer incentives from a year ago, we were up $267 in the quarter. All year we have improved margins in the Domestic and Premium Luxury, in addition to the Import. So the margin expansion was not just driven by the Import segment.

So we think there's opportunity there, but of course supply is also a driver.

If I could ask a final question on the SG&A, to grow 71.3%. I went back; it looks like that's the lowest fourth-quarter level we have seen since '04, when obviously unit volumes were a lot heavier for the industry. And I guess adjusted for some of the incentives you got a year ago, the improvement was bigger. Where do you see SG&A as we're in this recovery mode?

This is Mike Short. As you know, this has been a focus on them for the Company for as long as AutoNation has been in existence. We are very focused on managing our net to gross and leveraging our cost structure. We've got a lot of initiatives in place to continue to do that over time. We hold out there as the brass ring the fact that we were below 70% as our historic low SG&A as a percentage of gross, and we intend to get back there and we're working hard to do it. And you are correct to point out that we are near record highs despite the fact that we are at still a much lower SAAR level. And I think that points to the level of productivity improvement that we have had organizationally during the downturn and it's a discipline we plan on staying with.

Thanks, and good luck.

Ravi Shanker, Morgan Stanley.

Another margin question, but this time one used and parts and services, I think you said in 3Q that high acquisition costs ahead of the inventory shortage kind of hurt your margins there. Did some of that spill over into Q4 as well? And also on parts and services, I think you can arguably say that warranty business is probably at a normalized level now versus an elevated level a couple of years ago. Does that mean that parts and services margins are probably going to be in this 41%-42% range?

It's Mike Maroone. First, on the used car side you're correct in what you said. The real pressure in used car margins for us came out of the certified preowned, where we had some margin compression in both Domestic, Import and Premium Luxury. We have reduced the size of our inventory. We are more focused to stay in that low 30-day supply and believe that there's some opportunity going forward in improving our used car margins.

On the service and parts side, or what we now call customer care, we also agree that the warranties should be stabilized at this point, subject to any major recall activity. Our margin compression there is really our aggressiveness in going after the tire business and other businesses that we haven't been as deep in before. We've got a lot of initiatives in the Company to penetrate the lower-margin business that we believe, long-term, is a key element in our customer retention strategy.

Is there any level of incremental margin for those businesses, i.e., as you mature those businesses and growth them until those margins improve as well?

I think they have got opportunity to grow. At this point in time, we want to earn the customers' business. The tire business especially has always been a lower-margin business, but I think there's other segments that we can penetrate with what we call a good, better, best strategy, and we are actively pursuing those. So I think there is some incremental margin opportunity going forward, but at this point it's a share of garage issue in attempting to have our customers returned for us for all services, not just select once.

Got it, and speaking with used, can you give us an update on the VVO initiative?

The VVO initiative -- we now have 27 of those stores open, and they are still maturing. We are still learning. We are very optimistic. We believe that it has allowed us to expand our offerings to customers, giving customers much better choice with less expensive vehicles. And we would anticipate opening more of those as the year goes along. It is very linked to supply, so as long as the new vehicle market stays strong, we believe we will have the inventory to make those offerings to customers. So we feel very good about that business.

Just finally, a question for Mike Jackson. I think a couple of your large dealer peers have been on a bit of a tear with you acquisitions. Can you just comment on what you're seeing in the space and if you're going to go down that path as well?

We're looking at our existing footprint. We're looking for brands that we don't have in given markets. We have made some acquisitions, big Toyota stores, we have had some greenfield sites from Audi to Fiat. We are still very disciplined on price and we are always looking at the arbitrage between share repurchase and doing an acquisition with a risk premium on the acquisition.

So my experience in these things is you never know, you never know. So we have no fixed target on acquisition or share repurchase. The only annual commitment we have on capital is to existing stores and aggressive investment in existing stores to make sure they are all top-flight, an ongoing commitment to invest in technology that we always are state of the art. And then we really look at acquisitions and share repurchase opportunistically. So I really can't tell you how the year is going to unfold.

On that point, have you given a CapEx forecast for 2012?

Yes, we called that $145 million.

All right, thanks so much.

John Murphy, Bank of America Merrill Lynch.

First question -- as we think about the industry, Mike Jackson, you sort of highlighted there had been a lot of rationalization on the automaker side, and particularly on inventory. But there's also been a lot of rationalization in the last four or five years on the dealership counts and we've declined by almost 5000 dealers over the last five years. So just curious -- are you seeing any the benefits of that consolidation yet? And do you think those benefits may increase quite dramatically as the SAAR increases as well?

First and foremost, thank you for your work along the manufacturers' product cadence. It's the best in the industry; it's a must-read for us.

Look, I think the consolidation that occurred in 2008-2009 and 2010, particularly the bankruptcy with the domestics, was a missed chance. It could have been far more comprehensive, particularly in the major markets. So I think there is some benefit there, but I would not say that it is what it could have been or should have been. And I still think there is more representation that's needed in the major metro markets.

So there is some benefit, but I don't see some inflection point that I would call out and say, you know, when the volume moves past this, you're going to see some huge payoff from it.

Thanks for using colors. Second question -- just thinking about the share repos, it seems like you have gotten a lot more comfortable taking on leverage to buy back shares. I'm just curious, obviously you have lots of room on your net debt to EBITDA covenant, but just curious as far as the limits on RP baskets that still exist and if you would be willing, really, to bump up against the net debt to EBITDA leverage covenant to really push the share buybacks, given where the shares are right now?

John, Mike Short here. Just a couple things -- first, mechanically there is no basket, so our limits our --

We have an investment grade covenants. There's no basket.

And so it's really the leverage ratio that's the governor on that. And I think the two characteristics I would use to describe the way we think about it is flexibility and being opportunistic. So in terms of flexibility, that's why you saw us go out and do the level refinancing we did. And you can see how much flexibility that new credit facility got for the organization. And opportunistic is looking at value. Mike talked about the way we think about capitals. We have and will continue to maintain a very strong balance sheet. We think it's one of the hallmarks of AutoNation and it's a critical strategy for us. And so within that context, we try to redeploy capital in the most value creative way possible.

And it would be fair to say at this point, given the level of share buybacks recently, you view your shares in the open market as the best return on capital at this point?

Again, it depends on the deal that comes across --

If you're looking backward, absolutely yes.

And you look at that relative to next acquisition opportunity that comes up. If there's a golden opportunity that we identify through our business development team, at that point that might become the better use of capital. But Mike is obviously correct. Given our track record, we see the opportunity to create and believe we have created significant shareholder value through share repurchase over the years.

All the while, maintaining excellent liquidity with daily trading volume that's 3.5 times our peer group.

We remember the lesson of 2008, and that is that organizations like us do very well to be protected by a strong balance sheet. And when the tide turns against you, you really want to have that strength there. So we're covetous of that.

Okay, thank you. Lastly, it sounded like a small nuance when you changed the name of parts and service to customer care. But it actually might be more than just a small nuance. Just curious -- as you are looking at that, is that going to be a whole rebranding effort in your stores and your communication to customers, where instead of just being a segment name, it really becomes a real branding tool in changing the name? Just curious what kind of studies you have done there and really what kind of benefit that my drive in the new customer care segment.

If you look at it, there's really two indicators there. One, we changed the structure of the organization. And we don't do that lightly. But we say these two disciplines, these two opportunities need a singular focus to realize all the potential that's there. Next, we have top talent taking both those responsibilities. And I think we have embraced a flag in the name that really says what that division is all about, and that is caring for the customer. So everything that goes behind that has to wait for another day, and we will talk about it on another day. But as an indicator of seriousness and direction, yes.

Thank you very much. Keep up the good work.

Patrick Archambault, Goldman Sachs.

Hi, good morning. First, on the comment you had about the product cadence, you said that that was one of three reasons for driving growth forward for this year in terms of volume. Curious what your experience in the past tells you about product cadence and pricing for you guys. It's obvious that new product will help OE pricing. But in terms of the premium to MSRP -- or maybe not a premium -- but lessening than maybe the discount to MSRP, is it something that we should look to as having a positive gross margin impact for you guys as well?

Absolutely, Patrick, you are spot on. There's no question that new product is a tremendous benefit and a tremendous margin opportunity. Depending on market acceptance and volume or Premium Luxury, how long that opportunity is there can really vary. Really, it's a combination. We are really in a new era here where we have this increased product cadence combined with manufacturing discipline with a focus on producing what the customer actually wants.

So I see the potential for profitable growth at both the retail level and the manufacture level. There are still certain manufacturer practices that are inconsistent with that, stair-step incentives being one of them. It's a very destructive incentive program that we wish would go away. There are still practices out there that are not in alignment with where today's customers in today's marketplace is. We work against them, so we are not at perfection yet, but we are in a dramatically different world with a lot more opportunity. We are simply not going -- as we make this journey back to 16 million plus units, it would be completely wrong to say, oh, they're just going back to where it was. That is not the case. It is a new world with new opportunities. Very exciting.

Great, and one more on used, if I can fit in. The used to new ratio went to 70 from a run rate of more or less the high 70s over the last call it -- looks like the five, six quarters. How should we think about that going forward? Are we reaching a point in the cycle where we are kind of changing, seeing a change in the tide between new and used demand and used growth going forward is going to be permanently slower -- permanently meaning slower over a sustainable period of time -- or is this just a temporary issue with inventory acquisition costs? How do we think about that?

It's Mike Maroone. I think that there's still lots of opportunity in used. I think the new vehicle market had obviously shrunk. The used vehicle market has been more stable. So now we are seeing a recovery in new. We are projecting more recovery in new. But I think there's still plenty of opportunity in used. We are still able to grow our used volume by 5%, our revenue by 8%. Yes, supplies are tight. We are working very hard on alternative supplies, doing some very creative online buying. And I think it's a supply-driven issue. But we still see plenty of opportunity in the used vehicle business. And it may not be as volatile as the new business, but there's still a lot there. And I think we will continue to work hard to improve our capabilities there.

Okay, great, nice quarter, thank you very much.

Simeon Gutman, Credit Suisse.

Can we talk about F&I? Mike mentioned a few of the drivers. Can you expand a little and maybe talk -- is the mix of vehicles helping? And then as we think about returning Japanese supply next year, how that factors into the F&I per car.

It's Mike Maroone. First of all, we were very pleased with our F&I performance. It's the first time on a full-year basis that we have exceeded $1200. I think it's a reflection of our ongoing efforts in store operations with training and certifying and continually working on compliance issues, so there's a strong tactical effort. More importantly, the lender environment is very favorable for both customers and retailers. There's a lot of lenders that have had great experiences with automotive credit, and there's certainly some aggressive buying going on.

In our Company, there is going to be a continued or an even stronger focus on products, and we've done a good job on products in the past. But specifically on vehicle service contracts and prepaid maintenance we are incenting our whole organization to do a better job of linking that customer, bringing them back into our customer care business. So I think there's more opportunity there. I think it's a very good environment and I see it doing nothing but doing better going forward.

Okay. And then talking about middle of this year, where we have an interesting period where we cycle some fantastic grosses from last year, the volume should be better. But how do you -- how did you manage it last year? Was something smoothed out as far as compensating on gross versus volumes? And how do you manage the potential volatility that the business could see because of that event or that dynamic that took place?

It's Mike Maroone again. I think we did a very good job in Q2 and Q3. We developed a proprietary pricing tool. And the pricing tool itself doesn't get more gross. What it does is it helps your stores have in their mind what is the target on a per-vehicle basis, benchmarking a lot of market data. And I think the tool and the training that goes with it really helped us with our margins. Certainly, as we go back to normalized inventory levels, the margins will drop some. But I think we still have an opportunity to expand margins above a pre-disruption level. And that is clearly our target here. Supply is a big driver. So we have an assumption that there is going to be some real thinking done by the OEMs and that the market will not be heavily oversupplied.

But we think we can do a good job. If you take out the one-time manufacturer incentives from Q4 of 2010 and this year, take them out in both years, our grosses were up $267 a quarter, Q4 2011 over Q4 2010. I don't think we can necessarily maintain that kind of spread, but I think we can be very positive. We were very encouraged to see margin expansion in the Domestic and Premium Luxury, not just in the Import segment which gives us a little bit of confidence in our capabilities.

And I guess following up to that, the pricing analytic tool -- how are you measuring how much better it's helping gross versus what the business is giving you naturally?

Well, first of all, what we do with that tool is we used three of third-party benchmarks before we set our prices. So we're looking at a number of different sites, saying what our vehicles sold in the market. We then establish a target and what we call a floor price, and we measure our stores' performance against those target and floor prices. I think ultimately, the bottom line is that you want to take market share -- and we measure market share very carefully -- while improving your margins. And I think we're doing a decent job of that, but it's an ongoing effort.

Okay, thanks.

Rod Lache, Deutsche Bank.

Also just a follow-up on used. It looks like the supply of used vehicles is going to decline quite a bit in 2012 and 2013 just because there was such a big downturn in 2008, 2009 and 2010. But you are mentioning that you think that used margins could continue to rise. I'm just trying to just square the -- the various issues. Are you thinking that there's very little impact on you guys from this shifting kind of demographics in the used market or on your comps? You mentioned some alternative inventory sources. Is that becoming -- is there enough momentum there to offset it? Can you give us any color on how big a factor that has been for you?

It's Mike Maroone. There's no question that supply is very tight. What we know is that we don't believe that we want to be a big auction buyer and bid against several hundred other people on the same car. So our focus is twofold. One is, it's doing a better job in-store. So we measure our stores' ability to generate appraisals and what appraisals they win is a key metric for us in our operating strategy. So we call it buying at the door. We want to acquire more vehicles at the door. It obviously creates a transaction, gives us a number of margin and revenue opportunities.

But at the same time, we don't want to limit ourselves there because we do believe that the market is so much larger and has so much more potential. So we are doing online work with a number of different -- we are doing some acquisition with eBay, with Edmunds, with Autobytel, using some online opportunities to get out and buy some cars. And they are early efforts, but we are very optimistic about our capability of buying cars online, and it's a very customer-friendly process as well.

So we really look at those two as opportunities, and we believe that the more inventory we can acquire at the right price, the more sales opportunity we have. And I think it's got an opportunity to pay off going forward.

Do you have any statistics you could share on the percentage you source nowadays from auctions versus where it used to be just to kind of -- for us to be able to gauge the success you are having there? And just also on the retail side, I'm wondering -- are you seeing any changes in the advance rates that banks are offering on the used car side of the market, just given how much used car prices have risen?

Let me start with the auction first. I don't have a ready stat at my hands, but I will tell you that most of our auction buying is certified pre-owned units that are bought online. It's a unique opportunity to keep our people in the stores and buy specific products that we need to fill out our CPO footprint. Beyond the CPO footprint, we buy very little at auctions.

Do you have any thoughts on the financing market for used?

First of all, the financing environment is very healthy right now. I can't tell you the advance rates are way up, but what I can tell you is the lenders that really want that business are looking at both the advanced rate and the quality of customer. And we've got plenty of lender opportunities and financing doesn't seem to be anything that can hold back that business at this point.

Great, thank you.

Thank you, everyone, for joining us today.

This will conclude today's conference. All parties may disconnect at this time.