Asbury Automotive Group Inc

Good day, everyone, and welcome to the Asbury Automotive Group Q3 2019 earnings conference call. Today's call is being recorded, and now at this time I'd like to turn the call over to Matt Petone. Please go ahead.

Thanks, Operator, and good morning, everyone. Welcome to Asbury Automotive Group's third quarter 2019 earnings call. Today's call is being recorded and will be available for replay later today. The press release detailing Asbury's third quarter results was issued earlier this morning and is posted on our website at asburyauto.com. Participating with us today are David Holt, our President and Chief Executive Officer, John Hartman, our Senior Vice President of Operations, and Sean Goodman, our Senior Vice President and Chief Financial Officer. At the conclusion of our remarks, we will open the call up for questions, and I will be available later for any follow-up questions you might have. Before we begin, I must remind you that the discussion during the call today is likely to contain forward-looking statements. Forward-looking statements are statements other than those which are historical in nature. All forward-looking statements are subject to significant uncertainties and actual results may differ materially from those suggested by the statements. For information regarding certain of the risks that may cause actual results to differ, Please see our filings with the SEC from time to time, including our Form 10-K for the year ended December 2018, any subsequently filed quarterly reports on Form 10-Q, and our earnings release issued earlier today. We expressly disclaim any responsibility to update forward-looking statements. In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. As required by applicable SEC rules, we provide reconciliations of any such non-GAAP financial measures to the most directly comparable GAAP measures on our website. It is my pleasure to hand the call over to our CEO, David Holt. David?

Thanks, Matt, and good morning, everyone. Welcome to our third quarter 2019 earnings call. We achieved record third quarter adjusted EPS of $2.33, up 5% from the prior year. This was driven by revenue and gross profit growth of 5%. We were able to grow our parts and service gross profit by 9%, grow our total front-end yield by increasing F&I gross profit, and bring our new vehicle inventory levels down by 10 days, which is within our targeted range. During the quarter, we expanded our footprint in Indianapolis by acquiring a Toyota store, and we entered a new market by acquiring a Subaru store in Denver. Both of these stores are characterized by a high quality and tenured team, solid performance profile, strong and loyal customer base, and sound business processes. We're excited to be entering a new market in Denver. We have long been attracted to this market due to its business friendly environment, moderate cost of doing business, and growing population and attractive demographics. In Mike Shaw Subaru, we have found the ideal anchor store. We plan to build our presence in the market following a similar approach to what we successfully executed in Indianapolis. Subaru also happens to be the number two brand in Colorado. We are excited about the return that we will generate from these two great acquisitions and the growth opportunities for Asbury in the Denver market. This quarter, we continue to make great progress implementing an enhanced process and procedures that leverage technology to create a highly guest-centric consumer experience at our pilot store in North Carolina. We're excited to consistently see exceptionally favorable consumer reviews as our guests react to the level of service and transparency. While we are focused on being at the forefront of innovation in our industry, We believe that success is driven by well-designed process improvement and effective change management. We plan to start thoughtfully rolling out our technology-driven process improvements to additional stores in the first quarter of 2020. We are confident that our investments in creating an unrivaled guest-centric experience will yield attractive returns. Before I end, I want to thank Sean for his valuable service and contributions to Asbury. He's been a great partner and a pleasure to work with. I speak for the entire organization in wishing him well as he embarks on his next chapter. I will now hand the call over to Sean to discuss our financial performance.

Thank you, David, and good morning, everyone. Overall, compared to the prior third quarter, our revenue increased by 5%. Gross profit increased by 5%. Gross margin of 15.9% was 10 basis points higher than last year. SG&A as a percentage of gross profit increased by 100 basis points to 68.9%. Operating margin decreased 10 basis points to 4.5%. Income from operations increased by 2%. and adjusted earnings per share increased by 5% to $2.33. As a reminder, in Q3 of 2018, we adjusted for an approximately $600,000 discrete tax item related to the 2017 Tax Act, or 3 cents per share. There were no adjustments for the third quarter of 2019. During the quarter, some of our stores in Florida were impacted by the threat of Hurricane Dorian. However, the effect was not material to our financial results. Our performance this quarter was, however, significantly impacted by a single midline import brand, where despite earning the available manufacturer incentives, results were considerably below last year. This brand alone negatively impacted earnings per share for the quarter by approximately 14 cents. Our effective tax rate was 24.4% for the quarter compared to 25% in the third quarter of 2018. Looking at expenses, SG&A as a percentage of gross profit for the quarter was 68.9%. an increase of 100 basis points over last year. This increase was driven by the enhanced benefits packages provided to our frontline associates, reduced OEM advertising credits, and continued investments in our omnichannel initiatives. As expected, our year-to-date SG&A as a percentage of gross profit is 68.5%, in line with our full year guidance of between 68 and 69%. With respect to capital deployed, during the quarter we spent $13 million on capital expenditures and $4 million repurchasing shares of our common stock. Our remaining share repurchase authorization stands at $66 million. This year to date, we have invested $43 million in our existing business through capital expenditures and real estate acquisitions, returned $15 million to shareholders through share buyback activity, and we have completed the acquisition of six new stores with total annualized revenue of $425 million. When making capital deployment decisions, we focus on achieving the highest risk-adjusted return. In the case of acquisitions, we assess each store individually with consideration for the market dynamics, quality of the brand, customer profile, operating performance of the store, opportunities for value creation, stability of the earnings, and much more. As an example, we have a higher hurdle rate of return when acquiring an underperforming import store requiring a significant turnaround investment than we would for a luxury store with a loyal customer base, high margins, and a solid parts and service business. At the end of the quarter, our total leverage ratio stood at 2.8 times and our net leverage ratio at 2.3 times. We believe that our capital structure positions us well to opportunistically capitalize on expected attractive future capital deployment opportunities. Our floor plan interest expense increased by $600,000 over the prior year, driven by an increase in inventory levels. Note that our new credit facility, effective on September 25th, results in a decrease in our new floor plan interest rate by 15 basis points, and our used floor plan interest rate by 10 basis points. From a liquidity perspective, we ended the quarter with $2 million in cash, $65 million available in floor plan offset accounts, $101 million available on our used vehicle line, $237 million available on our revolving credit lines, and $173 million of undrawn mortgage facilities. In closing, I want to take this opportunity to express my sincere thanks and appreciation to David and the board for their support during my time at Asbury. It has been an honor to be part of this exceptional team, and I wish everyone all of the very best and continued success in the future. With that, I'll hand the call over to John to walk us through the operating performance in more detail.

Thank you, Sean. My remarks will pertain to our same-store performance compared to the third quarter of 2018. Looking at new vehicles, SAR for the quarter was at 17.1 million units, or flat versus last year, and retail SAR was down 1% for the quarter. Our new unit sales decreased 5% and the margin rate was 3.9%, down 40 basis points from the prior year. We experienced margin pressure across our midline import brands, however, domestic margins were flat, and we were able to grow gross profit in our luxury brands. We are pleased that we were once again able to offset the overall margin pressure by strength in F&I. Our total new vehicle inventory was $810 million, and our day supply was 76, down 10 days from the prior quarter. Turning to used vehicles. Unit sales were up 6% from the prior year, on top of an 8% growth rate last year. Our gross profit margin of 6.6% represents a gross profit per vehicle of $1,467, down $113 from last year. Though our gross profit per unit was down, it is important to remember that used car volume growth also drives increased reconditioning parts and service gross profit, as well as F&I business. Our used vehicle inventory of $176 million is at a 36-day supply, up three days from the prior quarter. Turning to F&I. Total F&I gross profit increased by 8%, and gross profit per vehicle increased by $119, or 8%, to $1,628 from the prior year quarter. Note that when we think about gross profit per vehicle, we look at the total front-end yield, which combines new, used, and F&I gross profit. This provides us with the best view of our true profit per vehicle sold. In the third quarter, our front-end yield per vehicle increased to $3,065 from $3,056 last year. This total front-end yield has remained stable over the past decade. Turning to parts and service, our parts and service revenue increased 8%, and gross profit increased 7%. This was achieved with a 7% increase in customer pay and a 13% increase in warranty. And now an update on our omnichannel initiatives. Our push start online sales were up 3% from the prior year. We continue to grow traffic utilizing our digital parts and service scheduling tool, and we reached a record of 137,000 online service appointments this quarter up 23% from the prior year. In addition to our omni-channel strategy, an important part of our continued success is our people. As previously announced, at the beginning of this year, we put together an industry-leading benefits package for our frontline associates, including subsidized medical plans, equity grants, education grants, a four-day work week, extended vacation time, and paid maternity leave. This enhanced benefits package is continuing to have favorable impact on both recruiting and retention. In conclusion, I would like to take this opportunity to express appreciation to all our teammates in the field and our support center who continue to produce best-in-class performance. I would also like to welcome all our new teammates in both Indiana and Colorado. We will now turn the call over to the operator and take your questions. Operator?

Thank you. If you'd like to ask a question, simply press the star key followed by the digit 1 on your telephone keypad. Also, if you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 at this time. We'll pause for a moment. And we'll first hear from Rick Nelson of Stevens.

Thanks. Good morning, guys. I wanted to ask you about the new vehicle, same-store units, down 5%. Looks like that didn't keep pace with the overall market. And the domestic brand decline of 17%, if you could comment on what was the driver there.

Sure. Rick, this is John. I'll address the domestic first. You know, we were pleased we were able to increase the PVR in our domestic stores 3% and maintain our margin. This is certainly we want to increase the volume in domestic, and it's an area of business we will focus on and improve. As far as the midline imports being down, three or four of the brands we actually outperformed in the market. It was really one brand where we underperformed as far as volume, which took us down to 5% in that segment.

And was that lagging brand, was that also responsible for the margin erosion that we saw with the GPU?

This is David. It was.

David, I guess, what are the strategies here with that brand to reinvigorate it? I know you've sold some stores. Your thoughts about that?

Yeah. We sold one. Over time, these brands are cyclical. We, more than any of our peers, have a high percentage of this brand, and it has a material impact on us right now. We're doing our best efforts to do what we can to offset it with parts, service, F&I, and use what we can control. But at the end of the day, we're a franchisee, to the manufacturer and we're trying to be opportunistic and do the best we can with it.

Advertising, PVR, $198 compared to $154 last year. That's really stepped up. Is that focused on specific brands or what is the driver to that growth rate?

I'd say it's a couple things. One, there's a little bit less credits from the manufacturers this year over last year. That's a small piece of it. The other piece of it is, too, when we do acquisitions, and we took in the Bill Estes Group kind of all at once, we kind of go through a transition phase to not do a culture shock. They were a lot more aggressive in spending advertising dollars, so you'll see improvements over time in that number coming back down. It's just a moment in time, if you will, and most of it is related more to the new acquisitions than it is the core company.

In the used car arena, are you sourcing more cars at auction to drive volume, and that's causing some of the margin erosion? Or if you could speak to the competitiveness of sourcing vehicles at auction.

Hey, Rick. This is John again. You know, our auction purchases run a small percent. It's about 50% of our total retail sales. We still focus on trades to keep the margin high. We were certainly happy to get the used vehicle growth back this quarter, especially with our comp versus last year. What we focus on, Rick, is really, as a company, we turn the inventory about 1.2 times per month. So for stock and 100 retail vehicles, we can expect 120 sales. The issue when you have to go to auction is if you have 100 cars in stock, you have a big weekend and you sell 30 cars, now all you have is 70, and the guys tend to run out and try to backfill that with quick purchases. So we've really focused on trying to keep a more steady flow of the pre-owned inventory and having less fluctuations. That being said, we were happy with the volume last quarter. we're going to be focused on getting the margin back, too.

I would also add, Rick, we're focused on CPO, too, and our CPO sales for the quarter are up 11%. And with those, there's a little bit more cost involved certifying those vehicles.

And just getting back to the problematic brand, is there anything on the horizon, I guess, to... shift those pressures with the brand?

All I can say at this point, Rick, is our job is to be great capital allocators and really strong operators, and we're always seeking to how can we better position Asbury and our brand mix, and that's certainly a focus that we have right now.

Gotcha. Thanks, guys. Good luck.

Thank you.

Next, we'll hear from John Murphy of Bank of America.

Good morning, guys. I just wanted to follow up on one of the comments, and I apologize. I may have misunderstood or misheard this. Sean, when you were talking about this midline import brand that you're having issues with, you said there was a $0.14 per share hit. Is that correct? Because the volume rebates or stair-step rebates didn't come through. I just want to understand if I'm getting this right.

Yes, John. The EPS impact was $0.1414, and it was primarily related to reduced manufacturer incentives, so a decline in the available incentive dollars.

John, just to clarify further, we attained almost all that money that was available by that OEM. but the total amount available was about 30% less than it was prior year.

Okay, and that was known in advance. That was not a change in the program mid-quarter or mid-month or something like that?

No, we were notified of it right after the quarter started.

Okay. Then a second question. When we think about the front-end gross being up $9, obviously F&I and PVR is helping out quite a bit there. I'm just curious if you can give us sort of a range of what sort of like the highest F&I PVR you have on an individual vehicle, you know, roughly, and, you know, how far you think you have for penetration for extended service contracts and stuff like that that might also help. Just trying to understand where this can go and if there's an absolute number, you know, increased potential and also a penetration potential as well.

John, this is John. I think there's still plenty of opportunity in F&I. I think we've talked about this before. We kind of focused on the bottom half of the organization and getting them up to average. So as far as PVR, VSC penetration, and overall penetration on product, I think there's still opportunity for us to grow.

Okay. And then just lastly, I think it's on your slide, you say about 23% of your parts and service revenue is is recon. If I run that through, it looks like there's about $52 million of recon revenue in parts and service in the quarter. If I apply that all to youth, it looks like you're doing about $2,300, $2,400 of recon revenue per unit and probably about $1,500 in profit there. Is that, I mean, is youth really driving, is recon really driving that big a chunk of profits in parts and service or is there something else going on there? What's sort of the average recon revenue and gross profit number we should think about for a used vehicle?

So I would tell you that the number per vehicle is a lot lower than that on a reconditioning. It'll vary by brand, but it typically hovers around $1,200 to $1,300 a car. So if you think about us selling a used car the way we look at it, to your point, we look at that front-end margin, we recognize that $1,200, and then naturally the F&I dollars.

I'm sorry, and the recon, that's a revenue number, and we should assume roughly 60%, 62% gross profit off that. Is that a fair way to think about it?

I'm sorry, John. I missed the revenue word. That's a gross profit number. It's a gross profit number, John, not a revenue number.

So if we looked at an all-in fully loaded GP for a used vehicle, your guys are printing $1,475 on the vehicle sale and about another $1,200 to $1,300 on GP on the recon side within parts and service?

That's correct.

Okay. All right. That's very helpful. Thank you very much, guys.

Thank you.

Next, we'll hear from Brett Jordan of Jefferies.

Hey, good morning, guys. Hey, Brett. Could you talk a little bit about the warranty growth? And I guess, are we looking at particular recalls or how long might we expect this... pretty significant warranty growth to continue.

This is John Brett. There are still some recalls going out. There's nothing major right now. Takata is still running out in some of the stores. So there's nothing major right now that's out as far as warranty recalls. There's just a lot of little things, reprogramming and that type of thing going on. Okay.

And then a question on F&I, I mean, just sort of a big picture. Is there a negative correlation between FICA scores and F&I spend? I mean, can you get at the lower end consumer either a longer loan term or gap insurance or products that don't sell further upstream?

So I would tell you as the credit scores go lower, and I'll just talk subprime for a second, your F&I dollars are very much governed by the lender. right down to what products you can offer and sell or not. So I would say you actually have more opportunity as the FICO score goes higher for product sales. Okay, great. Thank you.

Next, we'll hear from Armenta Sinkovicius of Morgan Stanley.

Great. Thank you for taking the question. You know, as we were thinking about the quarter here, you know, second quarter had an elevated level of inventory versus a year ago. You worked that down. I'm surprised to not see it come through in the new vehicle same-store sales. Maybe you could walk me through the dynamic on, you know, the inventory day supply and the impact to same-store sales.

We worked hard on the quarter trying to bring our new vehicle inventory back to our targeted range. Some of it was we moved inventory internally. So the stores that had a higher day supply, we moved it to the stores with a lower day supply.

And that's essentially how we get to a lower day supply, was just shifting inventory around?

Yes.

Go ahead, David. This is David. It's also, again, you're doing your allocations with these manufacturers once or twice a month, so it's obviously scaling back. And when you think about an overall day supply, you're looking at a number, but what you have to realize is the width of these inventories, how many different model lineups there are, and then within the model lineups, how many different package offerings there are. It's very difficult to satisfy everyone, but you have to have a fair sampling of of inventory to try and be able to hit it, especially in the domestic truck side. There's hundreds of different ways you can order and package these trucks, so it's really key to make sure you spend the time to be thoughtful about how you're packaging and moving those trucks. John's comment as far as moving inventory, that was more on the domestic side with trucks, and that market shifts around a little bit based upon how the trucks are equipped and what market has a certain need.

Okay. And then, you know, as we're thinking about, you know, the challenges here from the third quarter, you know, with this specific brand, you know, how do we think about the incentive environment here for the fourth quarter?

Yeah, I would say, you know, we're in the same position today as we were in the third quarter as it relates to incentives and where we are with that particular brand. You know, quite honestly, We called it out because it was a very material number. We're actually pretty happy with our quarter. When you think about what we did with F&I Part Service and used, climbing over that 8% growth rate last year, and our additional investment in our Omni channel, there was a lot going on in the quarter. Then you had the noise of a hurricane, the hurricane that didn't hit, but it was five days of impact. We know how the media can drive those up. Our stores were actually shut for a couple days. and then the few days they were open around it, there was no business because everyone was focused on the hurricane. So there was a lot going on in the quarter, and quite honestly, we're happy we stayed focused to generate what we did. Okay. Appreciate the answers.

Thank you.

Next, we'll hear from Chris Bottiglieri of Wolf Research.

Hi. Quick question on the push start, I think 3% growth. You've been making a lot of progress on that pretty impressive growth over time. Was there anything about the comparison this quarter that was more difficult? I mean, 3% just kind of seems relatively low to where you are with that. And then just for context, given your exposure to Atlanta and Florida, are you seeing any impact from CarMax's omni-channel push or even Carvana for that matter? Any thoughts there would be helpful?

Sure. This is David. I would tell you it's a new entry for new car dealers to be able to do full transactions online. I don't know what everyone else will report with first out, but my perception is we've been leading the market as far as sales. And I think when you initially come to market, you get that long-hanging fruit and pretty strong increases quarter over quarter. It's really now about us enhancing the product, getting more lenders online. because what we've seen over the last year with the product, where it started off kind of half new, half used sales, it's tipped more to more used than new. So having that availability of lenders online, we think will enhance it further. We have a tremendous amount of activity on the tool and a tremendous amount using it, but the exit point right now for most consumers that aren't converting is are around the credit application piece where they're putting their Social Security number online. It's a difficult challenge to convince a consumer in this day and age to put their personal information out there.

Gotcha. That makes sense. And then just one follow-up question related. For warranty, can you elaborate a little bit on the programming of it? As the compares get more difficult on warranty into Q4 into next year, maybe how much confidence you have that that warranty could continue. I'm just not sure I understand, like, what's driving the warranty growth, given SAR's been flat and CPO's been up slightly. This doesn't seem like a metric that should grow as robustly as it has. Just want to get your thoughts on kind of sustainability, if that would be helpful.

Sure. You know, I would say in years past, there were certain brands that had dramatic recalls for large dollar amounts. And this year, it's more about many brands having small recalls. I think as technology gets better in these vehicles, there's a lot of programming errors and issues that come up. It's very, very difficult to us. I mean, this has come up in 34 years for me in retail. One of the hardest things to predict is what is warranty going to look like next year. It's very difficult to say. Some of the brands that are down this year, we expect it to be up. Some of the brands that are up, we expect it to be down. So it's really very difficult. I guess there's a little bit of a cadence around new models as far as looking ahead to think potentially you might have some small issues that come with it. But we tend to go into every new year thinking warranty is going to be flat or we model that and then see how that adjusts throughout the months. That's okay. Thank you. Thank you.

Rajat Gupta with JP Morgan has our next question.

Hi, thanks for taking my question. Just had a question on the SG&A pickup in the quarter. I know you had talked about the second half being a little higher than the first half. You had cited omnichannel investments as one of the reasons. You also cited reduced OEM advertising credits as one of the reasons. Can you help elaborate on what's going on there? Is this more of a one-time major step-up in investments, or is this something we should expect in the base run rate going forward? I have a follow-up.

Sure. This is David. I'll start, and then Sean can clean it up. We foreshadowed in the last couple quarters that the second half of the year, we anticipated SG&A going up. So we kind of ended up where we expected to end up. The OEM credits being a little bit light, it wasn't across the board with all OEMs. There was only certain ones. And it wasn't material. We knew we had the acquisition of Bill Estes coming on and what they were used to spending and what that was going to do for an impact. And we understood the cadence of our investment and on the channel. So, again, that was the purpose of foreshadowing in prior quarters, expecting it to increase. John, I don't know how you want to.

Yeah, the only thing I'd add to that is one of the other items was the enhanced benefits packages that we are providing to our frontline associates that just the timing of the expenses related to that will be higher in the second half as we foreshadowed last quarter. Our year-to-date SG&A is 68.5%. It's very much in line with our expectation of between 68% and 69%. And so we continue to expect that for the full year 2019.

Got it. And I know, again, in the beginning of the year, you talked about 67 to 68, I believe. Or, you know, you've been in that ballpark historically. I mean, is 68 to 69 kind of a good level to think about going forward? You know, just, you know, if I think about 2020 or going forward, is that kind of like a range you would like to be in? Or could it go lower from here?

Sure. So we started the year, our guidance actually at the beginning of the year was between 69 and 70, really relating to the additional investments that we've been making in our omnichannel initiatives. And as I'm sure you can appreciate, a lot of those additional investments flow through the SG&A line on the income statement. Our SG&A expenses will be lower than that this year primarily because of the results from our omnichannel initiatives are better than we initially expected, and that's actually resulted in some benefits on the SG&A line, and that's driven our SG&A expenses lower. Do I believe long-term that there are opportunities to increase the efficiency of our SG&A spend below that sort of range? I do, but I think that is a long-term outlook as we enhance our omnichannel initiatives and our enhanced processes. But I think 68% to 69% is a reasonable expectation in the medium term.

Got it. That's helpful. And then any updated thoughts on capital allocation, what we're seeing in the M&A space out there in terms of multiples? Is it still a pretty attractive market out there? It looks like there's still a decent amount of opportunity on your balance sheet to take on some leverage. So what are we seeing out there? And then any thoughts on potential to pivot a little bit towards buyback as well, given where the stock price is?

Sure.

Thanks.

This is David. There's a tremendous amount of activity with acquisitions out there. Some of the stronger brands and luxury brands are holding their multiples well. Some of the more struggling brands right now, the multiples have come down pretty good. You know, I think our approach going into every quarter is where's our opportunity and what presents our highest potential for return for our shareholders. And we'll certainly be opportunistic and enter the quarter that way. we do believe in growth and adding stores, but thoughtfully. It's very easy to buy something much harder to run it, so we really want to make sure that it's a good long-term acquisition for the company, and most importantly, it balances out our portfolio well.

Got it. Any thoughts on buyback in the near term, or is the focus more on M&A at this point?

Yeah, I would simply answer that by saying as the quarter enters and we see what our opportunities are, certainly that's a lever that we will pull if that's more attractive than an acquisition.

Yeah, and I'll just add to that that we have a balanced approach to capital allocation and we are very opportunistic, as David said. It's hard to look at our numbers for one quarter. You need to look at the numbers over a period of time. You look, for example, last year in the fourth quarter, we spent almost $50 million on share buybacks. This year, we've spent a little bit more on acquisitions than buybacks, but it really is based on the opportunities and where we can see the opportunity to create the highest risk-adjusted return for our shareholders.

Good. Makes sense. Thank you so much. Thank you.

Next we'll hear from Stephanie Benjamin of SunTrust.

Hi, good morning. I was hoping you could maybe talk a little bit further on your omnichannel investments and some of the digital investments that you're making. I know that in the past and even in the slide deck you called out, whether it's on the sales side or building out financing capabilities, if maybe you could provide a little bit more granularity on what you're focusing on right now or is it really a broad suite of things and you know, what we can expect to be your focus on that, you know, next quarter, even as we move into 2020. Thanks.

Sure. This is David. I would say it's ramping up in the second half of the year, and we'll probably neutralize a little bit towards the first half of next year. It's really in several different categories. It's software expense costs and investments, It's investment in people, adding positions, changing positions. So I would say it's human capital and software technologies where the biggest investments have been in this second half of the year and will be there in the first half of the year. So we have the online approach with parts and service that we're doing. We have the online goal of completing a car deal 100% online, which we're not there yet, but we're getting closer. Um, and then we have the guest experience piece within the dealership and how did the two melt into one? So they're not two different processes and they're very seamless. Uh, so we're very focused on that integration. And that's, that was my point in the script when I referred to that store, North Carolina. So it's kind of the omni channel, what we've been working on at an enterprise level, uh, creating those transactions, but then bringing it into the store to make it seamless. Uh, and, and that's where eventually we're going and that's what we're going to start rolling out in 2020. We see strong potential, not only from a guest experience standpoint, but an opportunity to tighten up SG&A a little bit.

Great. Well, I really appreciate the color. That's all I had. Thank you.

Thank you.

Next, we'll hear from David Whiston of Morningstar Equity Research.

Thanks. Good morning. First question is on the same store, used-to-new ratio. What was driving that really large increase of 880 bps? Is that omni-channel? Is that just a lot more off-lease supply, turning people away from new? Can you just talk about that a little more?

Well, you saw our – this is John. You saw our used vehicle sales were up, so obviously that was part of it. And David had touched on the online that the – the push start is really heavily more towards the used vehicle side than new currently.

Okay. On the pressure from the midline import brand, obviously these types of stair steps and monthly targets, it's an issue all the time, and some automakers are more flexible than others. My question is basically it. At what point do you just – how many quarters or years does it take for you to say at some point maybe it's not worth it for a particular brand?

You know, I think this space has been saying for a couple years it's not worth it. And it's a little bit more exacerbated. I hope to not be confusing with this. But when you think about we believe our opportunities are part service, F&I, and used, and we can control that. We can't control the new car market. Having said that, several of the midline import brands are very strong parts and service business units as well. One of the midline imports, really the one that we're referring to today on the variable side, also happens to be a little bit weaker than the other midline imports when it relates to parts and service. So in an odd way, you're getting exacerbated on both ends. you're feeling it with the incentives on new, and then it's not traditionally as robust a parts and service customer as some of their competitors.

Okay. Finally, just a broader strategic question. I've always been interested in the fact that you're not in California, given it's the largest car market in the country. Do you have interest in ever expanding there?

You can never say never. There's a You know, when we look at an acquisition, a big part of it is land costs and a business-friendly environment. Dealerships expand and contract well from an expense standpoint in markets and can adjust to SAR well. You can't adjust your fixed expenses. So our goal is to always be in markets that we can weather up and down times and we don't laden ourselves with a heavy debt on fixed expenses, meaning real estate or a heavy tax environment or something like that. So California is a great state to do business in, I'm sure, but we think that there's better opportunities for Asbury to create larger returns in other markets.

Okay, thanks, guys.

Thank you. This concludes today's discussion. We appreciate your participation in today's call. Have a great day.