Group 1 Automotive Inc (GPI) 2018 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Group 1 Automotive 2018 Fourth Quarter and Full Year Financial Results Conference Call. Please be advised that this call is being recorded. I would now like to turn the call over to Mr. Pete DeLongchamps, Group 1's Senior Vice President of Manufacturer Relations, Financial Services & Public Affairs. Please go ahead, Mr. DeLongchamps.

Thank you, Denise. Good morning, everyone, and welcome to today's call. The earnings release we issued this morning and a related slide presentation that include reconciliations related to the adjusted results we'll refer to on this call for comparison purposes have been posted to Group 1's website.

Before we begin, I'd like to make some brief remarks about forward-looking statements and the use of non-GAAP financial measures. Except for historical information mentioned during the call, statements made by management of Group 1 Automotive are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve both known and unknown risks and uncertainties, which may cause the company's actual results in future periods to differ materially from forecasted results. Those risks include, but are not limited to risks associated with pricing, volume and the condition of market. Those and others risks are described in the company's filings with the Securities and Exchange Commission over the last 12 months. Copies of these filings are available from both the SEC and the company.

In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, the company provides reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on its website.

Participating with me today on the call, Earl Hesterberg, our President and Chief Executive Officer; John Rickel, our Senior Vice President and Chief Financial Officer; Daryl Kenningham, our President of U.S. Operations; and Lance Parker, our Vice President and Corporate Controller.

Please note that all comparisons in the prepared remarks are of the same prior year period unless otherwise stated.

I'd now like to hand the call over to Earl.

Thank you, Pete, and good morning, everyone. 2018 was a year that, again, presented unique industry, political and macroeconomic challenges for us. Nevertheless, our operating teams managed through these challenges and we were able to grow the top line revenue of our company as well as adjusted earnings per share.

Our U.S. business was subject to very difficult comparisons due to the unprecedented sales pace in our Houston and Beaumont markets subsequent to Hurricane Harvey's 2017 devastation. Houston and Beaumont new vehicle unit sales were down 16% in the fourth quarter this year following a 23% decline in the third quarter. Despite these difficult comps, our U.S. operations team delivered positive full year same-store gross profit growth through a continued focus on improving our used vehicle and after sales business as well as record-setting year in F&I.

Our U.K. business was once again hampered by political turmoil as the overhang of Brexit has continued to weigh on consumer confidence, driving a new vehicle retail market decline of 7%. Additionally, the WLTP legislation that was enacted across the EU in September greatly disrupted our supply chain and had a disproportionately negative impact on our most profitable business, Audi. Despite these significant headwinds, our U.K. team managed to keep same-store gross profit flat on a constant currency basis.

The Brazilian market had a very contentious presidential election in 2018 and the result appears to bode well for the future of the local auto industry. 2018 new vehicle industry sales increased double digits and current estimates imply that this pace should repeat in 2019.

The auto industry is still less than 2/3 of the 3.8 million unit peak reached in 2012 and 2013, but recent trends suggest that local auto sector recovery continues to gain momentum.

Despite all of these factors, we're proud to announce that for the full year of 2018 Group 1 reported a 10% increase in net income to an all-time record of $179.6 million and a 15% increase in adjusted earnings per diluted share to an all-time record of $8.91. Group 1 retailed over 170,000 new and approximately 150,000 used vehicles delivering record revenue of $11.6 billion, an increase of 4%.

Turning to our fourth quarter results. I'm pleased to report that Group 1 earned $43.8 million of adjusted net income for the quarter. This equates to record fourth quarter adjusted EPS of $2.31 per diluted share, an increase of 10% over a very tough comparison from the prior year.

As previously mentioned, our 2018 fourth quarter Houston and Beaumont new vehicle unit sales were down 16% from 2017, which distorts our current U.S. same-store results. Also, our GAAP net income and EPS numbers are greatly distorted on a year-over-year basis due to the revaluation of U.S. deferred tax liabilities in the fourth quarter of 2017 associated with the new tax law passed last year. Also impacting the quarter was a severe decline in U.K. new vehicle unit sales due to a continuing shortage of 2019 model year Audis as the brand works to recover from the new WLTP legislation.

Our fourth quarter same-store U.K. new vehicle unit sales declined 16% from the prior year with a 48% decrease in our Audi sales driving their decline.

This decrease was consistent with Audi's performance across the U.K. industry in total. We expect most of these sales to be recovered over the course of the next 2 quarters. We were able to mitigate the financial pressure from significantly lower U.S. and U.K. new vehicle sales volume with solid used car and F&I performances across the company and aggressive cost-reduction efforts in all of our markets. Further offsetting these headwinds is a significant reduction in our outstanding share count. For the full year, we repurchased over 2.8 million shares, which represents 14% of our beginning 2018 common share count.

Turning to our business segments. During the quarter, we retailed over 42,000 new vehicles. Total consolidated new vehicle revenues decreased 4% on a constant currency basis, driven by a 6% decrease in unit sales related to Hurricane Harvey comps and U.K. emissions legislation mentioned earlier.

Our new unit sales geographic mix was 75% U.S., 19% U.K., and 6% Brazil. Our new vehicle brand mix was led by Toyota Lexus sales, which accounted for 26% of our new units, BMW/MINI represented 12%, VW/Audi and Honda/Acura both represented 11% and Ford represented 10% of our new unit sales.

During the quarter, we retailed over 36,000 used retail units, driven by strong performances in both the U.S. and U.K. Total consolidated used vehicle revenues grew 8% on a constant currency basis as we sold 6% more units with the average used vehicle selling price increasing 2%.

Total used vehicle gross profit increased 9% on a constant currency basis as the unit increase combined with total used vehicle gross profit per unit increase of 3%. The used volume and per unit margin increase were the result of our corporate-wide focus in this area of our business and especially our Val-U-Line initiative in the U.S.

Total consolidated after sales revenue increased 4% on a constant currency basis, driven by increases in customer pay of 7%, wholesale parts of 5% and warranty of 3%, partially offset by a 4% decline in collision.

Adjusted finance and insurance gross profit increased 8% on a consolidated constant currency basis. This growth was driven by increases in retail units of 2% and F&I per retail unit of 6%.

Regarding our geographic segment results, I'd like to turn the call over to Daryl Kenningham, President of U.S. Operations, to discuss our U.S. quarterly results before I cover the U.K. and Brazil. Daryl?

Thank you, Earl. We were generally pleased with our performance in the U.S. in the fourth quarter despite very difficult comps versus a year ago. As Earl mentioned, Hurricane Harvey significantly distorted our year-over-year operating metrics.

Despite a 10% decline in same-store new vehicle gross profit from the prior year, we were able to generate a slight increase in total gross profit because of very strong performance in our used and F&I business segments.

On a year-over-year same store basis, I'm particularly proud of the fact that we continued to generate strong growth in used retail unit sales where we saw 11% improvement. Val-U-Line retail unit sales generated over 10% of our quarterly used volume during the quarter, which coupled with significantly improved wholesale results were the primary drivers in our same-store used vehicle gross profit growth.

The wholesale improvement reflected lower reliance on the used vehicle wholesale markets where volumes declined 18%, but our total wholesale profitability improved. In addition to the 11% same-store retail sales increase, we increased our total used vehicle gross profit per unit by $42.

Moving forward, our intention is to continue to focus on keeping more units for retail.

Additionally, we are piloting new pricing models that we believe will improve our gross profit opportunities and optimize our customer traffic. Our quarterly after sales business grew 2.1% on a same-store basis. The results were negatively impacted by a 2% decline in warranty revenues, which could be primarily explained by the lapping of Takata airbag recall campaign and a 5% decline in collision revenues, which were up against a tough comp due to Hurricane Harvey.

Wholesale parts revenue increased 4% and customer pay service generated a strong 6% increase on a same-store basis. We're especially pleased with the customer pay growth at the 57 stores where our 4-day work week was fully implemented for the entire quarter. On a same-store basis, we increased technician headcount by 12% in those stores and service adviser headcount by 21%. This additional staffing has allowed us to add significant capacity without any additional capital investment and has resulted in customer pay service growth that is double our other locations.

Looking forward to 2019, now that we have the very tough warranty comps behind us, we would expect after-sales growth to return closer to mid-single-digit range.

F&I income per retail unit for the quarter was a record $1,760 and for the full year was $1,705, this despite headwinds from our Val-U-Line initiative and rising interest rates.

Our digital efforts continue to show great progress. Our goal is to do business when and how our customers want to do business with us. Toward that end, we have completed the pilot phase of our digital retailing initiative and we couldn't be happier with the results. Our closing rates were outstanding, the front and back gross profit levels were better than expected and the customer feedback has been excellent. We've now started a nationwide rollout and expect digital retailing capability to be in all of our U.S. stores before the end of the second quarter.

In addition, customers scheduling service appointments online grew 23% versus the fourth quarter of 2017 and now over 25% of our service appointments are made online.

And in 2018, we were able to dramatically increase the efficiency of our marketing spend as we drove a 43% increase in our organic customer traffic. Organic web traffic is much more productive than traffic generated from third-party websites. All of these digital initiatives lower our cost and make it easier for our customers to do business with us.

And lastly, although SG&A delevered from 69.0% to 70.3% on a same-store basis for the quarter, we were up against very tough Harvey comps. Our second half 2018 adjusted SG&A was 71.0%, a sharp decline over the first half adjusted SG&A of 72.8%, which represents the intense focus we placed on controlling costs after a slow start to the year.

I will now turn the call back over to Earl.

Thanks, Daryl. As mentioned earlier, our U.K. operations were once again significantly disrupted in the quarter due to the WLTP legislation that came into effect on September 1. Total industry was down 4% for the quarter, but the Audi brand in the U.K. was disproportionately affected with a 46% decline. In areas that we can control, used vehicles, after sales and F&I, our team once again delivered strong same-store growth. Our used retail unit sales increased 10% and total used gross profit increased 5% on a constant currency basis.

F&I per unit increased 7% and after sales gross profit increased 3%, both on a constant currency basis.

Now turning Brazil -- to Brazil, which had another very strong quarter as we continue to benefit from the ongoing economic recovery, coupled with our process improvements and strong cost control.

Total same-store gross profit increased 11% on a constant currency basis, driven by a 44% increase in F&I, a 12% increase in new vehicles and a 5% increase in after sales. Our team did a tremendous job leveraging this additional gross profit as SG&A declined 570 basis points to 83.4% and operating margin increased 70 basis points to 1.7%. We continue to be very proud of the work our local team has done and are well positioned to take full advantage of the recovering market.

I'll now turn the call over to our CFO, John Rickel, to go over some of our fourth quarter financial results in more detail.

Thank you, Earl, and good morning, everyone. Before I cover my prepared remarks, I want to take just a moment and address some confusion around our earnings consensus that's arisen this morning. As of 10:30 p.m. Central Standard Time last night, the consensus in Bloomberg and in FactSet was basically $2.29 per share. Sometime over the overnight hours a new estimate was entered into the system from our Morgan Stanley analyst who increased his quarterly estimate from $2.25 to $2.58, an almost 15% increase in expected earnings. I would note there was no covering note that went with this increase. So I cannot -- able to address what changed in his expectations. If you look now in FactSet, it still reflects $2.29, which we believe is the more appropriate estimate. Bloomberg, however, has picked up this inflated estimate that came out late and is now reflecting a higher number. We would respectfully suggest to our covering analysts and to our investors that the appropriate thing to do is to ignore that higher estimate that came in late and continue to reflect what is in FactSet at $2.29 as our agreed consensus for the quarter.

With that, for the fourth quarter of 2018, our adjusted net income decreased $0.5 million or 1.1% over our comparable 2017 results to $43.8 million. These 2018 adjusted quarterly results exclude $13.1 million of net charges, primarily consisting of $12.7 million of noncash franchise rights impairments arising from our annual intangible asset testing. The prior year's adjusted results exclude $66.2 million of net after-tax gains, primarily related to reduction in the corporate income tax rate enacted in the U.S. Tax Reform Bill. This lower tax rate reduced our deferred income tax liabilities by approximately $73 million. This benefit was partially offset by net noncash asset impairment charges of approximately $6.5 million. On a fully diluted per share basis, adjusted earnings increased 9.5% to $2.31, a fourth quarter record.

For the quarter, we generated $2.9 billion in total revenues, which was a slight decrease from the prior year with headwinds due to Hurricane Harvey comps, the impact of the WLTP legislation on new vehicle sales in the U.K. and the impact of exchange rates. Our gross profit increased 1.2%, however, as gross margin increased 20 basis points to 14.8%.

As a percent of gross profit, adjusted SG&A increased 220 basis points to 74.8% as the above average gross profit generated by strong Hurricane Harvey replacement demand significantly contributed to a very difficult SG&A comp.

Floorplan interest expense increased by $2.8 million or 21% from the prior year to $16.5 million, reflecting higher LIBOR interest rates versus the fourth quarter of last year. Other interest expense was basically flat.

Our consolidated adjusted effective tax rate for the fourth quarter was 22.7% and for the full year was 23.4%. We forecast our full year 2019 tax rate to be between 23% and 23.5%.

Turning to our consolidated liquidity and capital structure. As of December 31, we had $15.9 million of cash on hand and another $33.7 million that was invested in our floorplan offset accounts, bringing immediately available funds to a total of $49.6 million.

Additionally, there is $277 million of available capacity under our U.S. acquisition line. For the year 2018, adjusted operating cash flow was $309 million.

During the fourth quarter, we repurchased 1.3 million shares at an average price of $57.31 for a total of $75.3 million. We have $49.7 million of repurchase authorization remaining. As Earl stated, for the full year, we repurchased over 2.8 million shares at an average price of $63.75 for a total of $181.7 million.

These repurchases totaled 14% of our beginning of the year share float. Our outstanding common share count as of today is 17.7 million shares.

Also during the fourth quarter, we used $4.8 million to pay dividends of $0.26 per share, an increase of 4% per share over the fourth quarter a year ago and an annualized yield of approximately 1.7%.

For additional detail regarding our financial condition, please refer to the schedules of additional information attached to the news release as well as the investor presentation posted on our website.

I will now turn the call back over to Earl.

Thanks, John. Related to our corporate development efforts, the company is pleased to announce the opening of 4 OEM granted add points. In November in the U.S. a new Acura dealership was opened in Sugar Land, Texas, a suburb of Houston, which increases our total Houston area dealership count to 17. Also in November in Brazil, we opened a Toyota add point in the city of São Paulo adjacent to our highest volume Honda dealership, which increases our Brazil dealership count to 18.

In December in the U.K., we opened a Skoda add point in Southend, north of London, using a facility that our Land Rover franchise recently vacated.

And finally, in January in the U.S., we opened a Porsche dealership in El Paso, which brings our total dealership count in that market to 6.

These acquisitions brought our total 2018 acquisition activity to 17 franchises, generating $615 million of annual revenues, and our year-to-date 2019 acquisition activity to one franchise generating $25 million in annual revenues.

Since our last earnings call, we have also disposed of a Hyundai franchise in Kansas City and a Mazda franchise in Houston as well as terminated a Vauxhall franchise in the U.K. and a Volvo franchise in Georgia. In total, these 4 franchises generated $65 million in trailing 12-month revenue. These dispositions are consistent with our strategy of disposing of underperforming assets and redeploying capital in ways that are beneficial to our shareholders.

Finally, before I turn the call over to the operator for your questions, let me update our market outlook for 2019.

For the U.S., we expect to see a slight pullback in the overall new vehicle industry. Total new vehicle sales in 2018 came in at 17.3 million units, a slight increase over 2017. We're anticipating a 2% decline in 2019 to around 17 million units. For the U.K., the new vehicle industry declined 7% in 2018 from 2.5 million unit sales in 2017 down to less than 2.4 million units. We expect the market to continue on the same path in 2019 with another 5% to 10% decline, which would equate the industry sales of around 2.2 million units. We believe that our brand exposure combined with the improved performance of our recent acquisitions will allow us to outperform the industry.

And for Brazil, the market improved more than we had anticipated at the beginning of the year. The industry unit sales increased from 2.2 million to 2.5 million units, a gain of nearly 14%. Given the positive signals we're seeing in the economy, we expect this trend to continue with an increase of another 10%-or-so to around 2.75 million units.

This concludes our prepared remarks. I'll now turn the call over to the operator to begin the question-and-answer session. Operator?

(Operator Instructions) And your first question will be from John Murphy of Bank of America Merrill Lynch.

Just a first question around WLTP and sort of the bounce-back that you're expecting sort of here in the near-term royalties based on your comments. You seem to think that you'll be able to catch up some of the lost demand, particularly your Audi dealerships. I'm just curious what gives you that confidence? Do you have sort of a backlog of orders and folks that are waiting where we'll see kind of a little bit of a boost early in 2019 as VW gets through these issues?

Well, we don't really have a big backlog just because we didn't have cars to show to people. But this is a time of year where you're starting to build an order bank for March to plate change month. So that's just beginning. But I would say I got my first level of confidence today. I saw January U.K. data and Audi retail sales, just retail, private retail only dropped 14% and they've been dropping more than 40% each of the previous 3 or 4 months. So it looks like things are starting to normalize. I don't think we have enough time to catch up through March, but I would certainly think by the mid-year point we should be okay. And what we do find is demand for the Audi brand is continuously strong. It's a very powerful brand in the U.K. Their business is very retail driven, not fleet driven. So we're starting to gain confidence by midyear things will be back to normal.

But would it be fair to say there is a little bit pent-up demand and that some of the consumers kind of held off? Is that...

Yes, sure. Yes, no doubt.

Okay. And then just a second question. With the slight pressure we're seeing on a dollar basis on new vehicle grosses in the U.S., you guys have done a great job of offsetting that with continuing to press F&I and PVR. I'm just curious how long do you think that sort of dynamic can go? And really simplistically, do you see more pressure on new vehicle grosses and upside in F&I and PVR or are we kind of reaching -- and I ask this question all the time and I apologize, but I mean, you keep beating us on the F&I PVR side. I mean, is that something at some point you stop giving up the new vehicle gross because you just can't get a whole lot more F&I PVR and we see it sort of correspond or sort of result in lower volume? I'm just trying to understand that dynamic and how far you can press it and how much the automakers are pressing on these grosses as well?

So John, it's Pete DeLongchamps. Certainly, we never intentionally work on giving up gross, but the margin pressure continues. We performed an F&I in all 3 countries. And I think that the dealerships remain resilient in their pricing models. Daryl mentioned some of the initiatives we have in place especially on the used front, but we think that we can continue to hold kind of where we are with the margins, but there is continued pressure on the front-end.

John, Daryl Kenningham. Nothing I would add about the F&I comments that Pete made. The front-end margins are a continual focus for us. That's a continual focus for the OEMs. They seem to be as interested in as well. And so we don't trade one for the other ever, try to get as much as we can on both.

John, this is John Rickel. Let me also add to kind of build there on Daryl's point. If you look other than kind of the fourth quarter this year when we're up against some pretty tough comps from the pretty robust demand that happened after Hurricane Harvey, our front margins have actually been pretty stable for 2-plus years. Daryl and the operating team have been focused on this and unlike a lot of the others in the sector, I don't think we get the credit that we should for the ability that the guys have done on holding margins. I'm looking at the numbers in front of me and they haven't dropped by more than kind of $50 over a 2-year period. So the operating team is actually doing a really good job of managing the front margin and then what we're able to deliver on the F&I has actually been able to grow the overall margins for us.

Okay that's helpful. And then just on Val-U-Line real quick, I mean, it sounds like that is going gangbusters for you out of the gates very quickly in the last couple quarters. Are there any kind of lessons learned there or any more opportunities on the used side as you're seeing something like this just have such great success so early on in the process?

We're pleased with Val-U-Line. We think around 10% of the mix is where -- the right level for us. We're always watching to make sure it's incremental, it is not substitutional, that's a continual focus for us. John, we're doing some other things that are -- it's kind of early right now but on some pricing that we started testing some things in -- late in the fourth quarter and early in the first quarter that we may have some more news later on. But for now, we're continually testing things like Val-U-Line and like additional internal auction capabilities and things like that. So a short answer is yes, we continue to want to push on those kind of initiatives.

Okay. And then lastly, real quickly on the digital efforts. It sounds like one of the big benefits is, it's much more efficient than lower cost advertising. My rough rule of thumb as I think about advertising, it's about 15% of SG&A; that might be a dated thought. I'm just curious, Daryl, if you would sort of underwrite that kind of rough guesstimate and as you get more efficient with this digital advertising, I mean, where could that number maybe go over time?

I don't have a guess on where we'd go over time, John. We are continually, though, trying to make our traffic more productive. It's not always a matter of just driving more traffic, it's a matter of driving productive traffic and that's what the organic shift allowed us to do in 2018 and we're continuing to do that with a lot of the digital efforts in 2019, including digital retail and we should be very happy with it.

I'm sorry, just one follow-up. Does that mean that the market reach on that dollar spend and your efforts is further than it traditionally has been? I mean, you're impacting a larger metro or market area?

I think, we're getting -- yes, better reach on it, yes, I do.

The next question will be from David Tamberrino of Goldman Sachs.

There were just a lot of questions from the previous analyst, but I think I still have a few more. On the parts and service side, you had about 100 basis points of margin pressure year-over-year. I don't know if you addressed that in your prepared remarks, if that's just from a mix shift or is there some incremental labor costs related to your capacity increases like higher labor rates that you need to pay. Maybe just walk me through that and if that should improve.

You hit it on the head there. We've brought on a number of additional technicians. Our technician count is up double digits and percentage-wise year-over-year. And that cost is in the cost of sales and lowers the margin effectively. So our focus is on driving margin and revenue across that capacity base.

Okay. So then, I mean...

Headcount in industry as you know is technician headcount. We feel like we made a lot of headway with that in 2018.

Yes, David, this is John Rickel. I would add to that. We think it's temporary, right. You bring them on, they're not as productive in the initial phase, but as the volumes grow that margin should return back to those more normalized levels.

Yes, got it. So I mean, you have, what, 47 stores? So maybe about half of your footprint right now starts to progress throughout the year, you'll staff up and then we should start to see that growth be a little bit more profitable as we start exiting 2019?

Yes. And just to be clear, we won't put 4-day work week in all of our stores. Some of them are too small. But we will have it in over 80% of the revenue that's represented in parts and service.

Got it. Okay. And then I do want to follow-up because there was a interesting question for the spend associated with the digital initiatives and then trying to understand what type of returns you're targeting getting out of that. Is there any rule of thumb you can share with us on dollars spent on third-party leads versus what you think it's going to be per GPI driven digital initiative leads and how that's going to accrue over time as you make that shift and bring in a different customer or have a different lead generation for the customer?

I can't tell you we have a target per se. I can tell you that what we have found is that when we can drive traffic organically, it's more productive and less costly to do it. And at some point that dynamic might change, but that's what we see today and that's how it will continue for us.

Okay. And then the last question from me definitely is, you still been active in the M&A market. What are you seeing from the smaller dealers and what are they looking to do? How are they addressing some of the headwinds that are happening in the industry as you are again, you're moving towards more digital, adding more service-based capacity? Is this something that they're able to do? And if not, is that going to present more opportunities for you to add and make more acquisitions going forward?

This is Earl. I think the biggest headwind for small dealers right now is probably similar to the one we have and that's increased floorplan cost. Interest rates were artificially low for a long time. I think also when times get a little tougher and the market growth goes away, scale has a little more benefit. So I also think there's a lot of unease in smaller dealerships about emerging trends like electric vehicles and so forth. So they're -- I know for a fact there are many more smaller dealerships that are considering selling. Right now, the math doesn't work well for companies like ours, at least for larger or high-quality acquisitions, just because of the reduced valuations of all the companies in our sector, but there will be more and more dealerships for sale, I think, continuously over time.

The next question will be from Rick Nelson of Stephens.

Got your comment on the Texas market. How you're thinking about that in 2019 as we fully lapped now this hurricane replacement demand?

Yes, Rick, this is John Rickel. On that front, yes, the tough comps from that are behind us. So that's cleaner. I'll let Daryl kind of address the overall demand environment, but the comps at least are now leveled out.

Yes, we feel good about Texas and after the spike in Q4 '17 due to Harvey, we feel like we're back in a more normal sales rate, but generally feel good about the market itself.

Got you. And Earl, you had mentioned lots of electric product coming down the pipeline. Like to get your thoughts on how you think that will impact parts and service and...

Well, there's no doubt that electric vehicles will have less service potential per unit, but it seems to be quite a long way off before they're a meaningful part of the units in operation. But it also seems that the amount of maintenance that'll require in terms of software updates and electronical diagnosis, and so forth, motor repairs and -- drive motor repairs and things like that are still to be determined. It seems like it will be a bigger issue in Europe and the U.K. long before it is here. We're looking forward to getting some experience with the Audi e-tron, which I think will be our first interesting experience in one of our primary brands. We have a reasonable number of orders for that and they should be fulfilled starting in April or May. So as we get experience, we'll be able to tell you more, but just functionally the way the -- the parts rack out, moving parts, that'll be less per unit, but I don't see that being any material impact on our business for a long, long time.

And eventually, I guess, those batteries get replaced and I would think that would encompass a big ticket?

Yes, yes. And we don't understand that dynamic yet. There's a lot of discussion right now on the winter in the Northern U.S. and throughout Europe about the range impact of cold weather on some of these batteries. So we're all going to learn together, I think, as these -- as the take rate for these vehicles increases.

Also like to get the early learnings with those pilot online purchasing, exactly what that encompasses? Is that soup to nuts including F&I and maybe some of the opportunities or headwinds you see there?

This is Daryl, Rick. We tested 3 different models. One of them included F&I, 2 of them did not. Before the end of this year, we expect F&I will be incorporated in all of them. We were encouraged by the F&I results, both online and off-line as those customers have started their process online. And it was in line with what we see on just terrestrial purchases. So that was a learning for us. Also, these customers that once they start this process online, they tend to buy a car at about double the rate of another customer that places an inquiry with us. So those are both things that we were extremely encouraged by and quite honestly surprised by. So we're comfortable enough, we're going to roll it out to the rest of the country, and we're excited about that.

And does this include home delivery as well?

We offer that. Yes, we do.

(Operator Instructions) The next question will be from David Whiston of MorningStar.

In the U.S., your used vehicle GPU was down over 10%, but volume was up about 13%. So can you just talk about is that mostly a Val-U-Line impact or are you overly discounting trying to get more volume right now?

Daryl Kenningham. Some of it is Val-U-Line impact, some of it is volume. When we sell something we also generate internal gross profit in our after sales departments and F&I profit as well. So we didn't purposely discount or give up margin, but we're focused on trying to drive volumes. John, I think, has something to add.

Yes, David, this is John Rickel. The other thing I would point out is what we really look at is total used profitability. If you look at total used, we actually were up on a same-store basis in the quarter in the U.S. and that's basically, as we're redeploying units from wholesale to retail, which is a key part of the Val-U-Line strategy, we're basically minimizing wholesale losses, actually generated some wholesale gains, and so the overall profitability of the used business was up $36 a unit in the quarter.

Okay, that's helpful. Also on going back to electrification, there was a lot of talk at the end of the year with Rivian and their truck at the L.A. Auto Show and now you got Ford doing a pure electric F-Series at some point and Tesla too. Do you think midsize and full-size pickup truck customers really want a pure electric pickup, there's something you think would just remain more in the domain of someone who really likes to spend a lot of money for something just very unique?

Well, we haven't heard any customer demand express to us yet and we are pretty dominant in Texas and Oklahoma. But I think, the OEMs are just trying to cover their bases at this point. And there could be a change in the cost of fossil fuels or tax price could be greater or something. So it seems to me all the OEMs are just trying to cover their bases so they can react to any changes in the market preference or taxation or whatever. But no, we don't have anybody knocking the doors down yet. But the dealer network and the OEMs, we have to be ready for change, so we'll adapt as it goes.

The next question will be from Michael Ward of Williams Trading.

Two things. It looks like here in the U.S., your new vehicle truck mix is about equal at the overall market. Now trucks sell for more than cars. Do you see a corresponding increase in F&I and also service and repair in trucks versus cars?

Well, the carry -- the finance carry is heavier on trucks just for the reason you mentioned, and so they provide a little more opportunity.

And on the F&I side, Mike, we do have a higher penetration of vehicle service contracts and maintenance contracts on trucks.

A higher penetration in trucks versus cars.

Yes.

Okay. And then just going back to the digital, I just want to make sure I understand it. So you have 3 different components where you're working on the digital. You have the retailing side of it, which includes some of the advertising, and then you have the service side. Now is all of the service nationally going through the service center there in Houston? And then lastly, I think the third part is on the used vehicle side, is that correct?

If I understand your -- this is Daryl. If I understand your question correctly, let me break it up a little bit. On our digital retailing, which is where we want to offer a customer an opportunity to purchase their vehicle online, we have a pilot going with a little less than 30 dealerships and we use 3 different providers to enable them. So some of that is OEM mandated and some of that is based on the direction we want to go.

And that's for both new and used?

Yes, sir. On service, yes, our service development center in Houston does take all of our inbound phone calls for service appointments and service departments. That happens. We also have enabled our website, including mobile, to take service appointments. And 25% of our service appointments today that are taken, are taken online from the customer. Those calls don't come into our service development center in Houston. Does that answer your question?

Yes. And I thought you said something in your prepared remarks that you said by the second quarter all stores would be activated, was that on the service side?

No, sir. That was on the new and used vehicle purchases. We were taking this pilot that we did with 28 dealerships and we're now going to roll it out to all 117 of our dealerships in the U.S. It's on new and used. The service side is in all the stores today.

It's already there. Okay.

The next question will be from Rajat Gupta of JPMorgan.

I just had a question on the 2019 SG&A leverage that you see, particularly in the context of used GPU pressure in the U.S. and then you're also making some investments on the parts and services side to increase capacity. I mean, do you think you can grow SG&A to GP -- the adjusted SG&A to GP in 2019 or how should we think about the trajectory there going forward? And I had a follow-up.

Yes, this is John Rickel. In general, we're comfortable with the view that as long as we continue to grow gross profit dollars, we should be able to leverage those and the normal flow-through is kind of 40% to 50%. So, yes, given -- we anticipate even with kind of a flattish SAAR environment that the initiatives on parts and service, on used and on F&I shall allow us to continue to grow our gross profit dollars. Yes, we would expect to be able to leverage our SG&A as a percent of gross as we go forward this year.

Great. And then just on the capital allocation strategy going forward, I mean, should we expect 2019 to be somewhat of a similar year in terms of the way you mix your capital allocation or is there anything different we could expect at least particularly in terms of M&A?

This is Earl. Obviously, that's a dynamic situation, but as we sit here today, I don't think the priorities have changed dramatically. We still believe our stock price is undervalued. And that there is nice accretion to share repurchases and we have about $50 million left, a little less than that on the Board authorization. We're interested to keep growing the company in terms of brands and geographies that will -- we can leverage our existing strengths. But it's just awful hard to make the math work right now and not destroy capital on really high-quality acquisitions of some of the top brands in some of the top markets. It's possible that sellers will get a little more realistic, and we can find some that work. We're certainly looking for that, but it does seem that our best accretion at this point in time still looks like share repurchases.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Earl Hesterberg for his closing comments.

Thanks, everyone, for joining us today. We'll look forward to visiting with you in about 3 months for our first quarter results.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your line.