Asbury Automotive Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: Asbury Automotive (ABG)

Asbury Automotive Group, Inc. (NYSE:ABG)

Q4 2013 Earnings Conference Call

February 4, 2014 10:00 AM ET

Executives

Ryan Marsh - Treasurer

Craig Monaghan - President and CEO

Michael Kearney - EVP and COO

Keith Style - SVP and CFO

Analysts

Rick Nelson - Stephens Inc.

John Murphy - Bank of America Merrill Lynch

Scott Stember - Sidoti & Company

Bill Armstrong - CL King & Associates

Brett Hoselton - KeyBanc Capital Markets

Mike Levin - Deutsche Bank

Jamie Albertine - Stifel Nicolaus

Brett Jordan - BB&T Capital Markets

David Whiston - Morningstar

Operator

Good day and welcome to the ABG Fourth Quarter Year End 2013 Earnings Call. Today's conference is being recorded. At this time I would like to turn the conference over to the treasurer, Mr. Ryan Marsh. Please go ahead, sir.

Ryan Marsh

Thank you, Whitney, and good morning to everyone. Welcome to Asbury Automotive Group's fourth quarter 2013 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's fourth quarter and year end results issued earlier this morning and is posted on our website at asburyauto.com.

Participating with us today are Craig Monaghan, our President and CEO; Michael Kearney our Executive Vice President and COO and Keith Style, our Senior Vice President and CFO. At the conclusion of our remarks, we'll open up the call for questions you may have and I'll be available later for any follow-up questions you might have.

Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward looking statements are statements other than those which are historical in nature. All forward looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements. For information regarding certain of the risks that may cause actual results to differ, please see our filings with the SEC from time-to-time, including our Form 10-K for the year ended December 2012, any subsequently filed quarterly reports on form 10-Q and our earnings release issued earlier this morning. We expressly disclaim any responsibility to update forward-looking statements. It is my pleasure to hand the call over to our President and CEO, Craig Monaghan.

Craig Monaghan

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

EPS from continuing operations of $0.88 is an increase of 22% compared to the prior year period. Our stores continue to produce excellent operating results by maximizing new and used vehicle sales opportunities, improving F&I penetration, pursuing incremental service opportunities and controlling expenses. Revenues were up 13% and gross profit was up 14%. And we achieved record fourth quarter income from operations with a margin of 4.2%, placing us among the leaders of our industry.

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

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

With that introduction, I’ll now turn the call over to Keith.

Keith Style

Good morning, everyone, and thank you, for your kind remarks Craig. As you know, I consider the privilege to serve our employees, the Board and Asbury shareholders in this new role. As Craig mentioned, our fourth quarter EPS of $0.88 was drive through business growth and continued expanse discipline.

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

Turning to capital deployment; during 2013, we acquired 150 million in revenue from acquisitions. Last week, we acquired a Range Rover franchise in Greenville, South Carolina with annual revenue of about $20 million. We are on target to meet our three year goal of acquiring $500 million in revenues through acquisitions.

During the fourth quarter, we spent $21 million on CapEx to upgrade our stores, expand our service capacity and invest in technology. For 2014, we are budgeting $60 million of CapEx; this includes $45 million associated with our annual capital plan, $5 million related to recent franchise acquisitions, and $10 million to prepare owned properties for franchises that currently operate in these facilities. We view this essentially as a lease buyout. For 2013, our lease buyout activity totaled $36 million. Going forward, we will continue to buyback lease property on an opportunistic basis. These transactions provide an excellent rate of return and enable us to control our operating assets.

During the fourth quarter we repurchased $10 million of our common stock or 197,000 shares. For the full year, we repurchased 697,000 shares for $30 million. Heading into 2014, we afford authorization to repurchase 70 million of our common stock which includes 20 million remaining under our formal authorization plus a new additional 50 million authorization from our Board.

In 2014, we plan to continue returning capital to our shareholders targeting repurchases of $30 million. In addition, our new authorization allows us to do more on an opportunistic basis. Taking a look at our balance sheet, we continue to take advantage of the low interest rate environment.

During the quarter, we’ve raised another $36 million in mortgages and end of the year with a debt to adjusted EBITDA ratio of 2.3 times. Ryan and team have done an excellent job on our debt structure this past year pushing out our first meaningful maturity to 2020.

Looking forward to 2014, we will continue to evaluate additional mortgage opportunities in order to take full advantage of the favorable rates and terms we’re seeing in the marketplace. From a liquidity perspective, we ended the year with total liquidity of $281 million which includes 5 million in cash, $44 million available in floor plan offset accounts, $72 million available on our used vehicle line and 160 million available on our revolving credit line. In short, we’re in great shape to support our capital allocation plans into 2014.

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

Michael Kearney

Thank you, Keith. I too would like welcome Keith on this call and coagulate him on his recent promotion. I would like to remind you that everything I will be covering with respect to operational highlights will pertain to same-store retail performance during the fourth quarter. New vehicle revenues and gross profit increased 7% compared to the prior year. Our new vehicle unit sales were up over 4%, basically in line with the industry. New vehicle margins for the quarter were flat compared to last year at 6.2%; however, on sequentially basis, our new vehicle margin improved slightly by 10 basis points. As stated in the past, I believe we can maintain our current new vehicle margins resulting in a per vehicle retail that should remain stable at around $2000 to $2100 a unit.

We ended the fourth quarter with $585 million of new vehicle inventory or 62 days' supply based on a trailing 30-day basis. We're comfortable with our currently overall new vehicle inventory levels as December sales provided substantial movement of that inventory. We continue to watch some of our individual brands very closely as we continue into 2014. Used vehicle unit sales increased 18% over the fourth quarter of last year as we continue to realize the benefits of our ongoing Asbury one-to-one program. Although our margins decreased 60 basis points to 8.6% compared to the prior year period, the substantial increase in volume more than offset the margin decline. This resulted in a 13% increase in used vehicle gross profit. Our sequential basis, our used vehicle margins were flat.

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

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

We continue to refine our purchasing and pre-owned acquisition program to ensure that we maintain an adequate supply of pre-owned vehicles. We will keep the inventory levels necessary for our continued growth in this sector. We ended the fourth quarter with a $127 million of used vehicle inventory or 38 days supply on a trailing 30-day basis. The level of inventory although higher than previous quarters should allow us to take advantage of the traditional spike in pre-owned sales we see in the first quarter.

Our strategy and practice within the F&I segment of our business remains unchanged. Disciplined execution of F&I sales processes and training create solid, reliable growth in results. Fourth quarter F&I revenues grew 16% compared to the prior period. F&I PVR for the quarter was $1,328 up 6% year-over-year. The lending environment remains favorable.

In the fourth quarter, our parts and service revenue grew 8% and gross profit grew 11% compared to the fourth quarter of 2012. Parts and service gross margin for the quarter was 59.7% up 160 basis points compared to the prior year. The year-over-year gross profit improvement continues to be augmented by 22% increase in reconditioning work, 36% increase in warranty work and 3% increase in customer pay.

Similar to last quarter, we benefited from a couple of recall campaigns during this quarter and as I have stated in the past you can never predict recalls. For 2014, we believe we can grow our parts and service business in a mid-single-digit range, while maintaining our current margins through our ongoing customer retention programs.

We’re in the early phase of the two important retention pilot programs designed to enhance the customer experience as well as take advantage of the changing requirements of a younger generation of vehicle owners.

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

I’ll now turn it back to Craig.

Craig Monaghan

Thank you, Michael. We’ll now be happy to take you questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Rick Nelson with Stephens.

Rick Nelson - Stephens Inc.

Hi, good morning. Nice quarter and year performance. I’d like to ask you about inventory levels, I see, new was up 17%, used up 29%, I missed the days of supply, if you provided that but if you could comment on inventory and how you see that affecting margin from a go forward basis.

Michael Kearney

Rick, this is Michael. Our new inventory was a 62 day supply, used was 38. We’re quite comfortable with all the 62 and used. As I mentioned in the script, the December sales moved out a lot of product. Our used inventory, 38 days is little bit higher than in previous quarters but again we took a lot of trades to the very end of the month and as you know that the first quarter traditionally can be a very strong used car market. So, again we’re comfortable with that.

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

Rick Nelson - Stephens Inc.

Okay. Can you provide some color on January sales trends and how we’ve had some weather disruptions kind of lot of from other country and all traders your view and all on the first quarter? Do, you think that can be made up in February and March.

Craig Monaghan

Hi Rick its Craig. Let me just kind of big picture that question and maybe Michael can provide us some more color. But, I would just say that January is traditionally one of the slower months of the year. You know, just weather disruption in the markets where we do business but because of those disruptions, because of the relative -- the lower significance of this month, we don’t feel that there is any reason for us to change our plan and like we said in the script we’re planning now on a 16.2 million SAAR. But then I’ll also add that a lot of our business happens outside the new vehicles, we’ve got expectations to roll our used vehicle business faster than we do our new because there is opportunity in parts of service as well that’s significant and if you like, we’re on track. Michael, can you add to that.

Michael Kearney

Yes. Rick just one piece. So, that I mean as Craig said, it’s a January’s very early part of the year. The month was not outside of our range of expectations and despite some weather disruptions, pre-owned business and parts of business and service business was where we thought it would be.

Rick Nelson - Stephens Inc.

Okay. Also like to ask you about the expense control on the gross profit flow through we’re calculating 34%, 35% extra rent very strong levels do you think that is a level that can be maintained as we look forward.

Keith Style

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

Rick Nelson - Stephens Inc.

Got you. And those level just to be clear that includes rent?

Craig Monaghan

That would include rent, correct.

Operator

And we’ll take our next question from John Murphy with Bank of America Merrill Lynch.

John Murphy - Bank of America Merrill Lynch

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

Keith Style

John this is Keith again, there is no doubt that at the beginning of the year we’re working through some low hanging fruit. 2013 really we got everything in place DMS-wise; we got a lot of stuff in place in the shared service side of things. We have a lot of work to do in that area still, I would say at the end of the year here we are at about 25% of our way through that process and we’re going to be working ourselves through that process through the end of the year. As you know that takes additional investment and technology, it takes additional software work and consulting work that we’re working through. So as we’re saving here we’re also spending and then look for better run rate into ‘15, but back to the 40% target that’s what we’re targeting and we could deliver that including the additional investment that we’re making this year.

John Murphy - Bank of America Merrill Lynch

So that’s including investments, so in ‘15 you could potentially see something better than that if the market cooperates?

Keith Style

That’s correct, in a stable environment we’d look for another step down.

John Murphy - Bank of America Merrill Lynch

That’s great. And just the second question sort of one in the same line. As we look at the growth in parts in service. Do you guys do any calculations or could you sort of allude to what the SG&A dollar catch rate is to a gross profit dollar for parts and service. Is it much lower than what you’d see for other parts of the business?

Michael Kearney

John this is Michael, no actually at the level of fix that we’re producing today in what we believe we can continue to produce the -- we believe the flow through weeks, we know the flow through is at much higher rate than in the variable side of the business as there is no real variable component to that part of the business. So once we cover our fixed expenses and our semi-fixed expenses the flow through goes up pretty quickly.

John Murphy - Bank of America Merrill Lynch

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

Michael Kearney

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

John Murphy - Bank of America Merrill Lynch

Great. And then just one last one on CFPB there is a lot of stuff that coming out of the NADA convention. Any comments you guys have on that or practices or things that you may change in your business, just general comments on that. I know there is no specific answers yet.

Craig Monaghan

John its Craig, I would say that from a big picture we’d love clarity and we don’t feel like our industry or CFPB has given us clarity that we would very much like to have. With turning to NADA, I would say that we very much support the direction that they are going and trying to nail down something that’s little more concrete for all us. I would also add that many of the elements that they are proposing we already have in place, so we’re just going to continue to watch how this plays out. I think bottom line for us is we feel very confident that no matter what comes we’ll be able to manage through it.

Operator

And we’ll take our next question from Scott Stember with Sidoti & Company.

Scott Stember - Sidoti & Company

Could you maybe talk about on the gross margin on the new side, what you experience on midline imports? Obviously looks like the luxury more than offset any negative impacts. So could you just talk about the trend line that you are seeing there heading into ‘14?

Michael Kearney

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

Scott Stember - Sidoti & Company

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

Keith Style

Scott, this is Keith again. So, we look at, if I can point it, we are working on. Those goals by fundamental, so everything across the board from accounts payable to receivables to inventory, we have all of those processes underway. We have pilot those programs and have them in about 25% of our stores at the end of last year. And really there is some heavy lifting this year behind the scenes and by the end of the year we are targeting full completion.

Scott Stember - Sidoti & Company

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

Michael Kearney

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

Operator

We will take our next question from Bill Armstrong with CL King & Associates.

Bill Armstrong - CL King & Associates

Good morning gentlemen. The follow-up on that last question, so your same-store warranty were up 36%, if we stripped out recall, what would that increase have been?

Craig Monaghan

Bill, I don’t have that answer I can get back to you on that. We don’t look at it that way particularly but if you want to follow-up with Ron, we’ll get you a shot at that.

Bill Armstrong - CL King & Associates

Okay. In general again stripping out the recalls, you are looking for about a mid single-digit products and services increase this year or what do you see is being the main drivers of the further increases?

Craig Monaghan

I think the biggest part of that is just the sheer volume of cars that are out there. We are just all selling if you remember in ’09, the SAAR was 9, 10, 11, now we are in 15 and they are floating around 16. There is just a lot of new product that’s out there with sheer volume and I think that they are mechanical devices and they do breakdown. The warranty coverage for almost all manufacturers is a little bit longer than it used to be in the past. So, I think that’s another piece of it but from our view I believe it’s just sheer numbers of more vehicles that are out there.

Bill Armstrong - CL King & Associates

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

Craig Monaghan

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

Operator

We will take our next question from Brett Hoselton with KeyBanc.

Brett Hoselton - KeyBanc Capital Markets

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

Michael Kearney

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

We think the inventory is available. We know the consumers are available. The rates are very attractive, so we think that’s a realistic growth expectation.

Brett Hoselton - KeyBanc Capital Markets

And then if you think about gross profit per year and you’ve kind of been in around that $1,700-$1,800 range for a while now. Is that in your opinion kind of a consistent expectation or an expectation we should think about going forward?

Craig Monaghan

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

Brett Hoselton - KeyBanc Capital Markets

And Keith congratulations. As we think about gross profit throughput kind of moving out into the out years, 2015-2016. What do you think in terms of the target expectation with obviously higher than 40% it sounds like you think you could kind of move back up into that 50% range or what are your general thoughts there?

Keith Style

I think we’re at the 40% now. I think into ’15 we can move that a little higher at this year we were predicting about 44% flow through that to be mid 40 target but that’s, as you know, that’s a long way away and may really takes the business growth to get their sales. So we’ll kind of jump that fence when we get to it.

Brett Hoselton - KeyBanc Capital Markets

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

Craig Monaghan

Brett we are constantly taking on different initiatives. We tend not to call them out we just feel like they are part of our day-to-day responsibility and kind of our operating objectives. I mean, the success that you see that Michael and team have had in used vehicle is because there was some money spent on the front end and some programs put in place to make that work. I think we’ll get the same thing happening in products and service whether it’s wiper initiatives, tire initiatives into these technologies there is a lot of technology investment that’s going on.

Keith mentioned the 25% of the stores are already in shared service centers. Those 25% get into those shared service centers without a lot of adjustments. And we have ongoing investment to-date. There is still a lot, Keith mentioned, there is more to be done in the back half of it. We think there is and we are spending on technology and we think the way that consumers buy a car in future is going to change dramatically.

There is a lot of energy is being spent on mobile applications right now. What we can do to expand our CRM and improve the not only customer experience but the way we sell car in the store we’ve got a lot of energy invested in that. So why we don’t call them out to you is big one off programs. I would say we -- our philosophy here is very much one of the continuous improvement and that is non-stop.

Operator

We’ll take our next question from Rod Lache with Deutsche Bank.

Mike Levin - Deutsche Bank

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

Michael Kearney

See Mike, this is Michael it’s a great question, by the way. So we, as Craig mentioned just a second ago, we, number of years ago put in what we call our Asbury one-to-one program and that indeed is a within dealership cultural shift. So we don’t abandon a particular segment of vehicle just because there is more of another segment. So it’s -- I don’t think there is the risk to that part of it. We actually are looking at some wonderful opportunities with more products in that sweet spot coming on line. But I will tell you that -- and the internal process that we put into place two and three years ago, which broadened our price band and broadened our mileage that we sell, we will not abandon that just because there is prettier girl on the block right now.

Mike Levin - Deutsche Bank

Okay. Now, in terms of F&I per unit as we sort of watch this come up from like 1,100 over 1,300. Is there been any introduction of new products within that or is it just sort of better execution and just moreover maybe just better pricing from low rates? I’m just trying to gauge if rates are to rise, is that sort of directly going to hit your ability to sell certain products to customers or is there any reason why we shouldn’t see this continue to trend up from here?

Michael Kearney

So, this is Michael, and I’ll take a shot of that one. I think we’re all benefiting from low interest environment that there is no question about that. We’ve not introduced really any new products recently. I think it is a function of execution, it’s a function of training, and it’s a function of emphasis that we put on those particular pieces with constant training program within our company, a constant certification program that goes on within our company. And there was a higher interest rate environment impact us.

I think there is always the risk that it will impact business, but as long as banks will finance the products which they’ve been willing to do within the parameters that the customers qualify for, I think that we can maintain the F&I numbers that we’re putting out there today. There is always bottom part that we can focus on, but I will also admit to you as we’ve talked about it constantly, there is a higher the number gets, the hurdle little bit harder jump over, but it’s not something that we’re terribly concerned about right now.

Craig Monaghan

And maybe I can just jump in. It’s Craig. I doubt that essentially two-third of the F&I PVR comes from the product sales, so that product sales gets a lot of attention from our people. I think one thing that probably we have seen over the last few years is shift of those product sales more towards maintenance and extended warrantee. Those bring us the added benefit of bringing the customer back into the store and driving incremental part to service business down the road, it’s very much the direction that we want to continue ahead.

Mike Levin - Deutsche Bank

What product is that shift the way from?

Michael Kearney

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

Mike Levin - Deutsche Bank

And maybe one just last quick one is, is there any way you could sort of put some brackets around what kind of retention in your parts business you get from used customers now they have one-to-one in place versus previous versus sort of historical levels, just any rough framework to think about that?

Michael Kearney

Mike, this is Michael. I will give you a very rough framework in that traditionally in our business retention of used car owners pre-owned customers and our service department is the worse retention that we all have. It's in industry issue. Again we have got some pilot programs in place today that we believe will address that, more to come as the quarters evolve, so rough bracket is that it’s the worse retention segment that we have. I won’t call it low hanging fruit but it’s a tremendous opportunity not only for us but the entire industry in that, it is one of our initiatives for this year.

Operator

We’ll take our next question from Jamie Albertine with Stifel.

Jamie Albertine - Stifel Nicolaus

Great, thanks for taking the question. Congratulations to the team on a great quarter and then as well to the Keith on the promotion and the first call CFO. If I may just very quickly housekeeping item unused as well, can you give us some sense of your certified pre-owned mix as it stood at the end of fourth quarter?

Michael Kearney

Jamie, this is Michael. I can give you a percentage number which is, it doesn’t mean a whole lot because it’s so different by brand. Our percentage of certified pre-owned in the European luxury brand is substantially higher than it is in our domestic product, it is somewhere between the two is our Honda and Nissan the middle line import business. Roughly, again, I’ll give you the overall number but I’m not sure, it made think, so I would tell you that it’s a run from high of 60% to a low of 10% depending on the brand.

Jamie Albertine - Stifel Nicolaus

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

Michael Kearney

That’s essentially correct, yes.

Jamie Albertine - Stifel Nicolaus

Okay, penetration rate on the F&I side for the used product as you know this is the ramp in retail sales just wanted to get a sense for how many of those customers versus the traditional new vehicle customer are opting for financing versus bringing in their own either from financing or paying cash?

Michael Kearney

Broadly speaking, if you count credit unions of course in that we’re probably in the somewhere around 80% finance penetration number.

Jamie Albertine - Stifel Nicolaus

Okay and how the change sort of overtime maybe that is year-over-year fourth quarter?

Michael Kearney

Not much, I mean it’s a fairly consistent number. I will tell you where the different we’re seeing is not necessarily the penetration to finance rate, but in the down payment there has not been as much down payment that’s been required as in prior years.

Jamie Albertine - Stifel Nicolaus

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

Craig Monaghan

This is Craig; I think what we have learned is that every seller is unique. There is a larger market out there, it doesn’t necessarily behave the way you were think it would behave. I look back about two years ago when the tax laws were changing we thought that year we’ll have a rush of sellers and it materialized.

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

I think the bottom line is that something that we cannot control. We will not overpay to get a deal done. We can always buyback our own store we have share repurchase. So, we just take what the market brings us.

Jamie Albertine - Stifel Nicolaus

I appreciate that. And if I may just one quick follow up on the first question on used I asked you. Do you have a sense for what the market was up in recently your addressable areas? I saw the 18% Asbury but do you know where, again what kind of the base line is based on where you complete?

Michael Kearney

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

Operator

We’ll take our next question from Brett Jordan with BB&T Capital Markets.

Brett Jordan - BB&T Capital Markets

Hi, good morning. Quick question on how we should think about increase in off leased vehicles in ’14 I guess as it impacts used vehicle gross margins either you’re driving down acquisition cost of used vehicle or higher penetration of CPO this year. But could you give us some feeling how we should think about that.

Michael Kearney

Brett, this is Michael. I think we all look at it as positive to have some off leased vehicles come in, we had assurance for number of years there we look at it as just a another acquisition potential. I’m not sure that it impacts our gross margin a whole lot one way the other. I think what it does do is allows us to have a bigger variety of product. And with that bigger variety of product I think we can sell more of them. So, I’ll look at that as a way we can sub-plant that the volume and get to the single digit number that I’ve talked about earlier.

Brett Jordan - BB&T Capital Markets

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

Michael Kearney

Brett, this is Michael again. I will tell you that we are still gathering a lot of the data on the tire imitative but I will tell you in the month of November our tire sales increased 17% over the prior November and in December 18% of that business we are seeing and it’s a number of factors that are brining and we are seeing the second group come through that are now spending more money in our shops.

I don’t have any other data, again we’re developing that and it’s time and we’ll have more granularly that. But we are definitely seeing customers come back in and we think long term that is exactly what the tire program is that is a retention tool.

To you other question about the weather, we anticipate that the very difficult weather we’ve had in one of our city is very good for the collation business. Its 30 to 60 days out type business but we believe that we’ll read the benefits out of that. As far as the other part, I’ve not seen any other direct impact because of the bad weather.

Brett Jordan - BB&T Capital Markets

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

Craig Monaghan

We don’t plan to that level of granularity.

Brett Jordan - BB&T Capital Markets

Thank you.

Craig Monaghan

We don’t have estimate of that.

Operator

And we’ll take our next question from Ravi Shanker with Morgan Stanley.

Unidentified Analyst

Good morning everyone, this is [indiscernible] for Ravi. I wanted to dig into the parts and service business a bit more and I know you guys gave a gross profit breakdown and I apologize if I’ve missed this but could you also breakdown for us the same store parts and service revenue growth in concerns of customer pay, reconditioning etcetera.

Craig Monaghan

If you’ve got another question…

Keith Style

8% parts and service same store revenue.

Unidentified Analyst

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

Keith Style

We only breakdown the gross profit that way.

Unidentified Analyst

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

Michael Kearney

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

Unidentified Analyst

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

Michael Kearney

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

Unidentified Analyst

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

Michael Kearney

There is always a program, so I would say there is not a big change, there is some subtleties to it that are a little bit different but not dramatically different though.

Operator

And we’ll take our next question from David Whiston with Morningstar.

David Whiston - Morningstar

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

Keith Style

Through CapEx respectively we’re looking at 60 million in total that is our $45 million annual plan than we have additional CapEx of 5 million associated with the recent transactions, acquisitions that we talked about today and the other $10 million which is just really ready in property for what is effectively lease buy ups, moving from a lease facility to an own facility.

David Whiston - Morningstar

And total liquidity?

Keith Style

Total liquidity we’re in great shape, in the area of $221 million in total liquidity, we’ll have our revolver still in place throughout the year and we’re beginning the year with to include the four plan lines somewhere on the $50 million in cash.

David Whiston - Morningstar

Back to the earlier question on NADA, it sounds like you are not right away implementing the dealer reserve proposals, is that correct?

Michael Kearney

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

David Whiston - Morningstar

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

Michael Kearney

I would -- I wouldn’t say we’re seeing more aggressive pricing, I think one thing we’re seeing though is much better content. That is midline import vehicles have the features that -- many of the features that you find in a premium luxury car. Other than that I don’t think there is really any significant changes we see from the Japanese OEMs.

David Whiston - Morningstar

Craig I think at the investor conference you had talked about how when you acquire, they may have to use the new ratio of about 0.5 and you get it to 0.8. I was just wondering can you share just one or two specific examples of what you do to re-ramp the store to get to that ratio.

Craig Monaghan

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

Michael Kearney

Just real quick, just a couple of examples David I mean most places that we would go in we would immediately evaluate the volume of cars that were sent to auctions and the reasons why we would expand in almost every case the price band of product that we offer to the consumer. And then we would also away with how we do reconditioning and the pricing that we do reconditioning on different price bands of cars. It’s all part of our process that we put into place, and you do those then you culturally shift the mind set in the store and you drive more product to the consumer to more attractive price and then you used volume goes up when it goes with that.

David Whiston - Morningstar

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

Craig Monaghan

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

Craig Monaghan

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

Operator

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

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Asbury Automotive Group, Inc. (ABG): Q4 EPS of $0.88 beats by $0.06. Revenue of $1.4B (+14.8% Y/Y) beats by $70M.