AutoNation Inc (AN) 2013 Q4 法說會逐字稿

Welcome to the AutoNation's fourth-quarter and full-year 2013 earnings conference call. (Operator Instructions).

Now I will turn the call over to Robert Quartaro, Senior Manager of Investor Relations for AutoNation. Sir, please begin.

Good morning and welcome to AutoNation's fourth-quarter and full-year 2013 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; Cheryl Scully, our interim Chief Financial Officer; and Jon Ferrando, our Executive Vice President responsible for M&A. Following their remarks, we will open up the call for questions. 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 brief statement regarding forward-looking comments. 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 such forward-looking statements.

Additional discussions of factors that could cause actual results to differ materially are contained in our press release issued earlier today and our SEC filings including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Certain non-GAAP financial measures as defined under SEC rules will be discussed on this call. Reconciliations are provided in our press release which is available on our website at investors. AutoNation.com.

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

Thank you, Rob. Good morning. Thank you everyone for joining us.

Today we reported an all-time record adjusted quarterly EPS from continuing operations of $0.83 for the fourth quarter and 24% increase on a per-share basis as compared to $0.67 for the same period in the prior year.

Fourth-quarter 2013 revenue totaled $4.5 billion, an increase of 8% driven by strong performance in all our major business sectors. We also reported an increase of 20% in operating income to $203 million. For the full year, adjusted EPS from continuing operations of $2.98 was an all-time record, up 17% from prior year. Revenue for the full year was $17.5 billion, up 12% over prior year. Operating income was $740 million, an increase of 15% over prior year.

In Q4 2013, we repurchased 1 million shares for $48.6 million at an average price per share of $48.16. On January 1 to January 29, we have repurchased an additional 2.3 million shares for $111 million at an average price per share of $47.90.

Planning assumption for 2014 industry new vehicle unit sales was 3% to 5% growth with total units above 16 million per year. We believe that replacement demand, attractive products and strong consumer credit will continue to support sales as we return to the normal selling rate of 16 million units. I would like to point out this marks the one-year anniversary of the launch of the AutoNation brand, unifying our former local market brand under one flag, AutoNation.

The coast to coast rollout of the AutoNation brand involved 23 manufactured brands and 210 franchises. Also during this rollout, AutoNation has had four consecutive quarters of all-time record adjusted EPS from continuing operations. I congratulate each and every one of our 22,000 associates on an outstanding job.

I would now like to turn the call over to Cheryl Scully.

Thank you, Mike, and good morning, ladies and gentlemen. For the fourth quarter, we reported adjusted net income from continuing operations of $102 million or $0.83 per share versus net income of $83 million or $0.67 per share during the fourth quarter of 2012, a 24% improvement on a per-share basis.

Our fourth-quarter 2013 results exclude $4.5 million which is $0.04 per share of net gains related to property dispositions. Our fourth-quarter 2013 results also exclude $3.4 million which is $0.03 per share of income tax adjustments. 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.

In the fourth quarter, revenue increased $352 million or 8% compared to the prior year and gross profit improved $71 million or 11%.

SG&A as a percentage of gross profit was 68.6% for the quarter which represents 130 basis point improvement compared to the year ago period. Net new vehicle floorplan was the benefit of $11.8 million, an increase of $4.9 million from the fourth quarter of 2012 primarily due to higher floorplan assistance. Floorplan debt increased approximately $489 million during the fourth quarter to $3 billion at quarter end due to increased inventory levels.

Non-vehicle interest expense was flat for the quarter at $21.7 million compared to the fourth quarter of 2012. At the end of December, we had $300 million of outstanding borrowings under the revolving credit facility and a total non-vehicle debt balance of $1.8 billion. This was a decrease of $16.4 million compared to September 30, 2013.

The provision for income tax in the quarter was $60.6 million or 35.6% which included the previously noted net income tax benefit of $3.4 million related to a favorable adjustment. From October 1, 2013 through January 29, 2014, we repurchased 3.3 million shares for $160 million at an average price of $47.98 per share. Today we announced that our Board authorized the repurchase of up to an additional 250 million of AutoNation common stock. AutoNation has approximately 405 million remaining Board authorization for share repurchase.

As of January 29, there were approximately 119 million shares outstanding and this does not include the dilutive impact of stock options.

As continued evidence of the strength of the cash flow generation capability of the Company, our leverage ratio decreased from 2.4 times at the end of Q3 to 2.3 times at the end of Q4. The leverage ratio was 2.1 times on a net debt basis including used floorplan availability and our covenant limit is 3.75 times.

Capital expenditures were $43 million for the quarter and $141 million for the full-year 2013. Capital expenditures are an accrual basis excluding operating lease buyouts and related asset sales. Our quarter-end cash balance was $69 million which combined with our additional borrowing capacity resulted in total liquidity of $974 million at the end of December.

We are well-positioned to continue to maximize company value and shareholder returns. We continue to demonstrate strong operating leverage, robust cash flow generation, a healthy balance sheet and disciplined expense management.

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

Thanks, Cheryl, and good morning. In the fourth quarter, AutoNation delivered record adjusted EPS from continuing operations for the fifth consecutive quarter. Additionally, we delivered a 4.5% operating margin that when adjusted for the net gain on property dispositions, tied our previous record of 4.3% and we grew revenue, gross profit and margins across all business sectors. We are very proud of this performance.

Starting with sales for the fourth quarter, same-store total gross profit for variable operations increased 8% on a combined new and used same-store unit volume increase of 4%. This was driven by the seasonal strength of premium luxury and a particularly strong quarter for AutoNation in this segment. I will note that on a total store basis, our premium luxury segment income increased 28% compared to the period a year ago due in part to a lift from new product launches and the resulting shift in mix within the segment. I will also note that premium luxury accounted for 46% of our total segment income in the quarter.

Also contributing was a solid performance in used vehicles and another strong showing in customer financial services. As I continue my comments will be on a same-store basis and compared to the period a year ago unless noted otherwise.

Looking at new vehicles in the quarter, same-store new vehicle revenue increased $55 million or 2% to $2.5 billion on new vehicle sales volume of 71,149 new vehicles, an increase of 465 vehicles or 1%. New vehicle gross profit of $163 million grew $9 million or 5% in the quarter, gross profit per new vehicle retailed of $2292 was up $105 or 5% with the premium luxury segment more than offsetting continued pressure in the import segment. Sequentially, gross profit for new vehicle retailed increased $280 or 14%.

Turning to used vehicles, we retailed 47,174 used vehicles in the quarter, up 4300 units or 10% with increases across all three segments. We saw a nice lift in certified preowned vehicles retailed in the quarter and continue to work aggressively to acquire used inventory both internally through increasing appraisals and winning more trades and externally through our -- we buy your car guaranteed offer program as well as various third-party partnerships.

Our used vehicle team is keenly focused on executing on the fundamentals of this business and they are delivering results as evidenced by retail used vehicle revenue of $872 million being up $87 million or 11%; retail used vehicle gross profit of $75 million increasing $8 million or 12%; and gross profit per used vehicle retailed at $1598 increasing $27 or 2%.

Relative to inventory, both our new and used inventory are in good shape. At the end of the quarter new vehicle days supply was 62 days versus 58 days sequentially and 54 days a year ago and compares favorably to the industry which we calculate to be at a 77 day supply. We remain disciplined with inventory and are well-positioned for the spring selling season. Our used vehicles days supply was 35 days, even with the year ago.

I will note that on a same-store basis, our combined new and used vehicle volume was up 12% in Arizona and Florida and was stable in Texas and California.

Rounding out the variable side of the business is customer financial services, a name change for F&I that we made last quarter to better reflect the services provided. In the quarter, customer financial services gross profit per vehicle retailed was $1378, an increase of $71 or 5%. Total gross profit of $163 million increased $15 million or 10% compared to the period a year ago.

We continue to be extremely pleased with our performance here. It is driven by a combination of our preferred lender network, OEM service contract alliances, store level execution, product penetration and the customer experience where we believe full transparency is a differentiator and value-added products help drive long-term customer retention.

As mentioned earlier, total variable operations gross profit increased 8% year-over-year. On a per vehicle basis, total variable operations gross profit of $3394 increased $132 or 4% in the quarter compared to a year ago and was up $217 per vehicle sequentially.

Next, customer care or service, parts and collision where in the fourth quarter customer care revenue increased $29 million or 5% to $629 million and customer care gross profit increased $14 million or 6% to $266 million. At 42.4%, our customer care operating margin was up 30 basis points as the business continued to grow across the board for customer pay, warranty, internal wholesale parts and collision for both revenue and gross profit.

In the quarter, we noted impressive year-over-year increases of 13% for both warranty gross and internal gross and 3% for customer pay gross. This marks the 14th consecutive quarterly increase in customer pay gross.

Our customer care team remains focused on operational improvements in the area of traffic, appointments and customer satisfaction as well as margin improvement and driving sales effectiveness.

At December 31, our store portfolio numbered 269 franchises and 228 stores in 15 states representing 33 manufacture brands.

As I close, I will reiterate that we are extremely pleased to have delivered record adjusted EPS from continuing operations for the fifth consecutive quarter and a record-tying adjusted operating margin of 4.3%. It is a fitting end to a perfect year for AutoNation where we rebranded over 200 of our franchises, grew with acquisitions and add points, made significant investments in our digital capabilities and sharpened our operational focus. We feel that we are well-positioned to grow our brand and take advantage of the opportunities ahead in 2014.

As I turn it over to Jon Ferrando, I would like to thank our 22,000 associates for their commitment and dedication to AutoNation. Jon?

Thank you, Mike. During the fourth quarter, we completed the previously announced acquisitions of O'Hare Honda and Hyundai in the Chicago market. The closings were well executed and the stores are now operating as AutoNation Honda O'Hare and AutoNation Hyundai O'Hare.

During 2013 as previously announced, we also completed the acquisitions of Honda and Hyundai stores in the Phoenix market and a Toyota Scion store in the Dallas market. In addition, we were awarded Mercedes-Benz franchises in the Atlanta and Tampa markets which we expect to open by early 2015.

Our 2013 acquisitions and add points align with our strategy of offering our customers the full range of cars and trucks in our key markets. Over the last six quarters, we acquired 12 franchises and were awarded four new premium luxury franchises by the manufacturers. The 2013 annualized revenue for the 12 acquired franchises together with the expected annual revenue of the four franchises awarded to us once they are fully operational, is approximately $1.1 billion.

Looking forward, we will continue to actively pursue acquisitions and new store opportunities with a focus on enhancing brand representation within our existing markets. We will continue to be selective and prudent with our capital with a focus on investing to produce strong returns and long-term shareholder value.

I will now turn it back to Mike Jackson.

Thank you, Jon. We will now take your questions.

(Operator Instructions). John Murphy, Bank of America Merrill Lynch.

I have a lot of questions because there is a lot of good things to ask about in the quarter so I apologize, I might be a little bit verbose.

Just on SG&A at 68.6%, back in our model we go back to 1999, we don't have anything that is even within 50 basis points of that. It was a really good performance in the quarter. Is there anything that is unique to the quarter? I know there is obviously seasonality and some things that can happen in the fourth quarter but is this a bogey we should be thinking about for 2014 estimates? And can you do better than this which it is very good already -- I'm just trying to understand how far you can go?

John, it is Cheryl. We remain focused certainly on the cost side of the business but we are going to continue to invest in digital and as you pointed out, the fourth quarter does benefit from strong premium luxury sales so we are going to continue to focus on that number. As we have talked about there is some seasonality built into that as well so I don't think it is all one direction from there but it certainly is a continued focus for us.

Okay. And then just a second question on the share buybacks. I mean it seems like you are getting very aggressive in the $48 range but as your earnings grow, that number might go up over time. I'm just trying to understand more thought process on allocating capital. Is $48 sort of the magic number on the stock price or might that creep up over time?

John, it is Mike Jackson. Our capital allocation philosophy remains unchanged. First investments in existing business and greenfield opportunities. Then we take a close look at the pricing in the acquisition market and whether there are strategic fit. And then on the stock, if you look at our track record, it is pretty much when we think there is a buying opportunity relative to where we think the stock is going to be in the future and clearly with the stress in the market for the last six weeks, we viewed that as a buying opportunity and took that step.

So I cannot give you a magic number, I will not give you a magic number. But I think if you look at AutoNation as a company, I think we are really good at three things, operational excellence, we are in the nitty-gritty retail business. We never lose sight of that. Look at our performance during the downturn. Investment in strategic capabilities, even if they add cost for an interim period. And finally, capital allocation. Those are the three things we put our energy into and I will stand on our track record.

Okay. And then just one more on floorplan assistance, it seems like the assistance has gone up relative to the expense. Is there anything going on where floorplan assistance has gotten a little bit more robust as inventories have crept up?

Part of that, John, is volume but then also there was a change in a premium luxury manufacturer floorplan program so those are the two combined factors that you see resulting in the higher assistance.

Okay. And then just lastly on F&I PVR [1370] at (inaudible), there is a lot of buzz about the CFPB and how this is all going to be dealt with. Mike, what is your view or all of your's view on what could happen as far as rate caps or do you just go to straight flats or what kind of impact can this have on your business? I you have dealt with this kind of stuff in the past. I'm just trying to understand what your current thinking is there and how far this 1370 could potentially go?

So within the 1370, about $500 of that is the fees that we are receiving from the bank so that is step one. I think the business model absolutely is a winner for all parties and all parties acknowledge that. That includes CFPB. So I don't expect a structural change in the business model.

Now everybody is trying to find common ground where the amount of discretion at the store level can be restricted to the point that the CFPB feels much more comfortable that the possibility of discrimination has been restricted. Whether that leads to more caps, I don't see flats or a solution like in NADA proposed which we are going to try in a few stores -- I call it the Pacifico model, where it is a markdown model where management has to sign off on it. I think there is a lot of discussion.

I think at the end of the day though, the business model serves the marketplace, the lenders and us extremely well. It is very effective, very efficient for everyone. There is a reason that 80% of all the loans are originated through the dealers because we are very good at it with a lot of added value, saves the customers a lot of money and do it very effectively for the bank.

So I don't know the end of the story yet and I think it will be an ongoing story but there will be common ground and I do not expect the fundamental business model to change. Really our progress on an improvement in financial services is around other products. Mike, why don't you talk about that rather than the fees from the banks.

Mike called it out. I think 67% of our gross there is generated from products and our real focus is on vehicle service contracts and prepaid maintenance products and we have dramatically improved our penetration there. A lot of our focus, our fee plans are driven towards those two products and they drive people into our service drive and really make a difference in customer retention. So the organization is focused on providing value-added products there and I think doing a very good job.

Great. Just one last question on same-store sales up a little bit less than 1% on a unit basis for new vehicles. That seemed a bit lower than your monthly releases would have indicated. Is there anything going on on timing there and also are you making the trade-off on lower volumes in the market to get the higher grosses that you got which were pretty impressive in the quarter?

Just to be clear, our monthly reporting is based on the manufacturer calendar which is quite different than a GAAP calendar. Sometimes it could be two or three days off. I think in the fourth quarter, we had two additional selling days according to the manufacturer calendar.

So that monthly figure is what we have reported to manufacturers in their retail reporting system. It is the same number that they are announcing and it is on their calendar. Then when we announce our financial results of course it is on a GAAP calendar with very strict revenue recognition standards and from time to time they are not going to line up precisely.

Got you. Okay. Very helpful. Thank you.

Rick Nelson, Stephens.

A question on margin improvement and new cars. This is the first time we have seen that actually I think going back 10 or 11 quarters. What do you think drove that and how those that jive with the comments you have made about inventory creep in the industry?

Rick, it is Mike Maroone. The improvement in the fourth quarter is in part seasonality. Most fourth quarters have a heavier weighting of premium luxury. There was a mix shift even within premium luxury and then there was some spectacular product launches and we will call out both the CLA and the S-class with Mercedes and to execute those two and we have a big Mercedes footprint, it really helped.

But the whole premium luxury segment was strong and it really helped to offset some real pressure in the import segment and then the domestic segment was quite stable and pretty pleased with our margin management. But certainly the quarter was influenced by the premium luxury side.

Also call out that the premium luxury segment was like 46% of our segment income so it is a really strong premium luxury quarter and we got a lot of benefit from it.

Rick, this is Mike Jackson. On the inventory situation first, our inventories are in line. But when I talk about the industry inventory, I am really talking about the Detroit 3; the Asians are fine in premium luxury, the German inventories are fine. But we are looking at industry domestic inventory at retail of 100+ days.

Now they will tell you it is something much lower than that but that is because when they calculate retail inventory, they are including their fleet sales into the selling rate which of course you should not do, you should divide retail sales into retail inventory. That is the real world and there we are saying hey, look, 100 days -- I will give the Detroit 3, they should probably have the highest inventory because they have the broadest and most complex product offering, particularly in trucks and there is a lot of specific trucks you have to offer. So I will give you that.

But 100 days is too much and I certainly don't want to wake up and all of a sudden it is 130 days or 150 days. So I think it is an appropriate subject to start the conversation about and that over time I think it is very manageable. As Mike said, the front-end grosses on the domestics are fine, there is no trouble yet. But we all know that if your inventories get out of control, the marketplace dictates to you you no longer control the marketplace. So it is time to raise the subject and have an appropriate conversation.

Thanks for that. That's helpful. So more of a warning sign than a current problem.

Right. Correct.

Any comments on early 2014 sales? I know we have had weather challenges in a lot of the country.

No, we release next week and I have learned my lesson never to comment on current month sales. We give the most visibility of anybody in the auto retail space by announcing each month and you will have our number next week with our thoughts on it.

That is fair. Thanks a lot and good luck.

Thank you, Rick.

Michael Ward, Sterne.

Thank you very much. Good morning everyone and thank you for taking the call. Cheryl, first of all on the acquisitions in 2013, it doesn't look like there was much of an impact from the transaction made in the second quarter in Dallas and in Arizona. Is there something with the accounting or am I missing something?

You will see that difference in the total and same store. When you look at prior year, we had the Boardwalk acquisitions which occurred and that was a larger transaction than the ones that we have done this year so they are flowing through the numbers.

So what is a good target revenue impact from the second-quarter acquisitions in 2014?

We haven't called out the specifics related to each acquisition. I think when you think about it in the aggregate, we have got that extra $1.1 billion of revenue that you are going to expect over time as the add points also come up to speed as well.

But some of that doesn't kick in until 2015 correct with the new --?

Correct with the add point build out particularly, some of the -- an Audi add point build out and then two additional Mercedes that we are going to be building out as well.

Mike or Jon, can you talk a little bit about maybe the bid ask spread for acquisitions because it seems like the acquisition pace is accelerating. Has the bid ask spread come together or the quality of stores, am I right in assuming that it is picking up?

Mike, this is Jon. There is a solid pipeline out there right now and I think we will see it for the next few years. I think there is a good balance on price. What I would say is it very deal specific. We look at a lot of deals and first of course, we are looking to make sure they fit within our footprint and our brand and market criteria.

And then when you get down to price on individual deals, there are sellers out there that have completely unrealistic expectations. And then certainly we also run into sellers with reasonable expectations where we can put a fair price on the table for them. That also works within our return criteria and then we are able to execute and get those deals done.

But I think the next few years there will be sellers, a good flow of sellers, entering the market and I think there will be a good balance on the purchase price.

Thank you. Just one last thing. How was showroom traffic and the closure rates in the fourth quarter versus last year?

It is Mike Maroone, Mike. Showroom traffic was up and of course, the e-commerce channel was extremely active so was the phone and the shopping patterns have changed some but all in all, our showroom traffic was up about 3% and we were able to convert at a very strong rate in order to get the volume we did. So we are pleased with our traffic. You'd always like more.

Do you think that is a reflection of your branding strategy or is it just the overall market?

I think the overall market, it reflects the overall market and I think you will see continuing strength with our branding strategy. We did our first branding a year ago, we didn't completely branding until June so I think you will see us continue to gain momentum there but still work to do.

Thank you very much.

Patrick Archambault, Goldman Sachs.

Thank you very much. Two questions left for me. First, on the used side, if you just look at the used to new ratio it has been kind up slightly in previous quarters and seems to have really kind of taken off here. I have maybe up 0.1, 0.2 and then sort of 0.6 up this particular quarter. So maybe you could just elaborate how much of that is AutoNation specific efforts, how much of that is maybe some shifts within the segments used versus new that you are seeing in the market. That would be my first one.

It's Mike Maroone, Patrick. There is a lot of interest in the used segment and I think our execution is better than what it has been in the past. We have really worked hard at acquiring vehicles, both winning trades in the showroom and using other methods outside the store to acquire vehicles and I think it has helped us a lot. We have also wholesaled less so we are retailing higher mileage vehicles and continue to perform at a higher level.

So to us it is both volume and margin and this is our second straight quarter I believe of 10% same-store growth and we are pleased with that. So I think there is still more opportunity in used. Just have to really work hard to get the right inventory at the right time and the right price.

I would also add that the CPO business was stronger so I think 32% of our vehicles sold in used were CPO and that was like 29% a year ago so more strength in CPO as well.

That is helpful and just tying that together, is that ratio which is I think had a lot of people model and think about it, is that something that can continue to rise in your opinion in subsequent years and quarters?

We think it is a continued opportunity for us, yes.

Okay, great. I mean one minor clarification from my end as well. There was a question relating to the additional leverage on SG&A. I think technology was mentioned as being a part of that outlook and I wasn't quite sure whether that was be careful because there is going to be some investments so we may not get the same level of SG&A leverage on a year-on-year basis from subsequent quarters or was the commentary technology investments we have made will allow us to be more efficient and we will continue to be able to grind that ratio down?

This is Mike Jackson. They are both true, you just have to get the order right. We are in the investment stage where I would say we are adding more costs than for what we are getting back but ultimately we are absolutely convinced it is going to drive tremendous productivity in the business.

It is a little like that phase we went through with the shared service center where we had an extended period where we were investing that took our costs higher that then gave us tremendous capability and a lower cost basis. So we are into one of those phases for digital and I think that will continue for all of 2014.

Very helpful. Thanks a lot, guys.

Rod Lache, Deutsche Bank.

Good morning. This is Dan Galves for Rod. Just on the used market, just looking for your view on positives and negatives on used volumes going forward. It seems like lease terminations, an increase in lease termination could be positive, maybe recovery and scrappage rates could cause more churn in the used market. Do you agree with those and what other positives and negatives should we be thinking about?

It is Mike Maroone. I think you called out the right positives. Certainly there is more lease returns. You've got select manufacturers that near the end of the recovery really use lease as a lever to get volume. We love that and those vehicles come in at a very sweet spot in terms of age and mileage.

I can't think of many negatives in the used business other than it is still competitive trying to buy older vehicles and really competing to win those trades. It is a very competitive business. As you know, we buy them one unit at a time but we are very optimistic about the used business and really are continuing to work to make sure that we are operating at an optimal level.

Thanks. How much volume are you getting from kind of the direct buy of used car programs without the customer buying a new vehicle?

It is a series of different things that we are testing. I mean we are buying trade-ins from Tesla, we are doing guaranteed offers, we have got a centralized buying team. There is probably 1000 units a quarter that we get from news sources and we are continuing to mine for other methods of getting other vehicles.

So to us it is about building a capability and I think our capability of buying vehicles outside our stores is one that is very important to grow long term.

Okay, great. And then just take a couple on customer care. As we look at -- when you sell a used vehicle, just wondering if you are getting better take rates on the -- or better retention on the service business from the used cars that you are selling now versus maybe historically? Do you see that as an opportunity to drive excess growth in parts and service over the next couple of years?

It is certainly a big opportunity and I would say traditionally the industry has not been great at converting those customers. We put a lot more emphasis in it. The obvious target is the certified preowned because that is often a new vehicle in tender who has similar purchase and servicing characteristics. So we are putting a lot of effort there and I think it is a continuing growth opportunity for us.

We really appreciate that business and I think our customers appreciate the levels of service we are able to provide and how competitive we are pricewise.

Okay, great. Then just one follow-up. If we look at the last three years of your retail sales volume, it is quite a bit higher today than it was let's say a year ago, maybe 10% but then if we look at maybe a six-year group of vehicles, it is kind of flat. So what is the bigger driver for your customer care business over the next year or two? Just looking for your sense of kind of what the population of vehicles is going to do for you over the next couple of years?

It is Mike Jackson. I think depending how far back you go, you have to recognize that we had a structural shift in our mix of stores. We reduced our domestic presence and increased our German premium luxury presence. We think that is a better balanced portfolio going forward. Obviously the volume is lower in German premium luxury as far as unit volume goes. But the business model is very compelling and the customer care business is very compelling. Overall we are optimistic about the customer care business that we can grow it in the mid-single digits going forward for the next few years and then we will see where the cycle really is.

Okay. I appreciate the color. Thanks.

Colin Langan, UBS.

Thanks for taking my question. You talked earlier about overall new vehicle margins and highlighted luxury but the luxury margin itself looked like it expanded quite a bit almost 700 basis points year-over-year. Anything that is driving the actual luxury margins to be so much better this quarter?

It was in particular a very good quarter for Mercedes-Benz. They had the a simultaneous launch of a new S-Class and a CLA. Both products were extremely well accepted in the marketplace and having both ends of the price spectrum, having new products at the same time drove tremendous traffic into the stores and we are basically sold out on those products going into 2014, going into this year.

So that's certainly -- and the fact that of our premium luxury business almost 9% to 10% of it is Mercedes-Benz was a big factor in our performance but the entire premium luxury business was excellent. But on the cadence of new products, Mercedes hit it just right.

Okay. Any color there -- the press release you are selling Auto USA. I mean will that be meaningful at all until next year? It seems like a very small business, right?

It is a small business. It is a business that's served us well but it is not a core business to us and we felt that it was better off in other hands. We appreciate the contribution they made but again, it is strategically we believe we can acquire the leads we need through other sources including the company we sold it to, Autobytel.

And the profit impact is very, very small?

Profit impact is small.

And then in terms of -- I'm not sure if I heard the numbers for parts and services. I believe you said warranty was up 13% year-over-year. I mean is that anything unique in the quarter that is driving the strong warranty?

We have seen strong warranty every quarter this year. I think it is the number of new product launches. Also the other thing that is influencing that is a number of manufacturers have moved to providing prepaid maintenance at no charge or included in the warranty so that number is growing and that number you could argue that is customer pay or warranty. It is officially categorized as warranty. I think that boosts that number somewhat but we are happy to have those customers and look forward to retaining them.

And it was up 13%, that's the right number?

That is correct.

And just one last question you talked earlier about the CFPB. Have you noticed any changes in the lenders you have worked with in terms of their policies? And when would you expect that you may see some of the changes? Is that something coming shortly or is that more toward the end of the year?

I think what is very interesting is there have been no changes and if you look at the Ally agreement, there are no operational changes in that agreement whatsoever. So you would think that if something significant was coming where certainly the government has a lot of leverage with Ally, it would have happened then but it didn't.

Our discussions with the lenders are that they are so satisfied with the current business model and how it works that they feel there will be some other solution to find common ground with CFPB. So it is interesting, nothing has changed yet and you have the first enforcement action and from an operating point of view, nothing changed.

Okay. Thank you for the color.

Brett Hoselton, KeyBanc.

Good morning. Can you comment on the gross profit per unit on the new vehicle side. Your expectations for the trend going forward obviously there has been some pressure on the import side. It looks like it continued on a year-over-year basis. I think last quarter you commented on it possibly stabilizing. And then I think in your comments in January, you are suggesting that there could be some additional pressure maybe on the domestic side going forward. But what are your expectations for the gross profit?

I think the domestic side, we are going to manage our inventories in a very disciplined way and we are hoping that the manufacturers do. So we are not concerned with that. I think we can maintain those. I think premium luxury is a good opportunity for us and there is certainly a lot of pressure on the import side really in specific models and that is where the challenge is and it is difficult to predict how that plays out so you almost have to look quarter by quarter as to what the mix ends up and that will help drive the margin.

But we are working very hard at managing our margins, getting lots of data, supplying our stores with lots of data on what we believe the -- what the prices are in the market and I think it helps them to manage those margins but it is a big challenge. That's for sure.

And then switching gears just on the outlook for acquisitions, 12 franchises, four premium luxury awarded, $1.1 billion in incremental revenue as they roll out. Do you think that that is a pace that you can sustain going forward? Do you think that it diminishes from where we are currently at or do you think it actually accelerates?

Brett, this is Jon. I think similar to share buyback and in the acquisition arena there is a good pipeline out there but it is difficult to predict. So we know that in the markets where we are looking to add brands that over the next five year, there will be attractive acquisition opportunities that come to market so we feel good about over the next few years there is going to be a solid pipeline and hopefully we will be able to execute on those getting to the right price.

But it is difficult to predict when a seller that we are targeting will enter the marketplace and when a deal will get done. So we will continue to be active but I can't give you a prediction on deal flow this year or how it will compare to what we have done.

This is Mike Jackson. We view it very opportunistically and in a very disciplined way. We could do a lot or we could do none. It really depends on the quality of the deals and the price. The same thing with share repurchase. There is no fixed plan that we go into the year with and we are in the great position that we can do it all, we can invest in stores, do acquisitions, do greenfields, repurchase share. But if the opportunity isn't there from a price value point of view, we will be very patient and very disciplined.

That is why it is hard, we don't have a meeting where we set a goal and say this is what is going to happen. We really take them a deal of a time and if it is right, we do it. If there's a lot of deals that are right, we will do a lot of deals. If there is no deals that are right, then we won't do any deals. It is hard to predict.

Thank you very much.

Brian Sponheimer, Gabelli & Company.

Good morning. Thank you very much for having me. I want to go back to your comments about in industry inventory and specifically that of the Detroit 3. Taking a little bit deeper dive particularly from a product standpoint, is there any corresponding relationship between where perhaps the imports have become more aggressive from a pricing standpoint and where you are seeing a little bit more slack from the American manufacturers?

No, I think the Detroit 3 have done a very good job of marketing their vehicles in a very professional way and a very disciplined way. I think they've hit by and large most of their sales targets. All I am observing is though that they have produced enough vehicles not only to support the growth, not only to support an appropriate increase of inventory for higher sales levels but inventory beyond that. There is absolutely no reason to take inventories up to 100 days. And the reason it works that way we all know because they use a calculation that includes fleet sales to artificially understate how much inventory is out there and they have revenue recognition on what they wholesale.

So far it is fine but it is something we should watch this year because if it goes to 130 days or 150 days, that will be a problem.

Understood. Switching gears a little bit in talking about some of the new product introductions by the luxury manufacturers, kind of in the value luxury market whether it is the CLA, the A3, etc., what kind of trade-ins are you getting on these cars as they are coming in? Is it pulling from the Acuras of the world or are you finding a different buyer?

I think they are very successfully attracting new buyers that are significantly younger and are coming to the German brands for the first time whether that is coming out of a used car or from another brand.

So we see a lot of strength in the German premium luxury. It is impressive that they are able to introduce products on the full range of the spectrum from $30,000 through $200,000 plus products that have a unique positioning in the marketplace. Admittedly unique pricing but they are very differentiated products. We have a lot of optimism and confidence there.

Over time do you see this as possibly being brand dilutive five, 10 years out?

No, I do not. I think if they were compromising the product, that would be another story. If they were getting to the price point by trying to do it on the cheap, there is no question that would be a problem. But whether you are looking at the very innovative and creative i3 from BMW, which is getting -- there is a lot of anticipation for, or to the CLA that they customers are absolutely delighted, they don't feel they have bought a cheap Mercedes, they think they bought the right car for them that they could afford at that price point.

So when we see that kind of customer satisfaction around these products at a different price point and a different age, they have got it well thought out and they are executing it well.

All right. Thank you. I appreciate the color. Nice quarter.

Thank you.

David Whiston, MorningStar.

Good morning. Thanks for taking my question. For Mike Jackson, can you just comment on why you are not rolling out the NADA proposal at all stores all at once? Are you just waiting to see how Washington reacts?

We will be piloting it or taking it into certain stores in the next few months to see exactly how it works, how difficult it is to roll out and how disruptive it is and what kind of issues we would have to roll it out on a broader basis. That is the way we do everything.

There is no way I am subjecting the entire Company to a rollout of something from one day to the next when we haven't figured out exactly how it would work and what the results would be. And because I don't know -- you don't know for sure whether it really takes you down to the road of achieving the objectives and how disruptive it is.

So I think it is very prudent. I applaud NADA for putting it together. I think it is a step in the right direction. We are going to take it into stores and see how it works and also we know we don't have any systemic issue with certainly our Company. We have seen the test results so I think we have time to do this in a prudent manner.

Okay, that is helpful. Back to share buybacks one last time. Just a little bit surprised you didn't buying hardly any shares throughout 2013 then all of a sudden accelerate to Q4 and again early this year. Did something change in the M&A pipeline relative to the first half of the year because it just would have made more sense I think to buy it back when the shares were lower, no?

Well, I am not going to give you a window into the inner workings of all the factors we look at. I will stand on the record that we have now invested $7 billion in share buyback at an average price of $17 a share. I think that we have that pretty figured out. We have rebalanced our portfolio by divesting stores that we feel couldn't fit our model and bought other stores instead and here we are earnings per share of $2.98. And considering everything that the economy has been through, the auto industry has been through to achieve that over these last five, six years really took this combination of operational excellence, strategic initiatives and very shrewd, smart and disciplined capital allocations.

But you would have to come work here if you really want to know the inner workings of how we do it. But I stand on our record.

Okay, that is fair. Thanks for the color. Just one final question on luxury mix shift. Mike Maroone, you mentioned I think earlier in the call that there was a mix shift improvement in that segment. I'm just surprised on that given the CLA launch so did the S-Class just (inaudible) all that. Any mixed headwinds from CLA?

I don't see any headwinds at all. I just wish we could get more of them. The customer acceptance has been phenomenal. I think the mix shift that helped drive it really is the S-Class and the S-Class is just an incredible car and everyone we got we sold and as Mike Jackson said, we have a waiting list for them as far as you can see. So I think that is part of it.

There were certainly some other new product introductions that we benefited from but those are the two that really come to mind.

Okay. Thanks very much.

Thank you everyone for joining us today.

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